The last decade has seen increased global awareness of environmental issues. It is because of this awareness that socially responsible investing (SRI) has become more visible and structured as a type of investment. The underlying rationale behind this type of investing is not only to maximise financial returns but to promote socially and environmentally sustainable development and growth.
Also referred to as value-based or ethical investing, SRI is an investment practice that considers both the positive and the negative social and environmental implications within the context of investment and securities analysis. Asset managers that deal with SRI portfolios often use customary quantitative analysis tools together with social and environmental analysis tools when making investment decisions.
SRI evolved in the 18th century when certain religious groups were opposed to making investments into companies involved with or linked to alcohol, tobacco and weapon production. Over the years, the focus shifted. Between 1960 and 1970, the focal point became equality, human rights and environmental protection. In the 1980s, much emphasis was placed on the apartheid regime in South Africa and many North American and European investors disinvested from the South African market. In the 1990s, emphasis was placed on anti-tobacco investing and poor treatment of workers. During the past decade, environmental issues and the concept of carbon footprinting garnered much attention.
Broadly speaking, there are two main types of SRI strategies that are used to achieve maximum financial return while at the same time, promoting and achieving social good, namely, core strategy and broad strategy.
Core SRI is essentially socially responsible investing in its fundamental form. It is premised on detailed screening and analysis on the grounds of ethical, religious or personal values. Core SRI investors will include religious groups, NGOs and even individuals who feel strongly about certain practices or beliefs.
Broad-based SRI, on the other hand, comprises a more simplistic approach, involving norms-based screening, engagement and integration. As institutional investors are the main investors in this type of investing, it traditionally has attracted far larger volumes than core SRI.
Although SRI has become quite prominent in the global investment environment, a number of impediments exist that stand in the way of further growth and innovation of these types of investments, especially in South Africa.
A universal challenge is that even though SRI has been around for a long time, it has no formal standard definition. In South Africa, an official definition is needed particularly in the way it would be interpreted with regard to broad-based BEE as it first became prominent during the apartheid era, where trade unions refused to invest their members' pension contributions into companies that supported the apartheid regime or that practiced poor industrial relations. The main focal point of early SRI mediums back then was the issues related to empowering those individuals who were previously disadvantaged and to improve and enhance their standard of living as well as the opportunities given to them. In order to continue this legacy, a clear definition of SRI is important.
More Issues to be Addressed
Another issue that needs to be addressed is the fact that short-term performance benchmarks are used in the SRI market. This creates a fundamental problem due to the fact that many investors are saving for retirement and therefore, have long term investment horizons. It is difficult to measure the performance of an SRI fund if one does not have a benchmark that is constructed based on the same or similar principles as the fund.
Other obstacles that impede the expansion of the SRI market within South Africa, as well as globally, according to sector experts, is a lack of skill and understanding in the investment sphere regarding SRI. It has also been noted that there is a lack of connection between asset managers investing in SRI stocks, compliance and monitoring.
Despite these challenges, there is increasing demand for investment opportunities in this market – the most obvious being the need to protect the environment we live in, thereby ensuring a sustainable future for generations to come. Concerns about the earth and the damage we are inflicting upon it have become of extreme importance and investors are now aware that besides protests and outright confrontation with authorities, they can now, via SRI, air their values and beliefs in a much more constructive and subtle manner.
SRI has also been identified as being a driver of good corporate governance as investors are now, more than ever, far more concerned with the way in which and where their investments are being deployed. The value they place on a stock depends not only on traditional evaluation but also on social and environmental criteria.
At present, SRI investments make up less than one percent of all assets under management in South Africa. This can be partly attributed to the impediments that stand in the way of future growth and innovation and also to the fact that there is not much South African legislation governing socially responsible investing.
Without proof that socially responsible investing can produce returns on par with traditional investments, it seems that many investors may continue to hold the view that SRI produces lower financial returns. Here, South Africa may take guidance from the global growth in SRI, look at the way it has been implemented abroad and choose appropriate legislation, practises and methods that would best suit our needs.
Samantha Matthew is an investment analyst at Glacier by Sanlam.
This article first appeared in www.iafrica.com on 30 July 2010.