Bigger SRI tent holds problems along with possibilities

This article from NI’s Andy Loving was originally published in the February 2015 edition of the Green Money Journal.  It offers some much-needed perspective on the recent surge of mainstream investment interest in ESG measures, which is often celebrated as being synonymous with SRI and its historic goals.  Andy begs to differ.

I have spent my 20-year career as a financial advisor working with people who want their faith and their values to be reflected in their use and investment of their money. From the beginning, I have been a socially responsible investing advisor to organize money for social change, while serving the needs and commitments of my clients.

But today’s social investing marketplace is increasingly driven by ESG (Environmental, Social, Governance) investments. The social investing “tent” has indeed gotten much bigger and, in the process, many strongly held values that my clients and I have seen as so important now seem unimportant, or at least less important, to many in the industry. Growth often results in increasing diversity, which can be a good thing. But in the changes in the social investing industry, certain values and priorities have been de-emphasized to the point that the character of the industry is significantly changed.

Information in the recently published 10th edition of the US SIF Trends Report on SRI documents concerns. The headline news of the Trends Report is, of course, the 76 percent increase over two years of U.S.-domiciled assets under management using SRI strategies. The jump from $3.74 trillion in 2012 to $6.57 trillion in 2014 was startling, encouraging and almost unbelievable. But of that more recent number, $6.2 trillion were assets where ESG factors only were being incorporated into investment decisions. There was no involvement in shareholder activism and community/impact investing.

These numbers indicate that many mainline money managers now believe ESG factors can and do influence the financial bottom line, making ESG material to profit maximization. The mainline Wall Street firms are finally believing what the SRI industry has been saying for decades.

The report also contains information about two other important areas of activity – shareholder advocacy and community investing/impact investing – where the news is not quite so encouraging. While ESG assets surged 76 percent over two years, the number of institutions and managers involved in filing shareholder resolutions has remained flat for four years. When will the firms that have begun to integrate ESG factors go further and become active in shareholder filing and shareholder engagement? For the SRI industry to push its historical goals forward, we need them to do just that.

And when one begins to inspect the Trends Report concerning community investing and impact investing, there are both troubling and encouraging signs. While we have seen a 16-fold increase in community investing assets since the first 1995 Trends Report, the increase in assets from $61.4 billion in 2012 to $64.3 billion in 2014 only represents a 4.7 percent increase over those two years.

The 2014 Trends Report included impact investing for the first time. This exciting arena which has focused on producing high social impact in environmental and economic areas with market-rate investment returns reported investments totaling $36.8 billion at the beginning of 2014. Together there is much good news here, but a wider and longer perspective reveals some concerns.

The idea of a “three-legged stool” has long been used to illustrate SRI investing. One leg is said to be screened investing, now often called ESG integration. The other two legs are shareholder advocacy and community investing. As illustrated by the 2014 Trends Report, our current stool would have three legs: a log for screened investing (ESG integration), a stick for shareholder advocacy, and a toothpick for community investing. Even if we add impact investing to community investing, the size of the third leg just might be two toothpicks instead of one.

It was not that long ago when the social investing industry was campaigning for firms and advisors to have 1 percent of their assets in community. Many met that goal and continue to. But if we use that measure now, the 2014 Trends Report reveals that about one-tenth of one percent of SRI industry assets is currently in community investments. And even if we include impact investments with the community investments, the number only climbs to 15 one-hundredths of one percent. Admittedly, this arithmetic comparison cannot be taken too literally, but it indicates where we are in the development of the industry. The part of the industry that has always dominated, dominates more assets than ever before and to an even greater degree.

As a faith- and values-based advisor with faith- and values-based clients, I see in the 2014 Trends Report an industry that is at a critical point in its development. Firms and institutions controlling a gargantuan amount of financial assets have come under the social investing industry “tent” after embracing the idea that ESG factors are absolutely material to the long-term financial health of companies. But faith and values investors want more than that. They want a commitment to social change and responsible environmental stewardship alongside profit. Profit is a good thing and a needed thing. But it cannot be the only thing. Milton Friedman’s thesis that maximizing profit is the corporations’ only responsibility needs to be rejected by all.

Total agreement on priorities will never be achieved, but we certainly need to start the conversation. We have to struggle with what is enough for us to stay under the tent together and work together toward some common goals besides profit maximization.

So what are some of the ideas, values and questions that faith-based and values-based advisors and clients would like to see discussed with ESG investors?

I fear that the potential influence of the new, large, powerful, financially flush ESG-only assets will steer the overall emphasis of the industry away from the crucial shareholder advocacy and the community/impact investing, already the stick and the toothpick of the SRI three-legged stool. Indeed, they already have. “Big money” in faith-based institutions, politics, and on Wall Street wields enormous power and influence, and we are naïve if we don’t believe it will in the SRI industry in the years ahead. If, 10 years from now, there has been no significant growth in these areas, our industry will be significantly changed. I acknowledge the responsibility of faith and values-driven investors to work so that does not happen. But, I would like the ESG-only investors to publicly talk about their plans, or at least about their interest, in shareholder advocacy and impact investing/community investing. This conversation is what we need for trust under the tent to grow.

It seems important to note that firms who historically were not SRI firms – such as TIAA-CREF and Neuberger Berman – have come in under the SRI tent and evolved into active members of the SRI investing community in a very full way. Even now, these two firms predominantly manage assets that are non-SRI/non-ESG, yet they participate in shareholder advocacy and impact/community investing in significant ways with their SRI funds. This should encourage faith and values investors to be patient and allow the new ESG investors a little time to adapt and evolve into the non-ESG areas of the SRI community.

Are ESG-only firms willing to explore shareholder advocacy and community investing? Or have they come into the SRI tent only because they have been convinced that ESG factors are material to the bottom line, to profit maximization? Do they want to use the resources of their firms to truly address climate change, income inequality and world poverty? Do they want to see more women and minorities on boards of corporations? Are they at least willing to ask their ESG clients if they are interested in these kinds of issues and help those clients to become involved?

Faith and values investors know that profit maximization will probably continue to be the highest priority for most ESG-only investors. Most faith and values investors are willing to work with differences if we have some common commitments that bind us. Global warming, climate change, affordable housing, small business lending in poor neighborhoods, microfinance investing, access to capital, investments in women and minorities – all of these are, for faith and values investors, both social and investing issues.

Intentional dialogue must begin. We have a lot to lose if we don’t talk, and an amazing collective influence to gain if we do.

Article by Andy Loving, a Certified Financial Planner® and community investments expert with Just Money Advisors ( ), part of Natural Investments, LLC. He also serves in an advisory capacity to the Oikocredit USA board of directors, as well as the board of the Faith and Money Network (formerly known as Ministry of Money).


Tags: , , , ,

Andy Loving

Welcome to my archive of newsletter articles and blog posts. For more information on my service offerings, please go to my advisor webpage.