A Promise of Socially Responsible Investing – Realized

Investment advisors who have practiced socially responsible investing (SRI) going back decades as some on our team at Natural Investments have, remember well the doubters’ refrains of our means for social and environmental change: using investment capital does not advance social progress and environmental preservation.  There is now evidence to refute them.

One way socially responsible investors create impact is by identifying which companies are exhibiting objectionable practices that undermine social progress or create environmental harm, and will  decide to withhold financial backing from such companies.  This is known as “avoidance” investing, one of several SRI leverage methods. The purpose of avoidance investing is two-fold: first these companies will find less financial support from the investing public, and second, those freed-up funds may be redirected to more solution-oriented companies, creating demand for their shares.

The rationale behind avoidance investing begins with the principle that the stock market operates on a “supply and demand” basis.  Companies whose shares are in demand will tend to rise in value, and out-of-demand companies will see their shares tend to fall.  When enough SRI investors withhold investment in problematic companies, this reduces demand for their shares and values may tend to decline.  Declining valuations for such reasons will pressure corporate management to consider improving their environmental and social performance.  However, SRI doubters respond that less scrupulous investors then swoop in and buy up equity shares in these companies at lower prices, thus bolstering demand anyway. Then share prices theoretically rise back up to fair market value, rendering the efforts of SRI investors ineffective and rewarding those willing to buy shares in these troublesome companies.

The same principle applies in lending to companies on the bond market.  Investors lend millions of dollars to businesses by purchasing corporate bonds, which are nothing other than securitized loans.

This critique of SRI avoidance investing is not unreasonable, although SRI investors have long believed that there is indeed a tipping point at which companies that operate in socially or environmentally insupportable ways will not find enough indifferent investors to continue investing in them and eventually respond to the pressure of conscientious investors.  That day has arrived.

In spite of the best efforts of the recent presidential administration to support fossil fuels, the fortune of the coal industry has declined as other forms of generating electricity have grown, including renewables such as solar and wind.  Estimates show that coal will generate just 20% of US electricity this year, down from 31% in 2016.  So, with a combination of foreign demand and regulatory accommodation, the industry has hung on by the skin of its teeth.

Yet, in recent months, the outlook for the sector has further deteriorated.  Why?  According to the Wall Street Journal, “the rise of ‘ESG’, or environmental, social and governance, investing is constricting the industry’s ability to obtain capital, current and former executives say.”  Whether it’s access to insurance or finding lenders (bond buyers), capital is being cut off to the industry.  “If they can cut off your financing, they cut off your ability to function as a company,” said David Stetson, CEO of Contura Energy, a major coal producer.

Conscientious investors are certainly aware of the loss of employment which occurs as outdated and harmful industries decline, through no fault of industry employees.  However, the answer is not to continue supporting the industries, but to invest in education and retraining services for displaced employees.  A strong labor force is a necessity for a healthy economy.  These workers can help, and prosper again in emerging industries, such as renewable energy.

In another enormous corner of the economy, the meat and dairy industries have long been climate change drivers.  Methane produced by animals is a potent greenhouse gas – worse than carbon dioxide.  In recent years, technologies and systems have been developed to capture and feed methane into existing gas grids as what is now called, “renewable natural gas.”  This is a byproduct of animal agriculture that had been going to waste, but has now turned into a resource; it was developed as an independent energy source.  Again, from the Wall Street Journal, “Analysts and utilities believe renewable natural gas could reach 10% to 30% of total natural gas supply by 2040.  The lower end of that range will still require help from policy makers, the energy industry’s deep pockets and companies eager to burnish their environmental credential for the funds that steer trillions of dollars with environmentally and social responsibility in mind.”

This is a direct acknowledgement that companies in the dairy and pork industries are willing to invest their own resources in this valuable climate change fighting technology in order to attract investment dollars from climate-minded investors.  This innovation does not cost the industry jobs.

From these examples and many others, SRI investors are defying the skeptics who charged that the efforts of ethical investors would always be undercut by profiteers, thereby mitigating their impact.  If you are a socially responsible investor yourself, CONTRATULATIONS!  Your decision to invest with impact, is in fact having an impact, today.  In measurable ways.

We all know that there is much more to be achieved in terms of creating greater social equity and opportunity, and the clock of climate change continues to tick.  SRI continues to innovate to help meet these challenges.  There is never a single silver bullet in addressing entrenched problems, though the evidence is showing that, as we always thought, SRI investing is an important part of the solution.

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Scott Secrest

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