The Rise of Socially Responsible Investing
If there is any question that Socially Responsible Investing (SRI) has entered the financial mainstream, one need only look at the international forums and organizations devoted to it.
SRI, a subset of Corporate Social Responsibility (CSR), is a business model that seeks to operate in ways that benefit, or at least do not harm, society and the environment. It has become central to investor strategy around the world.
According to Andromeda Wood, Vice President of Regulatory Strategy at Workiva, an ESG platform, “2024 looks set to be an interesting and busy year for environmental, sustainability and governance (ESG). Following a period of consolidating sustainability standards in 2023, this year, businesses will need to act to ensure they have effective reporting processes and procedures in place.”
Wood noted that greater alignment between sustainability and financial operations is emerging, although uncertainty surrounding the European Parliament elections may delay some initiatives. The same can be said of the 2024 U.S. elections, where diverging views on climate change, housing, and social equity continue to influence policy.
“Many people hoped for consolidated sustainability standards,” Wood wrote. “There are still some areas where consolidation has not been achieved, but progress toward interoperability is clear. In 2024, we’ll see international companies mapping their route forward while maintaining their current reporting processes. It’s still a time of change, but movement is in the right direction.”
The State of ESG Investing
Climate change remains the most significant ESG issue for asset managers, representing $3.4 trillion in managed assets, according to Lisa Woll, CEO of US SIF: The Sustainable Investment Forum.
Her findings show that:
- Fossil fuel divestment policies affect $1.2 trillion in assets, ranking fourth among ESG criteria.
- Avoidance of weapons and tobacco ranks second and third, covering $1.8 trillion and $1.7 trillion respectively.
- Anticorruption is the leading governance criterion, influencing $1 trillion in assets, followed by board diversity and oversight at $926 billion.
- Human rights top social concerns, encompassing $987 billion in assets, followed by equal employment opportunity and workplace safety.
Meanwhile, greenwashing has complicated ESG reporting. The U.S. Securities and Exchange Commission has proposed new rules to prevent misleading fund names and require more transparent ESG disclosures, similar to measures underway in the European Union.
“The US SIF Foundation believes that these SEC proposals are motivating asset managers to be more circumspect about what they consider ESG assets,” Woll said. “As of early 2022, $7.6 trillion in U.S.-domiciled assets were managed under ESG incorporation criteria.”
Impact Investing and Measurable Change
Community investment and impact investing are integral parts of SRI. Impact investing, first popularized by the Rockefeller Foundation in 2007, aims to generate measurable social and environmental outcomes alongside financial returns. The concept, however, is far older—rooted in postwar initiatives like the World Bank’s founding in 1948 to help rebuild communities after World War II.
The Global Impact Investing Network defines impact investing through four key characteristics:
- Intentionality: The investor’s intention to create positive social or environmental outcomes.
- Investment with Return Expectations: Investments are expected to yield financial returns, or at minimum, preserve capital.
- Range of Returns and Asset Classes: Investments may deliver below-market or market-rate returns across asset classes.
- Impact Measurement: Investors commit to tracking and reporting the social and environmental performance of their portfolios.
While some investors remain cautious about ESG or impact investing, data suggests strong financial performance. The Canadian Forum for Impact Investing notes that portfolio performance generally meets or exceeds expectations for both social and financial returns across developed and emerging markets.
Standards and the Path Ahead
International frameworks like ISO 26000 highlight corporate social responsibility as essential to overall performance. The guidelines recognize that healthy ecosystems, social equity, and strong governance are integral to business longevity.
As ISO 26000 states, “Organizations are subject to greater scrutiny by their various stakeholders. We need to ensure healthy ecosystems, social equity, and good organizational governance.”
The growing adoption of ESG standards and impact-driven strategies reflects a shift toward long-term accountability in global finance. Whether these practices can meaningfully address challenges like housing inequality, water scarcity, and climate change will be measured over time, as future generations inherit the outcomes of today’s investment choices.
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References:
Andromeda Wood, Environmental Finance, 5/27/24 https://www.environmental-finance.com/content/analysis/esg-compliance-in-2024-what-to-expect.html
Lisa Woll, CEO US SIF and US SIF Foundation https://www.ussif.org/Files/Trends/2022/Trends%202022%20Executive%20Summary.pdf
thegiin.org
Ibid.
Canadian Forum for Impact Investing and Development
Abhilash Mudaliar, Rachel Bass, 11/14/17, GIIN GIIN Perspectives: Evidence on the Financial Performance of Impact Investments
ISO 26000 Guide on Social Responsibility https://www.iso.org/files/live/sites/isoorg/files/store/en/PUB100258.pdf