Socially Responsible
Investing – SRI or ESG – What are they?
by
Edi Alvarez, MSc, CFP®
September 2009
Socially
Responsible Investing (often referred to as SRI) has been a part of investing
for a long time. Initially, it was intended to promote particular religious or
social values (such as temperance, anti-tobacco or anti-gambling preferences).
Eventually it grew to include pacifist values, human rights, health and (the
latest a focus) a green environment. On the face of it SRI sounds great, but
analytically
speaking SRI performance has always left me questioning its role in our
portfolio. SRI is only workable within a plan if the client understands and
accepts the likelihood of lower returns (as opposed to being fully invested in
the market and investing those gains in carefully chosen socially responsible
ventures). In 2008 SRI investors lost more than the domestic market (around 40%
on average), but some have now evolved into ESG or environmental, social and
governance (ESG) investments. ESG appears to show much more promise than SRI,
but is a much newer strategy and therefore offers us less data upon which to
base our performance and risk measurements.
What is
currently included in SRI versus ESG investment products? SRI is investing with
one’s values, screening out or not investing in certain companies or industries,
or only investing in particular companies. On the other hand, ESG looks to
invest in companies based on environmental, social and governance factors. In
the beginning, SRI performed poorly as people selected out (often lucrative)
sectors and businesses based on perceived moral or social values. Now the claim
is that SRI focuses on broader areas of sustainability but with an eye to the
long term potential, shifting it closer to the realm of ESG. The implication is
that this type of selection leads to investment in a set of companies that are
better run, whose business models offer less risk and deliver better financial
performance in the long run. Unfortunately, ESG is less well know and seldom
used by non-institutional advisors.
Most clients
want to invest in SRI or ESG as long as it does not cost them. Others are
willing to pay a premium for this type of investment. There are times when ESG
investments can be made and still retain equivalent returns. As stated, the
performance and risk is generally less clear when working with ESG since they
are newer. Time will tell and we will keep evaluating this strategy. I find
clients inevitably begin to understand that by selecting a subpopulation from
the entire investment world they are less diversified and may take a potential
performance and volatility hit.
Frankly,
clients deserve a globally diversified portfolio. Moreover, it is easier to
attain looked-for returns by employing well-established low-cost investment
vehicles. Nevertheless, when clients chose to support SRI or ESG with some of
their investments we can accommodate this request IF they have the capacity to
absorb the potentially lower returns and potentially higher volatility.
In the future we will continue to evaluate ESG products and will use them to supplement components in our diversified global portfolio.
==== ONLINE RESOURCES ===
www.srinews.com
© 2009 Edi Alvarez. All rights reserved.