- S-Network Global Indexes
- Posted August 3, 2017
A Different Take on Socially Responsible Investing (SRI)
What is Socially Responsible Investing? This is the big question asset managers are facing as they try integrating social responsibility into their management practices.
Like beauty, SRI is in the eye of the beholder. The “market” defines SRI as the confluence of three factors: Environment (E), Social (S) and G (Governance). But market participants see the relative importance of these factors differently.
For many, the Environment holds sway. But for others, it is the social component with an emphasis on workforce diversity. Hard-nosed investors look at performance benefits that seem to come from isolating good governance practices as the key consideration.
Parsing the data becomes highly subjective which explains why implementing “best practices” is so important. There are over four hundred key data points that define best practices. These data points include simple questions of policy: Does the company have a formal policy for promoting diversity? Does the company have a formal plan for reducing CO2 emissions?
Then there are the metrics that validate policy. For example, what are the company’s actual CO2 emissions and what is the trend line for these emissions in the recent past?
Aggregating all of this data establishes a company profile that drives deep into a company’s interaction with the economic milieu, including the social efficacy of its supply chain. For example, Apple, one of the world’s largest companies, gets high marks for its environmental and governance practices, but loses ground when it comes to its social positioning. This is mostly because the companies involved in their supply chain don’t employ well-regarded business practices.
These data points constitute a new frontier in investing, because they facilitate a more rigorous level of analysis. In fact, defining whether or not a company adheres to established ESG best practices is the essential first step in constructing a socially responsible portfolio. Once a best practices universe is defined, the highly personalized definition of Socially Responsible Investing can be applied through the exclusion of companies based on their business practices. Some examples include participation in the energy, nuclear, armaments, and tobacco or alcohol industries.
However you define the relevance of environmental, social and governance practices, it starts with applying best practices.