Socially Responsible Investing

Socially Responsible Investing

Guide to Socially Responsible Investing

Socially Responsible InvestingSocially responsible (SR) hedge funds integrate social and environmental criteria into their investment decision making process. Within this general framework socially responsible hedge funds follow a variety of investment strategies such as equity long/short, merger arbitrage and fixed income arbitrage.

The approach of socially responsible investors (SRI) generally fall under three primary categories: screening, community investing and shareholder activism. The screening approach involves both avoiding companies that do not uphold social and environmental standards (negative screens) and investing only in companies that uphold strict social and environmental standards (positive screens). Community investing targets companies and industries that have explicit social and/or environmental objectives. Carbon trading, renewable energy credit trading, ethanol trading and emissions trading are popular strategies, as are socially motivated industries like alternative emerging, microfinance and public healthcare. On the other hand, socially responsible shareholder activists leverage their role as shareholders to motivate change in social and/or environmental impact of the company.

Over the last few years, SRI has emerging from a niche market to become a potentially important player in the investment space. According to GreenMoney Journal’s 2007 report on SRI trends in the US, total assets under management of SR funds grew 13% between 2005 and 2007, a significant chunk of which was driven by the alternative investment space. All indicators point to a continued increase. Most of this is driven by investor demand, as more and more investors align their investment portfolios with their personal values and try to motivate social and environmental change through their investment strategy. However, a small and growing movement in the SRI space has been arguing that an analysis of a company’s environmental, social and governance (ESG) performance provides an effective measure of the management’s strength and therefore the company’s long-term financial performance.

White papers and reports related to socially responsible investing

  • Global Change Associates has several excellent reports on hedge fund activity and trading strategies in energy and ‘green’ sectors.
  • Goldman Sachs, “Introducing GS Sustain.” June 2007.In this report Goldman Sachs describes its proprietary framework that incorporates ESG analysis into long-term analysis of industry themes and cash returns valuation to pick stock and emerging industries. This PowerPoint presentation summarizes the performance of GS Sustain.
  • Lydenber, Steven D. “Envisioning Socially Responsible Investing: A Model for 2006” Domini Social Investments, USA, Autumn 2002. Written in 2002, this article lays out what major initiatives must take place in the corporate, institutional and financial communities for SRI to become an important player in social, economic and political debates.
  • Nocera, Joe. “The trouble with socially responsible investing.” International Herald Tribunal, April 2007.Nocera looks at the difficulties involved in evaluating a company’s social and environmental standards. In doing so, he also questions the value of relying on independent agencies like KLD Research to decide which companies socially responsible investors should consider and avoid.
  • Standard and Poor’s, “S&P ESG India Index: Index Methodology.” January 2008. In this report S&P briefly outlines the eligibility criteria, index construction and index maintenance it uses in selecting companies for its S&P ESG India Index.
  • Woll, Lisa. “The 2007 Report on Socially Responsible Investing Trends in the United States.” Green Money Journal, Summer 2008. This report is published every two years, and synthesizes the major trends in the SRI industry. In the process, it also provides a very good introduction to SRI.
  • Yegnasubramanian, Anu. “Environmental, Social and Governance: Moving to Mainstream Investing?” Business for Social Responsibility, June 2008. Several major financial institutions have been developing analytical frameworks that include ESG criteria as part of their fundamental financial analysis results in better investment decisions. This report looks at the challenges behind the mainstream adoption of ESG criteria into investment decisions.

Information Sources

Corporate Social Responsibility Website is a news source covering corporate social responsibility. It is a good place to start researching the social and environmental profile of a company

Green Money Journal is a tri-annual journal covering major trends and events in SRI

KLD Research & Analytics is one of the primary independent research firms that cater to SRI managers. As such, it provides up-to-date news, independent research reports and benchmark indexes for the industry.

Centre for Responsible Business, University of California Berkley, Haas School of Business runs the Markowitz Research Program which examines the foundations and trends in SRI. As part of the effort, Lloyd Kurtz, Senior Portfolio Manager of Nelson Capital Management writes a blog that provides commentary on major SRI themes and also has a collection of quantitative studies related to SRI. The centre also runs the Markowitz Prize for Socially Responsible Investing, the only award that recognizes quantitative research in the field.

Social Investment Forum is a membership association for socially responsible investors and related organizations. It hosts an annual conference for members and puts together research related to SRI that ranges from basic definitions, to industry reports. is a good tool for socially responsible money managers with discussions on SRI strategy and interviews with prominent market players. This website is directed primarily towards traditional institutional investors.

SRI World Group is an up-to-date news source on issues and events related to social responsible investing as well as companies’ social and environmental profile. It also has a database of major companies’ social responsibility reports.

Guest post by Sharini Kulasinghe

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