It can be confusing to the average reader what Socially Responsible Investing (SRI) means, as well as why are there are such a wide variety of terms used to describe the field.

The usual assumption most have about SRI is that if an investor chooses this option, in order to match their values to their investing, they will more than likely leave returns on the table, as a result of having to avoid certain sectors such as gambling, tobacco and alcohol.


 

While this is how the field of SRI got its start, it has since moved on, and Sustainable Investing 2.0 is now a rapidly expanding area of great momentum and importance in finding value and maximizing financial performance.

Terms used for the field vary widely from SRI to Sustainable Investing to Responsible Investing to Impact Investing and more.  We previously provided some insight into terminology in this previous About.com piece, 

The problem with these terms is that they imply that if you go down this path, you subconsciously think anything else you might do is unethical or unsustainable.  What really is happening slowly but surely is gradual mainstream adoption of sustainability into investing across all asset classes.

Take the rapidly emerging field of Climate Bonds, as our first Calvert Series piece described recently here at About.com.  The Climate Bonds Initiative recently reported on the universe of climate themed bonds now representing over $500B, with calls from the mainstream IEA calling for $1T per year leading up to 2050 to help finance the needed low carbon energy transition and much more.

 This area is rapidly expanding as we speak, with this universe previously estimated last year at under $350B, or an increase of something like 50%.  Fixed income makes a lot of sense as a vehicle for climate change solutions if you think about it.  The premise is here is some money, pay me back over the next 20 years, when such longer term trends will be playing out if the science is correct.  The same longer term timeframe mechanism also works well for Infrastructure projects, such as financing technology to enable grids to interact with fluctuating renewable/low carbon energy sources.  Private Equity also works well, given longer term horizons than public equity, allowing for upfront investments in energy efficiency savings that play out longer term, as firms such as KKR are leveraging increasingly.

Public equity is the tougher nut in some ways, given high frequency trading, quarterly reporting, M&A activity and even passive investing, which has grown into a powerful bloc.  Public companies remain beholden to their shareholders first and foremost, and have a harder time investing from a longer term perspective.

But this too is starting to change.  The work we did last year with the UN Global Compact on a Value Driver Model provided a mainstream frame of growth, productivity and risk, highlighting companies who have been evolving towards sustainability-advantaged growth and efficiency in the billions of dollars.  30 case studies are available, with longer, detailed cases on Boeing, Dow, Dupont, Pirelli, Praxair, Philips, Reckitt Benckiser, Schneider Electric and Swiss Re, all of whom have been looking forward and evolving their companies towards more involved sustainability strategies.  Our preferred definition of Sustainable Investing (as per our second book Evolutions in Sustainable Investing, which looked at 15 cases of fund managers in the field) called for a future oriented, opportunity directed investment mindset, and the Value Driver Model offers a chance to find the winners of tomorrow solving for societal problems while improving their own bottom lines.

Perhaps of most interest, the longer case companies we looked at in 2013 had dramatically outperformed their benchmark over the previous three years when they had a strong focus on sustainability - the long case companies we wrote about were +68% while the benchmark MSCI World was +33% at the same time, over double the financial performance, showing that sustainability and performance are actually perfectly compatable.  Companies who ignore environmental and social trends may well be left behind, much as the coal sector has lost something like 75% of its value over the same recent period.  Hence, we see the $45T of signatories to the Principles of Responsible Investment looking at our Value Driver Model in their considerations of ESG (environmental, social and governance) integration, and we are seeing interest from other major sustainability organizations as well.

As September comes, watch for large asset owners and fund managers to increase their commitments to sustainability, as we previously previewed.

The very good news is that we can outperform and become more sustainable at the same time.