Whether you call it sustainable investing, ethical investing, or even "conscious capitalism," socially responsible investing has established itself as a viable investment strategy for achieving a financial return by supporting a social good. According to the Forum for Sustainable and Responsible Investment, socially responsible investing, or SRI, accounts for $8.7 trillion of professionally managed assets -- a 33% increase from just two years ago -- and one-fifth of all investments under professional management.
Yet since the November presidential elections, one can't help but wonder whether 2017 (and beyond) may prove difficult for SRI investors. After all, many sectors that are diametrically opposed to the principles of SRI have soared in value since Donald Trump won the presidency.
Is sin in?
For example, private prison operators CoreCivic and GEO Group have surged 79% and 48%, respectively, while aerospace and defense contractors such as Boeing and General Dynamics jumped 10% or more.
Does that mean so-called "sin stocks" will make better investments in the year ahead than virtuous ones? Not necessarily. After all, gunmakers Smith & Wesson Holding and Sturm, Ruger are down 25% and 20%, respectively, while mega brewer Anheuser-Busch InBev is off 9%.
By contrast, the company that came to define conscious capitalism, Whole Foods Market, is up 8% over the past month, as is Panera Bread; alternative building supplies maker Trex is up 18% since the election. There remains plenty of opportunity to do well by doing good.
However, the Forum for Sustainable and Responsible Investment identified four particular areas of concern where money managers were directing their investments -- and where you may want to direct your own investments.
Of the $7.79 trillion in assets under management (AUM) focused on this topic, climate change was singled out as the environmental factor attracting the greatest amount of attention. The organization found some $1.4 trillion in AUM by money managers was targeting this issue -- a fivefold increase from 2014 -- but that's not the whole story, as an additional $2.1 trillion from institutional investors was also impacted by it.
To understand who's putting what money where, an institutional investor, as its name suggests, is an entity like a bank, hedge fund, or pension fund that pools its money to invest in various assets such as stocks and real estate. Meanwhile, a money manager is a person or business that manages the portfolios of individuals or institutional investors.
Although climate change-oriented policies and legislation may get short shrift in the coming administration, there are still ways investors can benefit from the success of companies providing goods and services that benefit the environment, including clean tech companies involved in energy efficiency, alternative energy, energy storage, and electric vehicles.
Social issues informed the investment decisions behind $7.78 trillion worth of money managers' AUM. Conflict risk accounted for $1.5 trillion of that total, along with another $2.7 trillion of institutional investors' money. That means these investors ruled out companies that do business in countries that have repressive regimes or sponsor terrorism.
Not only does this approach avoid supporting countries with poor human-rights records, but it avoids the inherent risks of investing in areas racked by conflict -- namely, unstable political environments, poor social support programs, and widespread violence.
Beyond conflict risk, social issues such as equal employment opportunity, diversity, and labor rights will continue to move investing decisions in the future.
Governance issues influenced $7.7 trillion in AUM, reflecting a doubling of funds since 2014. Corporate political spending and lobbying was the single most important issue to investors; shareholders introduced nearly 400 proposals relating to this issue between 2014 and 2016.
Shareholders in a publicly traded company are entitled to introduce resolutions to be voted on in the next annual meeting. Because many feel that corporations inappropriately wield influence over government policy and even shape the language of legislation, they often demand that management be more transparent. Even when they aren't successful (and most are not), these resolutions remain a meaningful way to encourage corporate responsibility, and they can eventually persuade management to adopt some or all of their suggestions, even if they don't garner a majority of support.
Another 350 proposals addressed proxy access measures, i.e., giving shareholders the right to nominate members to the board of directors. The level of their success is indicated by the fact that the number of companies in the S&P 500 giving investors greater access grew from 1% in 2014 to 40% today.
Proxy access can help invigorate board elections and make the boards more responsive. Too often boards of directors are sclerotic rubber stamps for management, but putting outside candidates on an equal footing with those nominated by management can help to build boards that are more vigilant in their oversight capacity.
Concerns over particular products that companies produce -- e.g., alcohol, tobacco, firearms, fossil fuels, and fighter jets -- influenced the money management decisions of investment vehicles with $1.97 trillion in AUM.
Why invest in a socially responsible fashion?
Socially responsible investing can probably trace its roots back to the late 1700s, when the Quakers prohibited members from investing in the slave trade. Today, SRI is a movement all its own, and as seen above, it commands substantial attention and financial resources from money managers.
SRI investing is also a bet on real long-term shifts in the way businesses operate. Companies are increasingly recognizing that concern for customers, employees, the environment, and governance can also make for good business.
Few companies achieve perfect ratings on socially responsible score cards, and many will excel in some areas but stumble in others. Investors therefore need to figure out what trade-offs they're willing to accept. But so long as they keep an eye on the four broad trends above and place their money accordingly, they can still do well in 2017 and beyond.