2015: An Impactful Year for Sustainable Investing
By Mike Sakraida
Exciting progress was made by the SRI (Sustainable, Responsible, Impact) investment industry in 2015. Here, we offer two lists of three important stories and trends that are likely to impact most individual and institutional investors, including retirement plans, foundations, and endowments. After many years of path breaking effort, we may finally be approaching a "tipping point" where responsible investing is all of a sudden considered mainstream-simply a key component of a smart investment strategy.
Top Three SRI Stories of 2015
This year saw action by the New York State Attorney General, Eric Schneiderman, which caused the Securities and Exchange Commission to increase its enforcement actions related to public companies that don't fully and properly disclose the impact of climate change. In 2010, the SEC had issued guidance to public companies, to make climate change disclosures in their public filings. Now the New York Attorney General is going after ExxonMobil and other companies for not complying with the climate change impact reporting rules.
This is not the first time that a New York Attorney General has gone after public companies for failing to follow SEC rules (former Attorney General, Elliot Spitzer, brought various cases against public companies). Why New York? One reason other state attorney generals don't pursue such cases is that they don't have New York's powerful Martin Act. This act allows the New York Attorney General to take criminal and civil action against almost any individual and company that has business which affects New York State.
#2 IRS Removes Tax Barrier to Impact Investing by Foundations
A September 2015 announcement by the IRS said that foundations would not automatically be taxed on their gains from mission-based investments (includes SRI/ESG investment strategies). The threat of this prior tax had motivated many foundations which make mission-based investments to limit their impact investments to a median of 2% of their endowments, according to a poll by The Center for Effective Philanthropy.
The IRS said that foundation managers must exercise the ordinary business care and prudence in making investment decisions that support, and do not jeopardize, the furtherance of the private foundation's charitable purposes. In short, they are not restricted only to investments that offer the highest return, lowest risk, or greatest liquidity.
#1 Department of Labor Interpretative Bulletin: ERISA Fiduciary Standard
This development takes the top spot for this category because it influences all investment professionals with fiduciary responsibility, not just those working with ERISA plans. This DOL interpretive bulletin issued in October, 2015, provides guidance on the investment duties of plan fiduciaries under ERISA (Employee Retirement Income Security Act) when considering economically targeted investments (ETIs) and investment strategies that take into account environmental, social, and governance (ESG) factors. In this bulletin, DOL clarifies that a fiduciary who prudently concludes that an ESG integrated investment is justified based solely on the economic merits of the investment, does not need to evaluate collateral goals as tie-breakers.
This interpretative bulletin actually can be viewed as a "forward to the past" clarification because it eliminated a 2008 bulletin and reinstated the language of an interpretive bulletin published in 1994. Perhaps an "unintended consequence," but the 2008 bulletin had discouraged many fiduciaries from making SRI/ESG investment allocations.
Top Three SRI Trends of 2015
#3 Another Record Breaking Year for Advocacy and Engagement
Last year’s record of social and environmental resolutions filed with public companies was broken in 2015. The majority of the shareholder resolutions filed are focused on issues of concern to socially conscious investors. According to Proxy Preview, the SRI-based resolution categories are, in declining order, by percent of total: the environment; human/labor rights; sustainability; diversity; and animals.
Investors seeking positive impact through their public market investment strategies embrace advocacy initiatives as a means to influence the behavior of public companies. It’s an important way to give your investments a voice. Effective shareowner advocacy is not automatic with all SRI investment programs, but it is with First Affirmative. We have our own advocacy expert, who partners with other investment firms and with advocacy groups like As You Sow, the group behind Proxy Preview, to ensure that our advocacy efforts have the highest probability of success.
#2 Ever Growing Investor Appetite for SRI Investment Programs
For most financial advisors, it has gone from IF an important client will ask them about responsible investing, to WHEN one of those key clients will want to know more about it. According to a study published in early 2015 by Morgan Stanley Institute for Sustainable Investing, 71% of individuals are open to sustainable investing-and only 37% of investment professionals are even somewhat interested. The "opportunity gap" is wide and very obvious.
Recognizing growing client demand, a number of large firms jumped into the SRI pool in 2015, and the results of a First Affirmative study released in October 2015 showed that a majority of financial advisors say they are likely to offer their clients SRI investment in the near future. When financial firms commit so much to an investment approach, many see it as a leading indicator of an even greater increase in demand.
#1 Putting the SRI Performance Question to Rest
There are scores of academic and other studies which show that SRI investing does not necessarily create a drag on performance-and the news providers have finally gotten the message. Also this year, these same news sources covered both the increased supply of and demand for SRI investment services. The increased positive exposure from journalists has worked to reduce remaining angst around the performance question, and motived growing numbers of investment advisors to seek out more information on SRI investment programs.
A number of the academic studies that focus on the performance of responsible investment strategies, such as Can ESG Add Alpha from MSCI, have offered possible reasons why portfolios with SRI/ESG-based limitations did not have an inherent performance drag: 1) Less environmental event risk. Many companies with poor results from an Environmental, Social, and Governance (ESG) analysis have a higher chance of an environmental disaster hurting their stock price. 2) More in-depth analysis. ESG factor analysis often produces a better picture of risks and growth potential. 3) Significant leaning toward "companies of the future." SRI investment strategies tend to result in a greater percentage of companies which are benefiting from the latest technologies and business practices. In the UK, the majority of pension funds say ESG factors are material to portfolio returns.
First Affirmative understands that the ways we save, spend, and invest can dramatically influence both the fabric and consciousness of society. We believe that in addition to the benefits of ownership, investors bear responsibility for the impact our money has in the world. Are you making conscious decisions about the impact of your consumer purchase and investment decisions?
Past performance is no guarantee of future results. For information about the suitability of any investment opportunity, please contact your financial advisor.
Posted: December 23, 2015