Socially Responsible Investing (SRI): The Insiders’ Take

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Socially responsible investing (SRI) has inspired a growing wave of interest as a deluge of media coverage, investment products, and dollars has been flowing into the space.

Though many advisers are skeptical and won’t recommend SRI strategies to their clients, financial services firms have introduced a flood of SRI vehicles, including mutual funds, exchange-traded funds (ETFs), insurance sleeves, and private equity, among others.

Whenever there is friction and opportunity — when traditional mindsets are in direct collision with evolving investor perceptions and client values — industry-changing disruption often follows. Meaningful, structural transformation could be going on here.

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To better understand what is really happening with SRI — to move beyond the hype, biases, and inaccuracies — the Institute for Innovation Development reached out to a cross section of socially responsible asset managers for their perspectives. With the critical assistance of Ultimus Fund Solutions in providing introductions, we drew together specialists whose expertise reflects the full SRI spectrum, from environmental, social, and governance (ESG), to impact investing, to focused thematic strategies. They offered their real-world, in-the-trenches perspective.

What follows is a lightly edited transcript of our conversation.


SRI Expert Panelists

Erika Karp is the founder and CEO of Cornerstone Capital Group, an investment advisory firm based in New York City that seeks to build and support the sustainable and impact investing field for values-based investors.
Robert Uek, CFA, and Bill Page are co-managers of the Boston-based Essex Environmental Opportunities Fund, an investment manager that operates at the nexus of environment and finance, investing in companies that enable greater natural resource and energy efficiency.
Vickie Benjamin is president of Karner Blue Capital, a Bethesda, Maryland–based advisory firm. Karner Blue Capital is among the first investment managers to offer research and impact strategies centered around animal welfare.
Matthew Blume, CFA, is portfolio manager and manager of shareholder activism at Pekin Hardy Strauss Wealth Management in Chicago. An independent wealth manager, the firm offers impact and ESG funds and strategies to investors through its institutional investment management arm, Appleseed Capital.
Robert G. Smith is president and chief investment officer (CIO) at Sage Advisory Services. Headquartered in Austin, Texas, the advisory firm offers fixed-income and equity ESG investment solutions that embody a commitment to sustainability and responsible investing.

Bill Hortz: As active leaders in the different realms of socially responsible investing, what are your biggest concerns in the space right now?

Matthew Blume, CFA: Our biggest concern is probably “information overload.” With the explosion of new products and strategies in the space, it can be nearly impossible for clients to digest it all and figure out which solution actually makes the most sense for them. In our experience, clients are looking to align their portfolios with their values, and this can be a real challenge with the huge number of different products that exist, as well as the varied messaging that is swirling around the space. This is an excellent opportunity for advisers to offer guidance and help connect client goals and passions.

Robert Uek, CFA, and Bill Page: Given the heightened interest in ESG investing, many asset managers are launching new ESG-focused funds or re-positioning existing funds to have an ESG tilt. We are concerned that many of these funds are sub-optimal offerings that are trying to capitalize on the rising interest in social investing but are not truly committed to a genuine effort to bridge institutional quality portfolio management with social impact. Investors need to look beyond labeling to determine if a so-called ESG strategy is appropriately aligned with and capable of delivering on their social and financial goals.

Robert G. Smith: There are a few concerns in the ESG space right now. The first of which is the continued issue of greenwashing — a form of marketing spin in which green values are deceptively used to persuade the public an organization’s products, aims, or policies are environmentally or socially friendly. Investors need to look beyond labels and understand the investing methodologies and impacts of the strategies in which they are invested. In addition, investors should evaluate the ESG reporting capacity of the managers that they are working with to determine whether there is third-party verification and auditing of their ESG strategies. This transparency is key in order to fully understand how assets are invested and whether the strategy is in fact investing in an ESG manner and creating impacts as expected by the investor.

Erika Karp: I do see a critical gap in the set of tools being used — in the ability to systematically measure impact. The lack of consistent, broadly applicable measurement standards makes it extremely challenging to understand how investment dollars benefit, or harm, our world. Organizations such as the Sustainability Accounting Standards Board (SASB), of which I am a founding board member, the Global Reporting Initiative (GRI), and others are working diligently to progress the adoption of consistent data reporting standards and meaningful metrics.

Vickie Benjamin: Confusion among investors — even the acronym “SRI” has multiple definitions: socially responsible investing or sustainable, responsible, and impact investing. When SRI began, the concept was based on the former and evolved into the latter. Also, the realization that incorporating ESG factors into investment decision making is only one component of socially responsible investing. In order to effect change and create impact, investing must be accompanied by robust corporate engagement and shareholder advocacy.

Handbook on Sustainable Investing

When you look at the media coverage of SRI, are you happy with the tone and substance? Are there important issues that are missing or are not being talked about enough?

Karp: On the whole, the increased media focus on this space is a positive. The one thing that really bothers me, though, is the persistence of the myth that impact investing implies concessionary returns. While it’s true that some impact investments are designed to achieve modest financial returns, it’s entirely possible to invest with the same expectation for market rate returns or better.

To your second question, I think more can be done to emphasize sustainable and impact investing as a fiduciary responsibility. The SEC has muddied the waters with conflicting statements about whether the consideration of material ESG factors should be a fiduciary duty or not.

I would also like to see more work in the mainstream press on the circular economy — the concept of intentionally designing waste out of the global supply chain across sectors. I think adopting circular economy principles is perhaps the single most meaningful systemic change we need if we have any hopes of averting climate catastrophe.

Blume: I think the media can do more to show how well sustainable investing can compete with more traditional strategies on a performance basis. That would generate even more interest from investors. But overall, I think coverage has been really helpful. More and more clients and advisers are having the conversation about aligning investments with values, and the stigma that used to exist around sustainable investing is gone. Media coverage has played a big role here.

Uek and Page: One of our frustrations is the re-hashing of articles discussing SRI approaches of yesteryear. Today’s generation of true social impact strategies is much different from the negative screening approach of SRI 1.0. For example, we are focused on investing to environmental themes, in the stocks of companies we believe have differentiated environmental solutions. We believe climate change and other environmental challenges create long-term investment opportunities, yet the SRI market seldom discusses thematic or solutions-oriented approaches.

We also believe that equity investors who want to align their ESG objectives with their portfolios should use active approaches for the higher-impact segments of their portfolios. Not enough discussion explores why a social/environment approach like ours, which is thematic and solutions-orientated, lends itself to a concentrated, active equity approach to investing, as opposed to a passive, index orientation.

Smith: Governance issues are missing in many discussions surrounding ESG. This often happens because there is a lack of clarity in the definition of governance factors. Governance looks at items such as bribery and corruption policies, whistleblower policies, board diversity, executive compensation policies, employee fair pay policies, as well as various others. These governance factors set the foundation and are indicators of well-run and transparent companies that are more likely to have positive outcomes on their communities and the environment at large.

Benjamin: More discussions are needed on how the definition of outperformance in this space should be expanded to include the intrinsic and intangible value of social performance. The issue here is the measurement of the value of social performance — one could exemplify this as to market returns equating to the risk-free rate and social outcomes equaling alpha. Investors, especially the new generation, are going to hold their advisers accountable to outcomes and will expect periodic reporting on impact initiatives and their outcomes.

Financial Analysts Journal Latest Issue Graphic

Any thoughts on the flood of new investment products in this space and the possible repercussions of there being so many options?

Smith: With increased amount of investment flowing toward ESG investment vehicles, there will be a strengthened consensus and conviction as to the legitimacy of ESG principles.

Benjamin: The “Great Wealth Transfer” from baby boomers to millennials is stimulating further growth and, most importantly, a maturation of socially responsible investing strategies. A recent study conducted by TD Ameritrade determined that performance isn’t the top priority for all investors — 67% said they cared more about advancing social and environmental causes than financial returns, which was the priority for only 17% of respondents.

Uek and Page: We see positive repercussions of the increased amount of interest in ESG investing. On the positive side, there is progress being made with ESG and sustainability reporting by corporations as investor interest increases. We stress, however, that companies must now articulate how their products and services can solve ESG issues. We invest in companies that demonstrate that their technologies represent solutions for environmental challenges — companies that now move the needle toward reporting impact solutions (i.e., the outputs in terms of, for example, water or carbon saved as they scale their technologies to the market).

Karp: Leaving aside concerns about credibility of some of these products, I think the repercussions are immensely positive. We think there are a lot of interesting and innovative products being launched that hold promise. Given Cornerstone’s laser focus on in-depth due diligence of investment managers in this space, we are pleased to report that there is no shortage of investment options to research. And the more funds that flow into investments intended to achieve positive environmental and social impact, the better off we will be as a global society.

Blume: In the past the challenge was simply having a set of products or strategies available to investors that would allow them to construct a portfolio that aligned with their values or satisfied their sustainable investment mandate. That problem has been solved. There is no shortage of products now.

However, this vastly expanded universe has now created due diligence complexities that have not been addressed. There is no standardization in the space yet. We don’t have clearly defined terminology. We have all sorts of different ratings systems, each with their own biases. And we have numerous data providers pushing out ESG data, but they all have their own subjective take on things. So many interested and motivated people just don’t know how to navigate all these new products and terms and whatnot. I see the best possible repercussion of all this being advisers stepping in to fill the need by learning this landscape and guiding their clients through it.

Investment Professional of the Future report graphic

Do you feel that social investment perspectives and methodologies will become more mainstream, and how will that occur?

Karp: It’s already happening. The climate change crisis has raised awareness of the critical need to invest for the health of the planet. We’re also seeing a generational shift, with younger generations wanting to integrate their financial planning holistically into their lives. Just as younger people increasingly cite a company’s stance on social and environmental issues as a key factor in deciding to work for that company, they increasingly want their investments to reflect their values and concern. I think that one day sustainable and impact investing will simply be called “investing.”

Smith: ESG investing will at some point become the standard. Understanding these additional nontraditional quantitative and qualitative factors allows investors to dig deeper into the operations and impacts of investable issuers. It will widely be viewed as another layer of risk management and become an accepted and material part of financial analysis.

Benjamin: Absolutely. The $68 trillion in wealth transfer to individuals who consider sustainability and social responsibility a way of life, versus just an investment strategy, will shape the investment marketplace and put greater accountability on investment managers to deliver products that are invested to improve social outcomes.

What is your best piece of advice for advisers and investors about social investing today?

Benjamin: Investors should determine what is important to them when investing and advisers should seek to match those needs to corresponding strategies. Thorough due-diligence efforts need to be exercised to provide the professional advice this growing social investing client base needs.

Blume: Do your homework. Not all funds and firms are alike, and their approaches to sustainability could vary pretty dramatically. Don’t just rely on some third-party rating to tell you a product is “sustainable” or “green” or whatever. Become familiar with the resources out there, such as the Forum for Sustainable and Responsible Investment and As You Sow. Due diligence is important for any investment, and this is simply one more area where investors and advisers should be sure they understand what they’re getting.

Uek and Page: As with any investment advice, the process needs to start with an understanding of an investor’s goals — including proactively learning about the client’s social goals — and construct a portfolio that can achieve these social goals while also meeting their financial goals. For example, does the investor care passionately about solving for climate change, improving world health, or eradicating poverty? If so, then an adviser can incorporate these values by recommending specific strategies and social managers for their asset-allocation strategy.

Smith: Advisers should be doing their research in terms of managers and their strategies in this space. As mentioned above, greenwashing continues to be a prominent issue and thus advisers should be taking a deeper look to understand exact methodologies, the manager’s and firm’s commitment to ESG, thought leadership in the space, and transparency in terms of process and ESG reporting.

Karp: Manager selection is key to successful impact investing. Because of the volume and varying quality of product, it’s important to really understand what the investment strategy is aiming to achieve and whether its investments are truly aligned with that objective. For advisers, this means being open to learning and adapting, and for clients, selecting an adviser who really “gets it” and understands how to navigate this investment landscape.

Thank you all for your contributing your perspectives for our readers, whom we encourage to join the dialogue and comment below.

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

Image credit: ©Getty Images/ Michael DeYoung


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Bill Hortz

Bill Hortz is an independent business consultant and founder/dean of the Institute for Innovation Development, a financial services business innovation platform and network. Hortz has over 30 years of experience in the financial services industry, including expertise in sales/marketing/branding of asset management firms as well as creatively restructuring and developing internal/external sales and strategic account departments for five major financial firms, including OppenheimerFunds, Neuberger Berman, and Templeton Funds Distributors. He believes strategic thinking, innovation creation, and strategic account management are the nexus of business skills needed to address a business environment challenged by an accelerating rate of change.



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