July 19, 2021
These days, I’m seeing more and more in the financial press about “impact” and “socially responsible” investing. I’ve been following these trends for some time, and felt it might be helpful to share some of my thoughts on these concepts. Unfortunately, like everything in the financial market, it seems this space is acronym-rich -- SRI, PRI, RIA, ESG. Enough to make me want to buy an extra vowel just to help complete the puzzle.
This is not a definitive history or a guide to impact investing. Far from it. It’s an attempt to demystify some of these concepts while at the same time sharing my views on them and their role in helping construct custom portfolios for clients. If you’d like a more technical overview of impact investing, this is a good place to start.
So let’s start at the beginning, my beginning.
In the early 1990s, I became aware of the concept of “socially responsible investing” or SRI. To add to the confusion, it can also be referred to as RI (responsible investing). Two acronyms down, and so many more to go.
The concept is relatively simple. Investors work with their portfolio manager to identify specific companies that are “not desireable” for investment. For instance, an investor could identify individual oil, tobacco, or gambling companies and exclude them from portfolio consideration. Once excluded, a portfolio manager would never acquire these shares on behalf of the investor. Because these decisions are based on specific companies, it is a highly-targetted approach that only applies to investors holding a portfolio of individual stocks. Decisions are made on a stock-by-stock basis, making this a truly customized investment solution.
Predictably, tools and resources have emerged that make setting up similar “screens” for companies practical for smaller accounts. Investors who relied on pooled or mutual funds (a basket of stocks managed by professional investment teams) in their investment plans were given more choice. Today, investors with a socially responsible bias have plenty of options from which to choose.
But, is avoiding a specific investment or investment category the best way to make a difference? Or is it the equivalent of crossing the street to avoid your irritating colleague from the third floor who never stops talking about whatever it is he likes to talk about? If an investor truly wants to make a difference, shouldn’t there be more to it than avoiding something they don’t like?
Of course, you can still construct portfolios by eliminating specific investments. I consider this a passive approach to responsible investing. However, advocates for change and activist investors have emerged who are trying to change the system from within. They are coming together and purchasing shares in companies. Because once you have a share, you have a vote, and a voice. It may have taken more than 20 years, but the voices are getting louder.
In May 2021, energy company Exxon Mobil Corp found out just how loud those voices have become. Activist investors “dealt a major blow to Exxon Mobil Corp... unseating at least two board members in a bid to force the company’s leadership to reckon with the risk of failing to adjust its business strategy to match global efforts to combat climate change.”
The question for the socially-conscious investor is simple. How active do you want to be? On one hand, you can avoid investing in specific companies or areas of the market. On the other, you can choose to be more active, invest in individual companies, and get a voice in how they evolve going forward. You may not think that you can change much but as Nelson Mandela said “It always seems impossible until it's done.”
For the socially-conscious investor, there are reasons to invest beyond simply achieving a rate of return. Find your motivation here. Some research suggests that companies who adhere to strict environmental, social, and governance standards (here’s another acronym, ESG) may in fact outperform over time.
We’ll save that for later.
Is avoiding a specific investment or investment category the best way to make a difference?