Despite the fact that Socially Responsible Investment (SRI) has a long history, it is only recently that its potential as a change and transformation engine in the management of companies and society has started to show.

The definition of SRI is a complex one that has evolved during the last few years and varies by country. Who exactly started talking about SRI and when is not clear; however in its current shape, it aims to offer an incentive to investors with an increasing awareness of social and environmental development. But, what is socially responsible for some people may not be considered socially responsible for others. Who judges, then, whether an investment is socially responsible?

Some socially responsible funds use exclusion-based criteria, for instance, company activity, such as the tobacco industry or the arms sector. Nevertheless, the reasons for exclusion can vary.

Over the past ten years, Eurosif has been one of the most active entities invigorating the debate to achieve a broad consensus on the definition of SRI. At the end of 2011, Eurosif started a consultation process with international experts in order to update the definition. The result of this process was the definition of seven strategies encompassing all the criteria used by assets managers that include sustainability and responsibility in their investment decisions or that take into account ESG aspects (environmental, social and governance). These criteria are:

  1. Sustainability-themed investment. investment in themes or assets linked to the development of sustainability. Thematic funds focus on specific or multiple issues related to ESG, thus contributing to facing social and environmental challenges such as climate change, ecological efficiency and health.
  2. Best-in-class investment selection. An approach where leading or best-performing companies or assets within a universe, category, or class are selected or weighted basedon ESG criteria.
  3. Exclusion of holdings from investment universe. An approach that excludes specific investments or classes of investments from the investible universe such as companies, sectors or countries involved in certain activities like weapons, pornography, tobacco or animal testing.
  4. Norms-based screening.Screening of investment according to compliance with international standards and norms defended by international institutions such as the United Nations.
  5. Integration of ESG factors in financial analysis. The explicit inclusion by asset managers of ESG risks and opportunities into traditional financial analysis and investment decisions, based on a systematic process and appropriate research sources.
  6. Engagement and voting on sustainability matters. Engagement activities and active ownership through voting of shares and engagement with companies on ESG matters. This is a long-term process, seeking to influence behaviour or increase disclosure.
  7. Impact investment. Impact investments are investments made in companies, organisations and funds with the intention of generating a social and environmental impact alongside a financial return. Impact investments can be made in both emerging and developed markets and target a range of returns from below market-to-market rate, depending upon the circumstances. Investments are often project-specific and distinct from philanthropy, as the investor retains ownership of the asset and expects a positive financial return. Impact investments include microfinance, community investing, social business / entrepreneurship funds.

The compliance of these investment strategies is known as Responsible Investment (RI), while strategies 1, 2 and 4 together define SRI. The main potential of SRI lies in people’s awareness of the concept of comprehensive development: we care not just about how much we gain by investing but how we get it and to what purposes. The concept of accountability is, therefore, reinforced; any citizen could request/insist that enterprises and public institutions have an important role to play in sustainable development, demanding to see responsible criteria.

Towards sustainable development

In the context of Corporate Social Responsibility (CSR),a company can do anything in its power to be considered socially responsible, but the investor should be the judge of whether its investment in a particular company meets the appropriate criteria to be considered a socially responsible investment. As such, the investor fulfils its role as an interest group – the company must, in other words, show its commitment in order to obtain the investor’s support.

Triple Bottom Line [Source: Wikipedia]

Triple Bottom Line [Source: Wikipedia]

Investment with sustainability or social responsibility criteria is one of the levers to move towards a more sustainable economy. Through the present economic crisis, which many countries are still reeling from, it has become clear that the sustainability of our economies is critical – both in the long term, and along the more immediate path out of the crisis.

The United Nations outlined, in its statement of Principles for Responsible Investment, that a key aspect to encourage companies to adopt CSR policies is that they receive clear signals from investors.

In other words, there are duties for everyone: on the supply side, investment managers should be encouraged to incorporate social responsibility, economic and environmental criteria when defining financial products. On the demand side, investors should incorporate social responsibility, economic and environmental criteria in their investment decisions. Anyone can be an investor (I’m sure you, dear reader, have a fixed-term savings account (time deposit)) and we should aware that we as a group can therefore provide a basic incentive to improve management practices and ensure financial market sustainability.

The belief that SRI is less profitable is not true. Portfolios that assume social, environmental and ethical criteria in their selection are (at least) as profitable as those that do not adopt these criteria.

Almost all commercial banks have financial products that follow social responsibility criteria (i.e. Santander, Barclays, or HSBC). However, they are not sufficiently advertised or easy to find and, interestingly, employees of these banks are (generally speaking) not aware of their existence. Let’s start out, then, by breaking down the disinformation barrier. Improving our environment through money’s effect on the firm behaviour is an idea that we should be able to convey.

A case study: SRI in Spain

Since 2007, knowledge in the field has improved, although much remains to be done. The economic crisis and its management have discredited banks. The public is adamant in its need for transparency, answers and concrete action undertaken by public administrations and businesses. Indeed, the desire for transparency has increased significantly recently. Still, Spain’s SRI market is less developed than its European counterparts. Both demand (increasing awareness and information about SRI profitability) and supply (large companies, investment funds and pension funds, banking ethics, etc..) need to be improved.

Despite the difficult economic situation, the responsible investment market continues to gain ground in Spain. Overall, the market has grown by 71% between 2009 and 2011. Nevertheless, the Spanish RI market is still dominated by large institutional investors, making up 97% of the assets managed according to ESG criteria. Among them, the most active participants are employment pension funds, the main market drivers of SRI in Spain.

The presence of retail SRI funds remains marginal. In the short term, the challenge is to overcome the retail market barrier, which remains sky high due to the conservative profile that has historically characterized the Spanish small investor as well as the distrust generated during recent financial scandals. Other challenges include dissemination, including greater presence in networks and media. Also, major financial institutions face the challenge of designing attractive SRI products and training their staff. They also must raise awareness within public administrations about their duty to manage and invest public money according to sustainability criteria. Above all, however, promoting financial literacy among the population remains key.

For more on SRI in Spain, in Spanish, see the article on our Spanish-language site.

Cover photo:  Sustainable Stock Exchanges Initiative [Source: Flickr UN Global Compact]

This is a non-profit explanation.

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