more than a quarter-century of building credibility, socially
responsible investing (SRI) and corporate social responsibility
(CSR) took the final steps crossing over from the periphery
into the mainstream in 2005.
Household names such as Citigroup and GE
went public with initiatives confirming that SRI and CSR considerations
can steer investment and business strategies, respectively. Recognizing
these watershed events, SocialFunds.com chose these developments
as its top two news stories of 2005. Rounding out the top five
SRI stories of the year are:
microfinance emerging as a new asset
class, the withdrawal of shareowner resolutions on climate change
after companies agree to issue climate change reports, and exchange
traded funds (ETF) adopting SRI strategies.
1. Mainstream firms adopt SRI strategies
How do you know when SRI has entered the mainstream? When traditional
brokerages, investment consultants and law firms embrace SRI, and
when illogical opposition lashes out.
This past year, at least four mainstream investment banks issued
research reports utilizing SRI analytical lenses spanning the gamut
of social investment research strategies. Citigroup subsidiary
Smith Barney issued a report that took a decidedly qualitative
approach, assessing sustainability issues across 28 sectors. Goldman
Sachs sailed the opposite tack, taking a quantitative approach
by correlating 42 environmental, social and governance (ESG) criteria
in the energy sector to financial performance as well as exposure
to “new legacy assets,” or newly discovered oil and
UBS sought to quantify that which is qualitative by establishing
a framework to measure corporate social liabilities across nine
sectors in its SRI report. Merrill Lynch partnered with an environmental
nongovernmental organization (NGO)—the World Resources Institute
(WRI)—to produce a report analyzing investment opportunities
due to climate change in the auto sector, making specific stock
recommendations on seven companies.
Mercer Investment Consulting stepped into the SRI fray by releasing
a survey of mainstream investment managers’ approaches to
SRI in March. Then in October, Mercer’s SRI consulting team
launched an ongoing research stream rating investment manager capacity
to assess corporate ESG performance, and conduct active shareholder
engagement and proxy voting.
The conventional wisdom that fiduciary duty precludes the consideration
of ESG issues was turned on its head this past year. A report from
the uber-mainstream law firm Freshfields Bruckhaus Deringer commissioned
by the United Nations Environment Programme Finance Initiative
established that fiduciary duty not only allows ESG considerations,
it sometimes requires them.
Perhaps inevitably, the mainstreaming of SRI met some opposition.
In a December move widely viewed as a capitulation to big business,
UK Chancellor of the Exchequer Gordon Brown unexpectedly killed
the Operating and Financial Review, a regulation mandating annual
corporate disclosure of environmental, social and governance information.
Incomprehensibly, Brown cited concern over “goldplating” (or
blind adoption of European Union regulations) when the OFR was
homegrown, the product of a multi-year, multi-stakeholder consultation
overseen by the Department of Trade and Industry.
With such major players embracing and validating social investing
strategies, it is clear that mainstream financial institutions
are finally seeing the light regarding the merits of SRI and sustainability
investing,” said Jay Falk, president of SRI World Group,
which publishes SocialFunds.com.
2. Mainstream companies embrace CSR strategies
If irrational opposition is a testament of success, 2005 started
with a bang for corporate social responsibility when The Economist
issued its diatribe against CSR in January 2005. Apparently, the
markets did not agree with the magazine’s assessment, as
several of the world’s most influential corporations adopted
significant CSR initiatives and policies this past year.
In May, GE launched its “Ecomagina-tion” environmental
responsibility initiative, a move that reverberated widely. When
a corporate giant such as GE places its stamp of approval on CSR
as a legitimate mainstream business strategy, it suddenly becomes
much harder to invalidate CSR. The fact that GE made the announcement
on the eve of the second Institutional Investor Summit on Climate
Risk at the United Nations headquarters demonstrates the company’s
recognition of the importance of corporate environmental responsibility
to the investment markets.
Wal-Mart, infamous for its truculence on CSR, astounded observers
with its October announcement of broad commitments to environmental
and social responsibility. These included 100 percent renewable
energy, zero waste and reducing greenhouse gas emissions by 20
percent by 2012, as well as increasing the percentages of women
and minority managers.
And in November, Goldman Sachs became the first major investment
bank to adopt a comprehensive environmental policy—and the
fourth major U.S. financial institution to do so, after JPMorgan
Chase earlier in 2005, and Bank of America and Citigroup in previous
Two-thousand-five was the year of announcements embedding CSR as
a valid mainstream business strategy,” Falk said. “Two-thousand-six
and beyond will be the litmus-test years for companies to demonstrate
action on CSR and critics to assess if these actions measure up.”
3. Microfinance emerging as a new asset class
The United Nations dubbed 2005 the “Year of Microcredit,” and
the markets reflected this by ushering in microfinance (which provides
small loans to the poor for starting up small businesses) as an
emerging new asset class. The most significant development advancing
this trend was the November launch of the Global Commercial Microfinance
Consortium. Deutsche Bank not only coordinates the consortium,
which also includes the Calvert Social Investment Foundation, Merrill
Lynch and Munich Re, but also manages its $75 million fund that
provides financing to microfinance institutions around the world.
Social investors’ portfolios have included microfinance for
years, so the emerging recognition of microfinance as a distinct
asset class with a host of different vehicles and strategies is
a welcome development,” Falk said.
4. Climate change resolutions withdrawn as companies agree to report
This past year, shareowner advocates solidified momentum toward
convincing companies to address climate change. This progress stems
from a campaign coordinated by Ceres and the Interfaith Center
on Corporate Responsibility. This past March saw the withdrawal
of shareowner resolutions after Apache, Anadarko Petroleum, Chevron,
Marathon Oil, Tesoro and Unocal agreed to issue reports measuring
climate change impacts and presenting plans for mitigation. Five
companies who made similar commitments leading to resolution withdrawals
in 2004—American Electric Power, Cinergy, Reliant Energy,
Southern Company and TXU—issued their reports or enacted
increased disclosure this past year.
In the matter of a few years, shareowner advocates have used the
resolution-filing process to shift climate change from the periphery
to a priority on the corporate agenda, compelling companies to
disclose information on how they plan to track and minimize their
environmental impacts,” Falk said.
5. SRI exchange traded funds launched
One of many signs of the maturation of SRI is the adoption of increasingly
sophisticated investment strategies. One such strategy is the ETF,
which resembles a mutual fund by bundling securities but differs
by allowing trades all day to exploit market flux instead of setting
net asset value once daily. One measure of the explosive growth
of interest in ETFs is the rise in assets under management by ETF
provider PowerShares Capital Management, which mushroomed from
$280 million at year-end 2004 to exceed $3 billion before the end
Early in 2005, Barclays Global Investors launched the iShares KLD
Select Social Index Fund on the New York Stock Exchange. KLD Research & Analytics
devised the underlying index to utilize an “optimization” technique
that overweights companies with strong social and environmental
performance and underweights companies with weaker social and environmental
performance. Mainstream institutional investors appreciated this
strategy, judging by the list of top institutional holders, which
includes JPMorgan Chase, Merrill Lynch, Goldman Sachs and UBS.
Soon thereafter, the American Stock Exchange began listing the
PowerShares WilderHill Clean Energy Portfolio, comprised of companies
that promote renewable and alternative energy. The fund clearly
appeals to social investors, as the top institutional holder is
Trillium Asset Management and the top mutual fund holder is the
Winslow Green Growth Fund, but mainstream institutions such as
Merrill Lynch and Wells Fargo also find it attractive. PowerShares
subsequently launched other ETFs that overlap into the SRI space,
including one focused on nanotechnology and another on water.
This article originally appeared on www.SocialFunds.com, the largest
personal finance site devoted to socially responsible investing.
William Baue works with SRI World Group, Inc., the publisher of