The desire to make a tangible difference in the world through one’s investment activities is not new, but it is gaining popularity.
In a 2017 survey of institutional investors, three-quarters of respondents said that synthesizing financial and nonfinancial goals — responsible investing, as it’s broadly called — is more important now than three years ago and will be even more important three years from now.
“Responsible investing seems to be at a tipping point right now. It is garnering increased interest and momentum, which will likely accelerate in the years to come,” said William J. Kelly, CEO of the Chartered Alternative Investment Analyst Association, which conducted the survey.
But before putting responsible investing into action, here are some terms and considerations widely used by financial professionals that are crucial to look at:
▪ Environmental, social, governance (ESG) is a generic term used by investors to evaluate corporate behavior as it relates to these areas to determine the future financial performance of companies.
▪ Socially responsible investing (SRI) is a values-based investment process that typically uses ESG criteria or exclusionary screening to remove undesired products or industries.
▪ Sustainable investing is a long-term approach that incorporates environmental, social and governance factors into the investment process.
▪ Impact investing seeks to create financial return as well as positive social and/or environmental impact that is actively measured.
So in responsible investing, we use ESG considerations during the investment decision making and subsequent ownership practices to deliver a desired symbiotic financial and nonfinancial result.
The important takeaway here is that there is not a “one size fits all” approach.
Responsible investing seems to be at a tipping point right now. It is garnering increased interest and momentum, which will likely accelerate in the years to come.
William J. Kelly, CEO of the Chartered Alternative Investment Analyst Association, which conducted the survey
So how do you measure the intangible result of your desired objective — in other words, that is to ask, “How responsible am I?” To this end, we have seen an explosion of data providers and standard setters, of which three examples are presented below:
▪ Principles for Responsible Investment (PRI) is an international network of investors, supported by the United Nations, working together to put the six principles for responsible investment into practice.
▪ The Global Impact Investing Network (GIIN) is a nonprofit organization dedicated to increasing the scale and effectiveness of impact investing around the world.
▪ The Global Reporting Initiative (GRI) is an international independent standards organization that helps businesses, governments and other organizations understand and communicate their impacts on issues such as climate change, human rights and corruption.
Building a framework can be a useful tool to make the most out your good intentions. A rather simple yet effective model could look like this:
▪ Belief: State what is most important to you as a responsible investor. This statement serves as a basis by which decisions are made as to what investments may be best suited to meet your goals.
▪ Process: Identify how your beliefs may be integrated into the underlying investments that will make up your portfolio.
▪ Create a complete diversified portfolio across asset classes that captures your belief(s) and is aligned with your process.
When it comes to the concept of responsible investing, several things become apparent. Common terms and ideas can be somewhat vague in their meaning and interpretation. Measuring the efficacy of your intended goals can be difficult; a framework designed to achieve your objective is a useful and prudent approach to stay on track.
The good news is that with increased awareness and demand by investors, these become more integrated into all aspects of investment decisions and business practices. How you choose to implement these considerations is up to you — just ask yourself, “Who’s responsible?”
As the head of investment research for WE Family Offices, Jim Ulseth leads the firm’s efforts around manager selection and portfolio construction. He also is a voting member on the firm’s Investment Committee. Ulseth is a chartered financial analyst (CFA) and chartered alternative investment analyst (CAIA) and is a member of the CFA Society Miami. Jim.Ulseth@wefamilyoffices.com or http://www.wefamilyoffices.com/
▪ This piece was written for Business Monday of the Miami Herald. It reflects the view of the writer and not necessarily that of the newspaper.