The changing nature of SRI

Socially responsible investing must evolve to a more sustainable model if it ever hopes to move into the mainstream, according to one U.S. industry veteran.

“Over the next couple of years, we’re going to see a transition from the old world of socially responsible to the new world of sustainable investing. This transition is critical if our industry is going to broaden its market,” says Joe Keefe, CEO of Pax World Funds, which launched the first U.S. SRI fund in 1971. Keefe was speaking Monday at the Social Investment Organization’s biennial conference in Montreal.

According to Keefe, SRI has historically been viewed as an alternative investment strategy for those wishing to invest according to their values. Sustainable investment, on the other hand, has the potential to be a transformative investment strategy, he said, that is revolutionary, perhaps even equivalent to the industrial revolution.

Part of the problem with SRI, Keefe believes, is that it has been defined mostly negatively, with exclusionary screens of so-called sin stocks. In terms of financial performance, SRI’s position has been almost apologetic, he added, with constant references to the fact that you don’t have to sacrifice performance to invest in SRI products.

“It’s the only investment approach I’m aware of that did not make a case for outperformance but instead had a defensive posture,” Keefe noted. “I would also argue that SRI’s message has been somewhat counterintuitive, restricting the universe of potential investments based on moral judgment.”

Although focused on values, the SRI movement has never clearly defined those values, he said, which could be liberal, conservative or religious.

Sustainable investing is the more logical approach, Keefe argues, fully integrating environmental, social and governance factors, combined with a definitive financial perspective. “Sustainable investing has a broad-based market and both institutional and retail investors are more responsive to this approach.”

The mainstream market will respond to a socially engaged investment approach that is defined in terms of sustainability and not in terms of exclusionary or negative terms, he added.

“The financial case for sustainable investing is getting stronger. There is mounting empirical evidence that companies with better corporate governance carry less risk and outperform poorly governed companies over time,” Keefe said.

Arguing over whether companies are socially responsible or not is silly, he said, and has led to misunderstanding over what the industry is actually about.

“Sustainable investing helps to identify forward-thinking companies, which will provide better long-term ESG and financial performance. We have to start making that argument, in my opinion.”

Keefe believes that the next period of major global reform will be a sustainability revolution. “We should no longer tolerate poverty, injustice and environmental degradation as a necessary byproduct of market capitalism.”

Dermot Foley of Vancouver-based Inhance, who also spoke at the SIO conference, agrees that SRI has an image problem and noted that asset growth on the retail side has been stagnant.

“Advisors and brokers believe that our style of investing is risky, even though in reality we have funds across all categories. Clearly, we have an education problem, since many people believe we invest only according to moral guidelines. We have to connect with mainstream investors.”

But he says it’s important to focus on positive developments over the past couple of years, such as the UN Principles of Responsible Investing, which have been adopted by many major financial institutions, such as the CPPIB and Quebec’s Caisse, as well as the explosive growth of SRI on the institutional side of the business.

Michael Jantzi of Jantzi Research says the SRI movement will not succeed until retail investors are fully on board. But he is also bullish, noting that major players such as Barclays and RBC are now in the SRI space.

Doug Watt is a Toronto-based freelance journalist.

(05/29/07)