Socially responsible investments are becoming mainstream investments.
The market — that is, investors looking for better investment returns, and consumers looking for more efficient products and services — is driving it.
Some companies, driven by these market forces, are more overtly considering the impact of their operations and products on the economy and the environment. That is, the market forces have made companies more aware of their environmental footprints, of the hidden costs of their operations that might not be paid for or offset by the wealth they create.
For example, who pays for the cost of clearing up the effects of pollution from a coal-fired power plant?
The gradual acceptance of socially responsible investment practices, including corporate governance factors, illustrates the adaptability of the market to new ideas and conditions when shown a prospect for enhanced return.
This development has evolved away from the still active but less fruitful strategy of divestment that closes off dialogue and possible alternative action.
Interestingly, the evolution has brought market discipline and accountability to SRI activity to better ensure it adds value to the economy. Corporations and mainstream investors are improving SRI to make it more valuable, letting the market judge it by the results it produces, not its ideals.
SRI-type activity that helps advance and sustain the corporate mission to make profit for shareholders deserves pursuit. That kind of activity, adapting to marketplace demands, has always been behind the corporate mission.
On the corporate level, JPMorgan Chase & Co. and Goldman Sachs Group Inc., for instance, have adopted policies integrating environmental and social issues into their financing decisions.
General Electric Co. has launched what it calls ecomagination, an effort to use environmentally advanced technologies to create products and services for the market.
On the investor side, European pension funds and global money managers have joined the Enhanced Analytics Initiative, which seeks to promote better sell-side research by steering brokerage business to securities research firms that are effective at analyzing non-traditional areas such as corporate governance, environmental, employment and public-health issues and integrating them into their mainstream reports.
Mercer Investment Consulting Inc. added a screen enabling clients to evaluate investment mangers on environmental, social and corporate governance factors. The Mercer effort is in response to a growing number of clients who believe these issues can affect the earnings of portfolio companies and therefore should be integrated into investment analysis by investment managers. The ESG factors will not have a formal role in the rating of investment managers, but will serve as an additional screen of managers for clients who want to use it.
The market is a powerful force driving activity that might seem SRI related but in reality simply makes good economic sense. For instance, along with concern about the cost of environmental damage, the high price of oil is driving innovation of alternative energy sources.
The efforts of corporate governance activists have led to greater disclosure of executive pay, and greater alignment of compensation practices with shareholder interests, including pay for performance policies. They also are leading to an examination of the disparity of pay and benefits between executives and rank-and-file employees.
Growing databases of SRI and corporate governance factors empower academics and consultants to conduct research to evaluate the value of incorporating such policies into corporate and investment practices, bringing further accountability of their value to the market.