loves the Earth.


Greenifying the Stock Market: Socially and Sustainably Responsible Investing

Money, at least in the United States, is indeed colored green, and it can be spent in a way that promotes sustainable practices, environmental initiatives, and just and fair treatment to all global citizens. By showing companies that you care enough about their ethics to especially (or especially not) invest in them, you can enact change and better business operations. To some, it seems natural that your personal values should be linked to where you invest your money. Luckily, the practice of responsible investing is becoming more recognized and commonplace.

So, what exactly is socially/sustainably responsible investing (SRI)? The idea that some type of social orientation should be tied to investing dates back to the late 70s, following the thought patterns of that time plenteous with civil and environmental rights movements. By 1980 the idea was mainstream. For example, presidential candidates Jimmy Carter, Ronald Reagan and Jerry Brown advocated incorporating some type of value system for pension investments as part of their campaigns for presidential office.1

In 1982, Joan Bavaria, an investment officer at the Bank of Boston, founded Trillium Asset Management, the oldest independent investment advisor devoted to only sustainable and socially responsible investing. Later in 1984, Bavaria went on to co-found The Social Investment Forum, now known as USSIF—The Forum for Sustainable and Responsible Investment. This is the largest organization to serve socially minded investors, and the go-to place for resources covering the social investing landscape.

In the 1990s, as consumer awareness grew about environmental pollution and natural resource degradation, responsible investing began to be used more as a means to promote environmental sustainability.2 Impacts of global climate change also started to lend significant business and investment risks to companies, who realized they had more to lose than just the shares of ethically-minded investors. This spurred a momentum towards corporate social responsibility (CSR) and better environmental, social, and corporate governance (ESG). In 1989, Joan Bavaria and Dennis Hayes, the coordinator of the very first Earth Day, founded CERES as a network for investors, environmental organizations, and other public interest groups to work together with companies to address environmental concerns.3

Modern SRI

Nowadays, SRI is commonly known as Socially (or Sustainably) Responsible Investing and is used to promote concepts and ideals that investors feel strongly about. There are three common ways to participate in SRI that include investing in companies that showcase some kind of environmental and social governance (ESG), or by participating in shareholder campaigns, or by practicing community investing.

Firms that exhibit ESG are attractive to ethically-minded investors. ESG refers to factors that are subset of non-financial performance indicators  that include sustainable, ethical and corporate governance issues such as energy efficiency, greenhouse gas (GHG) emissions, staff turnover, and litigation risks. In addition, the company is expected to ensure there are systems and benchmark metrics in place to ensure accountability on these issues, and performance is reported annually by the company or through third party ESG assurance organizations. Often, ESG is the formal term that umbrellas other commonly used phrases like sustainability, accountability, and corporate responsibility.

The second way is through shareholder advocacy such as holding shareholder campaigns to prioritize certain issues. This is an interesting tactic where investors buy shares in non-SRI firms in order to use their leverage to transform or push through specific values at that firm. An early example of this was on April 13, 2000, when 13.5 % of British Petroleum Amoco shareholders voted ‘yes’ to an agenda raised by shareholder activists concerning its strategic positioning within the climate change debate. A final 2002 vote of 11% in favor of the proposal and 9% abstention constituted a “success” for the shareholder campaigners.4 Another advantage of this strategy is that it allows investors to benefit from a company’s stock price appreciation and dividends, while still working to change the company’s policies. Shareholder advocates operate from within, using their legal rights as shareholders to place socially and environmentally responsible solutions on the corporate proxy agenda.5

Lastly, community investing, also called impact investing, allows investment of capital to go directly to certain communities within the U.S. and abroad that are under-served by more traditional financial lending institutions. Community investing can give recipients low-interest loan access to investment capital and income, in addition to providing valuable community services that include healthcare, housing, education, and child care.

There has been some introduction of another form of social investing called common good investing which is a synthesis of current SRI and community investing. Common good investing implies investment done above individual or civil success. Terry Mollner, one of the founders of the Calvert Group, considers it may be the “next layer of maturity beyond socially responsible and impact investing.6” In other words, common good investing implies investing in companies interested in the common good of everyone beyond regional boundaries or personal bank accounts.

How to Practice SRI Investing

To practice socially/sustainably responsible investing, the approach includes investing in stocks and bonds from companies, counties, or municipalities that promote certain actions, or avoid participating in others. For example,  an investor may want to invest in Ecolab Inc. because of their technologies and services that protect clean water, provide safe food, and help create healthier environments. This same investor, however, may eschew investing in Philip Morris because smoking cigarettes is seen as a high social and environmental health cost.

The process of picking and choosing firms for SRI investing is often referred to as screening. In this example, investing in Ecolab Inc. would be considered a Positive Screen because the company was chosen directly due to its promotion of healthy living. Meanwhile, a Negative Screen was used to exclude Philip Morris based on the fact that a socially-minded investor would not want to support tobacco use, no matter if the company promises profitable returns. There is also a third way of screening called Restrictive Screening which looks at the proportions of a company’s activities, and decides that even though a small part of a company’s activities are in an undesirable sector, if the amount is small relative to the rest of the company’s activities then SRI investment is permitted.

Socially/sustainably responsible investing is becoming more well-known and desirable. In fact, over the last two years, the field has grown by more than 22% to total $3.74 trillion in total managed assets. Currently, about $1 of every $9 under professional management in the U.S. can be classified as an SRI investment.7 This increase in SRI investing is in part because of investors acting on investment decisions with an ethically- and environmentally-conscious point of view, but also because SRI funds tend to perform just as well, if not at times better, than non-SRI funds.

Performance of SRI Funds

From the beginning of SRI investing to about 2009, social investing was still considered a niche product due its constant underperformance compared to the S&P 500.8 Most SRI indexes, however, often outperformed their own benchmarks, if not the market. More recently, though, SRI’s have been seen to have more consistent and often higher returns than non-SRI funds. Several SRI indexes have outperformed both their own benchmarks and the market, plus exhibiting a faster rebound after bear markets than their non-sustainable counterparts. For example, the iShares MSCI USA ESG Select Index, an exchange-traded fund (akin to a mutual fund) that tracks an index of companies with high-level environmental, social and governance standards, over the past five years returned an annualized 2.3% compared with 1.7% for the S&P 500 stock index. Likewise, the Calvert Equity Fund, one of the largest and oldest SRI funds, gained 6.9% annualized over the past 15 years, compared with 5.5% for the S&P.9

This may be because of karma, but more likely firms that are listed on SRI indexes often dedicate more resources to innovation, waste-control, and employee development which strengthens their overall operations. In addition, by not relying on raw materials that may be running out or are socially unsustainable, theses companies benefit. For example, an October 2013 report by Sonen Capital and KLF demonstrated that socially responsible and impact investments can compete with and at times outperform traditional asset class strategies because the sustainable sector holds significantly larger absorptive capacity, or a firm’s ability to recognize the value of new information, assimilate it, and apply it to commercial ends.10

On the other hand, it is good to remember that SRI indices often use their own metrics which are specific to the investors to whom that index is valuable. For example, investors interested in renewable technology may buy stock within the FTSE Environmental Technology Index Series. This series requires companies to have at least 50% of their business derived from environmental markets and technologies. While this is a value-driven benchmark, the companies who are eligible for this index may not be the highest performing, and thus, would yield a lower return, than say an index that included British Petroleum (BP). While this environmental index may outperform in terms of its own standards, this is difficult to compare to the traditional standards stipulated in the S&P 500. Needless to say, a diversification of interests and values reflected in the emergence of SRI indices is a healthy counterpart to only investing for financial return.

Accountability and Qualification

In addition to practicing SRI through screening, shareholder advocacy, or community investing, there are also specialized stock indices that require companies to disclose sustainability data to qualify for listing. Globally, the growing popularity of responsible investing has contributed to the creation of these indices (some already mentioned) that include set standards for corporate ESG performance.11 Some common indices are the Dow Jones Sustainability Index which uses its own Assessment Questionnaire for qualification, the MSCI Index that does in-house ESG research, and the FTSE4Good Index Series. Common reporting frameworks used for deciding company inclusion in indices are provided by the Global Reporting Initiative and the Carbon Disclosure Project. These organizations are pivotal, along with many others, in pushing through standard sustainability reporting for companies and developing accurate ESG metrics.

How to Invest

There are several options when it comes to socially responsible investing. So far, mutual funds have been the most common way to invest in SRI. The largest fund companies that work with SRI mutual funds include Parnassus, GuideStone Funds, and Calvert. Exchange Traded Funds or ETF’s, another option alike to mutual funds, have recently come out in SRI format, and investment firms such as Powershares and iShares both provide offerings.

In addition, looking at listings within SRI indices or checking out the ESG of some favorite companies may lead to individual SRI investing. Discussing your picks with a broker or other financial expert may be the first step to becoming a socially-responsible investor.

This Just Up

Currently, there are several news-worthy events happening in the SRI-arena. One of these is the fossil fuel divestment campaign, started by sustainability advocate and scientist Bill McKibben. The campaign is based on the idea that to stay below 2◦C of global warming (which if breached would result in near 100% chance of over-heating and devastation), emissions cannot go beyond 565 gigatons of carbon dioxide. The fact that fossil fuel companies have more than 5 times that amount in coal, oil, and gas reserves makes their assets highly-overvalued if measured by ESG standards, and thus, investors are currently buying within a carbon bubble ready to burst. Internationally and across the U.S., investors, including universities and municipalities, are exercising a socially responsible decision to divest their stock in fossil fuel companies. This is a current example of how aligning ethical values with financial ones can make a huge impact on how our businesses operate and how we can influence our world for the better.


1. Gray, H. (1983). New Directions in the Investment and Control of Pension Funds. (pp 34) DC: Investor Responsibility Research Center.
2. Richardson, B. J. (2008). Socially responsible investment law: Regulating the unseen polluters. Oxford: University Press.
3. Ceres. (2013). Ceres Coalition.
4. O’Rourke, A. (2002). A New Politics of Engagement: Shareholders Activism for Corporate Social Responsibility. For the Greening of Industry Conference, June 23-26.
5. Mollner, T. (2013). The Differences Among Socially Responsible, Impact, and Common Good Investing: The Latter Is the Future of All Investing.
6. Tkac, P. (2006). One Proxy at a Time: Pursuing Social Change through Shareholder Proposals. Economic Review, Q3, 1-20.
7. Chamberlain, M. (2013). Socially Responsible Investing: What You Need to Know.
8. Andritolu, D. Socially Responsible Investing: Invest and Let Live.
9. Glassman, J. K. (2012). Five Mutual Funds for Socially Responsible Investors.
10. Sonen Capital Press. (2013). Evolution of an Impact Portfolio: From Implementation to Results.
11. USSIF Foundation. (2012). Report on Sustainable and Responsible Investing Trends in the United States.