Investigating Socially Responsible Investing

Working in a team of 3 students, we spent the semester investigating, analyzing, and envisioning the future of Socially Responsible Investing and Sustainable Investment Vehicles.

Through our research we found that first and foremost, the term “Socially Responsible Investing” (SRI) lacks clarity, and the definition varies widely depending on who you ask. As the socially responsible and sustainable movements have progressed, the SRI landscape has become more and more cluttered and difficult to navigate.

There is a lack of transparency in the SRI system, stemming from the very definition of what constitutes of Socially Responsible Investment. Historically, SRI investing is an offshoot of values-based investing, and has at its core an issue-base screening system. This means that investors can select investments which filter (in or out) companies that produce alcohol or tobacco, perform testing on animals, have human rights violations, produce toxins, or a multitude of other issues.

Mutual Funds and ETFs are among the most popular vehicles for SRI, as they tend to minimize the exposure and risk of the investor. However, there is a downside – in order to minimize the investment risks, the funds are often composed of huge Fortune 500 companies, selected for being the best in their industry, even if the industry itself may be objectionable. In addition, the algorithms and scorecards used by large investment firms to rate the companies in their funds are often kept secret.

Ultimately, we defined Socially Responsible Investing as “Stocks, bonds, mutual funds, and ETFs that have been screened in some way to reflect the values of the individual or institution investing in them” but even that is a very vague definition.

We see SRI as a trend that will continue into the future, but without some effort to inject real transparency into the industry, it will continue to be confusing and subject to cries of “greenwashing.”

Our recommendation included adjusting the nomenclature used when describing the industry and the investments from SRI to ESG, standing for Environmental, Social and Governance; the creation of a self-regulating industry council; a glossary of common definitions; and a call for the disclosure of ratings and rationale behind selections for inclusion into SRI funds.

Moving forward, we envision a system of defined and published classification, certification and oversight criteria for ESG investing

Full project report available upon request.

Date: Spring 2010
Class: Capital and Markets
Contributed to: Secondary Research, Writing, Analysis, Concept Development, Ideation