Conscious Capital Is Changing How Finance Functions
It used to be that when clients said they wanted to make a difference with their dollars, their financial advisers would tell them to make as much money as possible, and then donate the profits to charity.
The mainstreaming of responsible investing—which can also be referred to as green investing, mission investing, sustainable investing, conscious capital, and many other names—makes it clear that times have changed. Investors now have hundreds of options to invest directly in the change they want to see in the world.
“Why invest in a company that lies and cheats about tobacco? This is the information age. Why take the risk of bad behavior?” explains Rob Thomas, president of Social(k), a responsible investment advisory service for retirement funds.
The value of responsible assets under management in the United States began to take off in 2007. It increased 76 percent between 2012 and 2014 to $6.57 trillion, according to The Forum for Sustainable and Responsible Investment (US SIF). This represents one out of every six dollars under management in the United States, and 9 percent of total global assets.
Investor interest in responsible investment is even more significant. The U.N.-supported nonprofit Principles for Responsible Investment (PRI) has attracted 1,500 signatories who collectively manage $60 trillion in assets.
It was the 2008 financial system collapse that really boosted investor interest, as a concerning level of systemic greed and deception was exposed, according to advisers and advocates interviewed for this article.
Another watershed moment was when studies began to prove that socially responsible investing was just as profitable, if not more so, than traditional investing. Links that show a financial risk to practices that harm the environment, harm human health, treat workers badly, fail to promote women, and many others, are key to driving investor demands for these types of disclosures.
“Numerous studies have said you do not pay a performance price for sustainable and responsible investing,” said Lisa Woll, the CEO of US SIF.
Rooted in Religious Liberty
Practitioners trace the roots of the movement to American religious organizations such as the Methodist Church and the Quakers, who refused to support sins such as slavery, liquor, tobacco, and war.
Divestment, which is a financial expression of one’s freedom to say no, is known for helping to end apartheid in South Africa. There have been other examples too, such as financial protests against the Vietnam War and against the genocide in Darfur, Sudan.
Divestment is an example of what is called a negative screen. It wasn’t until the late 1970s and early 1980s that the category really broadened to include positive screens for the types of criteria investors cared about, which led to new and specialized asset instruments.
In the early days there were tens, but now there are nearly a thousand responsible investment funds for investors to choose from, and options exist in nearly every asset category.
Bob Goellner is the founder and owner of Common Interests, a family wealth financial advisory firm based in New Jersey. He got his start in responsible investing when the insurance company he worked for purchased one of the early responsible investment pioneers, Calvert Investments, and it was housed in the same office.
“As they evolved, I just rode along,” said Goellner, but then he changed companies and found himself watching the evolution of the category from a distance.
Finally, it was the financial crisis that got him to consider opening his own firm. He thought to himself: “This is a way of us doing it ourselves, and ensuring for ourselves that the companies we are invested in are not on the bad guy list.”
Malaika Maphalala is a responsible investor, and an investment adviser for Natural Investments LLC, based in Keauhou, Hawaii.
As a child, Maphalala’s father fled apartheid with his family, and it made a huge impression on her.
She later witnessed firsthand the positive impact of a forestry project in Nigeria, and then saw how a disconnect in funding was missing the mark for a needy community in Hawaii.
She became obsessed with making finance work for maximum impact, and that is when she found social finance “a very powerful way to move money into things that matter.”
With her personal investment dollars, she chooses a social impact fund that supports companies creating jobs in the developing world.
One of the most edgy aspects of responsible investing is its shareholder activism. If investors desire, they have channels to hold companies responsible for their commitments, and to push for further change and accountability.
This can happen through letters, phone calls, meetings, and more formally, a shareholder’s resolution.
David Wood, director of the Initiative for Responsible Investment, housed at the Hauser Institute for Civil Society at the Harvard Kennedy School, explains that many initiatives are led by advocates, who organize interested investors.
“There is a set of dominoes that are falling on the way up to a larger platform,” said Wood.
In the last six years, almost all the major banks have made commitments to responsible investing, signaling that the category has moved into the mainstream.
The banks are most active in the tax-exempt green bond market, which has soared to $41.8 billion globally in 2015, versus just $2.6 billion in 2012, according to Investopedia.
“Small parts of the firm [banks] are deeply engaged,” said Woll, and they recognize there is something really valuable in doing this. “In the next decade, there is an opportunity to expand this to a broader part of the firm,” she added.
Wood said he has “huge concerns” with the big banks getting involved, and it potentially leading to regulatory or industry capture.
Responsible investing is about long-term thinking, he said, which is at odds with the current dominant paradigm of capital flows designed for short-term gains and rent seeking, a financial term for economic gain that does not reciprocate by generating any benefit to society.
He wants to use this moment to reclaim our control over the markets, and “to have that discussion,” he said, adding that some of the root understandings need to be changed.
“The interests of investors and society will align over the long term,” he said.
Investors Push for Change
Investors have many tools they can use to push companies to change their practices. A few examples of active campaigns are below.
Reduced Funding for Guns After Sandy Hook
Following the December 2012 shooting at Sandy Hook Elementary School, and growing pressure from elected officials and stakeholders, institutional investors and money managers have incorporated investment criteria related to military and weapons production, according to The Forum for Sustainable and Responsible Investment.
In the past two years, consideration of these criteria by money managers has grown nearly four-fold in asset-adjusted terms, incorporated by 292 investment vehicles representing $588 billion in assets. Among institutional asset owners, concerns over military and weapons production now apply to $355 billion in assets, a nearly five-fold increase.
Campaign to Reduce Methane Emissions
The nonprofit Principles for Responsible Investment is engaging investors to address methane emissions in the oil and gas industry.
Research found that none of the 65 market leaders disclose targets to reduce methane emissions, and only a third report on emissions to investors. It was estimated that leaks cost industry $30 billion in lost revenue, so it gives companies a financial incentive to pay attention.
Climate change concerns account for one of the biggest categories of investor action. Many advocates credit millennials with pushing their universities and colleges to divest from investments in fossil fuel companies. Today, there is a growing number of investment options that screen out fossil fuel interests.
Palm Oil Concerns in Supply Chains
Green Century Capital Management, together with the New York State Common Retirement Fund, organized a letter to the Roundtable on Sustainable Palm Oil (RSPO) to strengthen its standards for certifying palm oil, a key ingredient found in an estimated 50 percent of all packaged goods.
Palm oil production is a leading driver of tropical deforestation, and the subject of considerable consumer concern, so major food companies were motivated to come to the table on the issue. Suppliers can either comply with the new sustainability standards or risk losing market access.
Signatories to the letter included major food companies Mars, Carrefour, Dunkin Brands, Albertsons-Safeway, Coop Switzerland, Seventh Generation, The Kellogg Company, General Mills, ConAgra Foods, Starbucks, Wal-Mart Stores, and five of the top 10 corporate purchasers of palm oil.