Why You Should Start Considering Socially Responsible Investing

Narrowly looking only at a company’s published financial accounts when investing in it could prove to be a costly mistake. Every company is also about people, and every company is only as good as the people who embody its mission. Quantitative assessment of a company should be weighed alongside qualitative criteria, such as how well it promotes corporate social responsibility.

To socially responsible invest (SRI), would be to invest in a company based on environmental, social and governance (ESG) factors, such as climate change initiatives, working conditions and executive pay. Investors who choose to invest in companies with flourishing corporate social responsibility (CSR) and clean PR records seem to be doing things right, and here’s why.

A compelling argument in favour of looking at what you can’t find in published accounts when assessing investment opportunity is the potentially greater return on investment. Modern portfolio theory would assume that since SRI works with a smaller investment universe, it will generate lower than expected risk-adjusted returns. According to Morgan Stanley’s 2014 findings reviewing 7 years of performance data for 10,228 open-end mutual funds, however, sustainable funds tend to exhibit slightly higher returns and lower volatility than their traditional counterparts.

By the same token, companies that embrace sustainability actually perform better financially than those that do not. A 2014 research study by the firm CDP found that corporations that are actively managing and planning for climate change (one of the issue areas that ESG considers) achieve an 18% higher return on investment (ROI) than companies that aren’t planning for climate change, and 67% higher than companies who refuse to disclose their emissions.

With regards to employee satisfaction, the link between employees and effectiveness is easy to correlate: unsatisfied employees affect working efficiency, which, in turn, negatively impacts the overall organizational effectiveness and profitability. Statistics have shown that companies in categories such as “Top 100 best companies to work for” have proven to be more successful than their counterparts and producing year on year increases in stock prices.

Governance plays an important part in socially responsible investing too. Studies found that returns of firms with greater shareholder rights and firms where the chief executive holds a large stake outperformed, and those that use corporate jets underperformed.

Socially responsible investing makes financial sense also in other ways. Many investors incorrectly assume that it’s not a viable way to think about investments, which results in undervaluing those opportunities available at socially responsible companies. This means more bargains out there for astute investors.

The argument that a socially responsible investment strategy “pays” assumes that paying more attention to a firm’s social responsibility—or lack of it—makes for a better predictor of future share prices. But a firm’s social-responsibility policies or practices are rarely of sufficient importance to its earnings to affect its share price. For example, while Wal-Mart Stores, Inc.’s costs have been reduced by its many “green” initiatives, those reductions have been ignored by analysts because they aren’t material to the firm’s future earnings.

A preferred approach to analyzing investment opportunities might be a hybrid of traditional and socially responsible investing. Social responsibility factors could be used as supplementary to further reinforce financial information and create a more well rounded picture of particular company at hand.

Regardless of the weight attributed to social responsibility with investing, it can significantly benefit the company and increase financial yields. For example, reducing emissions allows companies to avoid any possible fines that could negatively impact net profit and therefore lower the return on investment.

Responsible investment does not require the use of specialised products. It is primarily about bringing additional data and analysis into existing approaches. Tailored products whose remit overlaps with areas responsible investment do exist, such as environmentally- or socially-themed funds, green bonds or social impact bonds, and these can form part of a responsible investment strategy.

There is no straight forward way to invest but by using both heart and the head through being diligent and researching both financials and ethical practices of a company could prove to be profitable as both sets of data go hand in hand.


 

Martin Graham is Chairman of Fineqia, an online platform and associated services for the placement of debt and equity securities, initially in the UK.  Graham has had a notable career in the financial services industry. Between 2003 and 2009, he was Director of Markets at London Stock Exchange PLC (LSE) and Head of the Alternative Investment Market (AIM) where he had direct responsibility for more than $500 million of revenue and 75% of group profit. He led LSE’s transformational growth strategy focused on driving market efficiency, resulting in a five-fold increase in market size between 2003 and 2008. Furthermore, Mr. Graham was instrumental in building LSE’s international franchise, which significantly outperformed its main competitors. Graham is currently Chairman of Aldbourne Partners Ltd., a London-based multi-family office business and wealth management consultancy. He has previously been on the Board of the Moscow Stock Exchange where he was Chairman of the Board’s Risk Management Committee.



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