SRI
Socially Responsible Investing (SRI) is a type of security selection, for all or part of a portfolio, in which positive and/or negative screening constraints exist to achieve social as well as investment returns.
+ screening
Favor, or constrain selection to, those securities which meet defined criteria for inclusion in the SRI portfolio; effort to look for qualifying securities
- screening
Constrain security selection to those which avoid a defined negative social impact.
size of SRI
- 8T in SRI portfolios out of 40T total AUM (20% of all professionally managed assets are in SRI portfolios)
- grew 14x over last 20 yrs and 33% in last 2
- 1000 ESG funds at end of 2015
fiduciary duty
- general duty of care and loyalty
- putting clients interests 1st
- treating all clients equally & avoid conflicts of interest
- fully disclosing all significant known investment risks
- acting in good faith
- having reasonable base of investment advice
- seeking best execution for client trades
ERISA fiduciary duty
-even tougher than ordinary duty (responsible for managing plans ONLY in interests of plan beneficiaries)
gov regulators’ attitudes towards SRI
SRI consistent with fiduciary duty if risk/return competitive with alternatives
-it’s ok to invest in SR assets if the asset would achieve equal or superior return on risk-adjusted basis to a non-SRI asset; has to be documented by investor
ERISA
governs investments in retirement vehicles like defined benefit plans; investments themselves; & in overseas, the selection of assets to make available to participants in defined contribution plans
DoL views on SRI
- seen in Rob Doyle: SRI OK if risk/return profile is competitive with other non-SRI investments the plan considers
- Bush admin released bulletin about documenting analysis of competitive returns
- 2015 issued bulletin, a major step in giving ERISA fiduciaries wider latitude for social investments; signaling more tolerant attitude by DoL towards SRI investments in ERISA plans (ERISA fiduciaries analyzing investments are now free to consider ESG policies of companies as potentially improving risk/return. )
why pension plans are significant in SRI and impact investing
- bc they’re HUGE; have a large proportion of total investment space; 63% of total AUM are in retirement plans
- internationally, pension plans are a large proportion of total assets; their involvement with impact investing is crucial
- 33% in defined benefit plans = pay benefits according to set formula; get benefits regardless of pension performance
- rest is in defined contribution = participants have to make own investment decisions and payout depends on individual investment performance
charitable (non-profit) boards and SRI
- if you’re an investment manager or trustee of an organization with certain goal, it may well be a part of your duty to you r stakeholders/beneficiaries to consider whether investing in that sphere would be carrying out the goals of the organization
- “In order to fulfill their responsibility to see that the [nonprofit] corporation meets its charitable purposes, [board members] may have a duty to consider whether their investment decisions will further those charitable purposes, or at least not run counter to them.”
- would be true for many organizations w/missions (like universities)
- if you’re Catholic charity w/o constraints on endowment portfolio, this could go against what you want to support`
ESG
Environmental, Social and Governance factors in investment decisions
- E = climate change mitigation; sustainability
- S = any social return factor that isn’t E or G
- G = governance; good corporate governance is inherently a social good; CSR, greater board diversity
examples of negative screens
– Example: Not investing in tobacco stocks
– Example: Not investing in South Africa due to apartheid (pre-1994)
examples of positive screens
– Example: Investing in firms whose products benefit the environment
– Example: Investing in firms where at least 40% of directors are female
fund types that can be SR
there’s a wide variety of investment fund types including: mutual funds, ETFs, separately managed accounts, variable annuities, closed end funds
topics important to institutional investors for 2016
- most important = conflict risk (terrorist or repressive regimes)
- following: climate change/carbon, E (general), S (general), G (general), board issues, exec pay, human rights, tobacco…
MSCI Indices
- biggest provider of indices in this space
- after acquiring KLD 400, created of large family of SRI indices
- MSCI Global Sustainability indexes
- MSCI Global SRI Indexes
MSCI KLD 400 Social Index
- 400 primarily large-cap US corps
- Designed to be like the S&P 500 except including set of (negative) SRI screens
- acquired by MSCI in 2010
MSCI Global Sustainability indexes
- Target highest ESG-rated companies making up 50% of market cap in each sector of underlying index
- Ex. MSCI World ESG index = large and mid-cap securities in developed countries; Include companies with high ESG rankings relative to sector peers
MSCI Global SRI Indexes
Target highest ESG rated co’s making up 25% of market cap in each sector of underlying index. Targeting 25% instead of 50% of parent index = more rigorous screening
MSCI IVA
- intangible value assessment
- MSCI’s methodology for generating company scores on various SRI/ESG measures to qualify or disqualify a company (or bond) for index inclusion in MSCI World Index (every stock of a certain size in developed markets)
MSCI IVA
- intangible value assessment
- making a partly subjective judgement from 1-5 for companies
- MSCI’s methodology for generating company scores on various SRI/ESG measures to qualify or disqualify a company (or bond) for index inclusion in MSCI World Index (every stock of a certain size in developed markets)
Step 1: Identify Key ESG Drivers of Risks and Opportunity for Each Industry
Step 2: Evaluate Risk Exposure and Risk Management Step 3: Rate and Rank Each Company against Sector Peers
DJSI
- 1st global sustainability benchmark
- Include only companies that fulfill certain sustainability criteria better than majority of peers
Calvert Investments
- Asset manager, mutual fund family with proprietary index
- Separate foundation promotes SRI & CSR
- performs social audit on 1000 largest US Co’s in DJ Total Market Index; evaluates products, environment, workplace, integrity
