The Challenge of Socially Responsible Investments
Aligning the Interests of Philanthropists, Foundations, Endowments, and Corporations

By Neil Rubin

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JULY 2008 - The growing popularity of socially responsible investment (SRI) is closely related to the increasing awareness of environmental and social issues and the advent of communication technologies that allow wide, efficient circulation of new information and alternative views.

From 1996 to 2007, SRI assets grew faster than the entire universe of managed assets in the United States. SRI assets rose more than 324%, from $639 billion in 1995 to $2.71 trillion in 2005, compared to 260% ($7 trillion to $25.1 trillion) over the same period for all managed assets (Social Investment Forum Foundation, Investment Trends Report, 2007). The same source also reports that socially and environmentally responsible investing has grown at an average annual rate of 26%. This ongoing growth indicates a shift in the investment paradigm—not just in how investments are viewed, but also in how portfolios are created and implemented.

Socially Responsible Investing Defined

SRI may be broadly defined as the act of committing money or capital to an enterprise, the aims of which the investor wishes to foster with the expectation of profit. When investors choose which investments to undertake, they typically look for vehicles that have the potential to generate good profits while minimizing risk. Although the investment decision-making process varies for each investor, when investors align their social or ethical criteria with their investments, the term “socially responsible investing” becomes an active investment philosophy. Thus, SRI is an emerging investment trend aimed at doing more than just generating profits; it also seeks to do well by doing good.

SRI covers a range of investors, from individuals who donate to different philanthropic causes, to the nonprofit organizations that, arguably, perform the greatest amount of philanthropic work per capita because it is central to their organizational goals. The ultimate success of SRI going forward will depend upon how effectively it can align the investment policies of private philanthropists and nonprofit entities (such as foundations and endowments) with corporate investment, policy, and production.

At present, it can be argued that, after philanthropy, SRI accounts for the next largest investment amount per capita because of its use of metrics that are similar to those used by nonprofits as well as business.

Evolution of SRI

The SRI concept began as a “values-based” approach to investing. This initial approach aims at aligning investors’ beliefs and/or values—to the greatest extent possible—with their portfolio holdings. Values-based investors use their personal values to help drive their portfolio construction, while paying little attention to the financial impact of their decisions. Such investors share the intent to act responsibly with their money. They are primarily looking to achieve social objectives, while also attempting to generate financial returns on their capital.

By the late 1990s, the “value-seeking” approach was developed as an alternative SRI strategy. Value-seeking investors look to see how social and environmental performance may drive a company’s share value. Because these investors are more concerned with generating profits, they look to nonfinancial “screens,” such as environmental and social impacts, as factors that influence stock performance. This approach represents the mainstream investor, as well as institutional policy.

Investment performance for SRIs is still measured by traditional benchmarks. The Domini 400 Social Index (DS400) is an interesting SRI alternative to the Standard & Poor’s 500 Index (S&P 500). The DS400 is a float-adjusted market capitalization–weighted common-stock market index created by Amy Domini and others at KLD Research & Analytics, Inc., in 1990. It is modeled on the S&P 500 and is intended to be a benchmark of large companies considered socially responsible or ethical. The index consists of 400 companies, weighted by market capitalization, selected from the largest publicly traded companies in the United States using KLD’s criteria. According to KLD, these criteria relate to community relations, diversity, employee relations, human rights, product quality and safety, environment, and corporate governance. The DS400 has, since its inception, produced returns of 11.01%, as compared to 10.57% for the S&P 500 (which tracks the performance of 500 widely held, large-capitalization U.S. stocks) for the period ending March 31, 2008. Although the performance of an index is not indicative of the performance of any particular investment, indexes are considered representative of their respective market segments.

The final approach to SRI, called “value-enhancing,” is used by investors—mainly in pension funds—who generally do not label themselves as “socially responsible.” Value-enhancing investors aim to do exactly what that label implies: increase the value of the companies in which they invest. Therefore, such investors are known to use shareholder activism to force companies to engage in good corporate governance. As fiduciaries, these investors look to maximize the value of their holdings as a way of catering explicitly to the expectations of their beneficiaries. If the means to achieving that end overlap with some social good, so much the better.

Regulation and Disclosure: Sarbanes-Oxley Act

Two sections of the Sarbanes-Oxley Act (SOX)—Title III, “Corporate Responsibility,” and Title IV, “Enhanced Financial Disclosures”—focus on a fundamental tenet of socially responsible investors: corporate social responsibility.

Title III, “Corporate Responsibility,” established a mandate that senior executives take individual responsibility for the accuracy and completeness of corporate financial reports. It defines the interaction of external auditors and corporate audit committees and specifies the responsibility of corporate officers for the accuracy and validity of corporate financial reports.

Title IV, “Enhanced Financial Disclosures,” describes enhanced reporting requirements for certain financial transactions, including off–balance sheet transactions, pro forma information, and stock transactions of corporate officers. It requires the establishment of internal controls for assuring the accuracy of financial reports and disclosures, and mandates both audits and reports on those controls. It also requires timely reporting of material changes in the financial condition of corporate reports, as well as specialized reviews by the SEC.

The procedures mandated by SOX are similar, in practice, to what socially responsible investors do: monitor numerous aspects of corporate governance, including the disclosure of policies and procedures, board independence and diversity, executive compensation, and the concerns of stakeholders (people affected by or interested in an organization’s operations).

Socially responsible investors seek to avoid companies that have demonstrated poor governance structures or have experienced histories of illegal or questionable activities such as securities fraud, insider loans, or bribery and corruption. They wish to bypass companies whose corporate governance and business practices compromise the interests of shareholders, and they favor companies that publish sustainability reports like those devised by the Global Reporting Initiative, described below.

Regulating and Disclosure: The Global Reporting Initiative

Incorporated in Amsterdam in 2002 as an independent nonprofit, the Global Reporting Initiative (GRI; is an institution that has developed standardized sustainability reporting guidelines through the active participation of worldwide organizations representing the following stakeholders: business, accounting, investments, the environment, human rights, research, and labor.

GRI indicators include measures of economic performance, such as community donation; environmental performance, such as greenhouse-gas emissions and water use; labor practices, such as employees’ health, safety, and diversity; human rights, such as policies regarding child labor and indigenous rights; community impact; bribery and political contributions; and product responsibility, such as customer health and safety, advertising, and consumer privacy.

The GRI produces what has become the world’s de facto standard in sustainability reporting guidelines, which organizations follow to publicly communicate their economic, environmental, and social performance. GRI guidelines are the most common framework used in the world for sustainability reporting. At present, more than 1,000 organizations from 60 countries use the guidelines to produce their sustainability reports. Organizations that report a voluntary use of the GRI guidelines include corporations, public agencies, smaller enterprises, nongovernmental organizations (NGO), and industry groups.

Reporting on sustainability performance is an important way for organizations to manage their impact on sustainable development. Sustainable development has many challenges, and it is widely accepted that organizations have not only the responsibility, but also a great ability to exert positive change on the world’s economy, as well as on environmental and social conditions.

Reporting leads to improved sustainable development outcomes because it allows organizations to measure, track, and improve their performance on specific issues. Organizations are much more likely to effectively manage an issue that they can measure.

Because organizations disclose information in the public domain, sustainability reporting promotes transparency and accountability, in addition to helping organizations manage their impact. Stakeholders can track an organization’s performance on broad themes (e.g., environmental performance) or on a particular issue (e.g., labor conditions in factories). Performance can be monitored year over year, or it can be compared to similar organizations.

As a result, an increasing number of investors emphasize the significance of environmental, social, and governance (ESG) issues, because these issues carry the potential for material risk, including social and environmental damage and legal liability. Consequently, socially responsible investors are urging companies to issue sustainability reports.

As ESG issues move toward center stage, companies that currently provide sustainability reports have an advantage over those that do not, from the standpoint of the due diligence performed by socially responsible investors and concerned portfolio managers. From the corporate standpoint, sustainability reports could provide a competitive edge in attracting and retaining a growing share of institutional and individual investors. From the investor standpoint, sustainability reports provide them with criteria beyond financial statements with which to evaluate an investment. The ultimate mission of the GRI is to make sustainability reporting by all organizations as routine and comparable as financial reporting.

Alignment with Corporate Policy

Within the nonprofit world, the growing desire among donors to invest in ways that reflect their personal values and social priorities makes SRI a highly effective tool that provides enterprises with a competitive advantage, if they choose to adopt socially responsible policies as a marketing point.

Not all companies emphasize environmental, social, and governmental issues, however, or do so effectively. This creates a challenge beneath the surface of portfolio performance numbers. The problem is inherent in the types of stocks and other financial instruments that nonprofit investment portfolios of all sizes may find themselves holding. The paradox is troubling: A nonprofit entity doing good works through its people, programs, and financial resources could inadvertently find its hard work undone by investments in companies whose policies run counter to SRI philosophy.

Socially Responsible Investing as a Change Agent

Adequate portfolio returns are essential for funding the missions of nonprofit organizations and maintaining their endowments. But these organizations face more options than the choice between not making money and compromising their goals. They face logistical challenges as well: Large foundations and endowments may hold hundreds of positions and have trouble keeping track of them, while small organizations lack the resources to do effective social screening of their investment options.

The growing awareness that the ways in which people save, spend, and invest can considerably influence society has increased the popularity of SRI. Accordingly, it also makes sense for individual and institutional investors with strong social goals to seek to forestall the potential disconnect between value and valuation. Such investors are tending to turn to SRI with the goal of achieving roughly the same returns as other investments, instead of using investment vehicles that do not share socially responsible investors’ ethical commitments. (See the Exhibit.)

No long-term study has yet shown a cost to SRI on a risk-adjusted basis (Social Investment Forum Foundation, Investment Trends Report, 2007). As the belief grows that investors bear responsibility for the impact of their money in the world, value-based, value-seeking, and value-enhancing investors may find that they can play a crucial role in improving the quality of society by establishing environmental, social, and governance criteria for the corporate world. If this is true, then it seems obvious that in a market-based global economy, corporations will ultimately find themselves with no profitable choice but to adjust to the values-based preferences of both the investment world that buys their securities and the consumer culture that purchases their products.

Expanded from the moral compass in which socially responsible investing maintains deep roots, even now, SRI and ESG products and policies make it possible for personal and institutional investors to commit their money to achieving some degree of social good, without being undercut by corporate actions or products. As SRI expands as an investment philosophy, it may well be able to change the concept of investing from more than simply seeking financial returns, to creating a robust vehicle that seeks to produce both investment and social-improvement returns.

Neil Rubin, CIMA, is senior vice president—investments, at Oppenheimer & Co. Inc., New York, N.Y. He can be reached at

This article is not and is under no circumstances to be construed as an offer to sell or buy securities. The information set forth herein has been derived from sources believed to be reliable but is not guaranteed as to accuracy and does not purport to be a complete analysis of the market segments discussed. Opinions expressed herein are subject to change with notice. Additional information is available upon request. Neither Oppenheimer & Co. Inc., nor any of its employees or affiliates, provides legal or tax advice.




















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