Big Money warms to socially responsible investing


Environmentalists have been preaching for decades that true societal change will only happen when the really big-money players, such as multinational corporations and banks, begin to balance profit-making with social responsibility.

Now, better late than never, that’s starting to happen. The ranks of the converted are swelling as more and more top CEOs and institutional investors adopt decision-making paradigms that require social and environmental impacts to be considered before money is lent or invested.

Individual investors are also putting their money where their hearts are. “In 2003, investments using socially responsible criteria exceeded $2.63 trillion worldwide,” writes Erik Assadourian in “Vital Signs 2005,” an annual publication from the independent Worldwatch Institute, a Washington-based research organization. Assadourian notes that the socially responsible investment market (SRI) is worth $2.16 trillion in the United States alone, where SRI mutual funds are rapidly gaining popularity.

SRI funds use three approaches: screening, to select or reject certain industries (for example, choosing eco-friendly companies and avoiding tobacco or weapons manufacturers); shareholder advocacy, to influence company policies; and community investing, to raise the flow of capital to certain communities.

Growth in SRI is not particularly surprising, though, since community-minded individuals and faith-based organizations have a long tradition of applying social concerns to investments.

“As early as the 17th century, Quakers screened out weapons companies from their investments,” says Assadourian.

However, what is new is that CEOs and the financial professionals who manage other peoples’ money are beginning to think more responsibly about social and environmental concerns. They are even finding that taking responsibility can improve their corporate image — and their profits.

For example, America’s three largest banks — Citigroup, Bank of America and JP Morgan Chase — now have “green lending” policies that affect how they manage their collective assets of nearly $4 trillion, according to Assadourian, this time writing in the September/October issue of Worldwatch magazine.

These banks did not go green in a burst of enlightened altruism, however. “The changes follow years of aggressive efforts by nongovernmental organizations [NGOs], investors and activists,” reports Assadourian. “With corporations spending a half-trillion dollars each year to create positive images through advertising, a sudden storm of negative publicity from the actions of thousands of coordinated activists can swiftly raise environmental issues to the top of managers’ action-item lists,” he observes.

But it’s not just banks. Governments, too, are starting to address the issue as the awareness of voters increases.

Across the industrial world, nations have adopted legal guidelines that require institutional investors — such as insurance companies and pension funds — to examine environmental, social and governance issues (ESG) in their portfolio decision-making.

Even in countries that have yet to adopt such legislation, a recent study compiled for the United Nations Environment Program by one of the world’s top international law firms found that ESG investing was more than just a wise option. “Institutional investors have a far greater opportunity — and in some cases a legal obligation — to incorporate environmental, social and governance issues into their investment decision-making than is traditionally believed,” states a UNEP press release.

The 150-page study, released last month by UNEP and lawyers at Freshfields Bruckhaus Deringer, surveys the law and legal trends in the jurisdictions of the world’s largest capital markets, including Australia, Canada, France, Germany, Italy, Japan, Spain, the United Kingdom and the United States. Titled “A Legal Framework for the Integration of Environmental, Social and Governance Issues into Institutional Investment,” the list of banks sponsoring the Freshfields report are worth a double-take, including as it does the Bank of America, JP MorganChase, Deutsche Bank, Citigroup, Royal Bank of Canada, Bank of Tokyo-Mitsubishi and National Australia Bank.

Their interest is not surprising. According to Freshfields Bruckhaus Deringer, the current value of assets managed worldwide by the investment industry has now soared to top $42 trillion. Speaking to a gathering of business and government representatives at the UN last month, Paul Watchman, a partner at Freshfields Bruckhaus Deringer, and senior author of the ESG study, explained that investors who advocate greater concern for social and environmental issues in investment decision-making are often challenged by those who claim that institutional investors are legally prevented from considering such concerns.

“Far from preventing the integration of ESG considerations, the law clearly permits and, in certain circumstances, requires that this be done,” Watchman explained.

“A majority of the jurisdictions have legislated [or are expected to do so shortly] to require investment decision-makers, particularly in the pensions context, to disclose the extent to which they take ESG considerations into account,” states the report.

Jurisdictions where ESG disclosure obligations already apply include Australia, France, Germany, Italy (pending), and the U.K.

ESG issues are those that have one or more of the following characteristics, according to the report: “[They] are the focus of public concern [e.g., genetically modified organisms]; they are qualitative and not readily quantifiable in monetary terms [e.g., corporate governance, intellectual capital]; they reflect externalities not well captured by market mechanisms [e.g., environmental pollution]; they are often the focus of a tightening policy and regulatory framework [e.g., greenhouse gas emissions; or, they arise throughout the company’s supply chain [e.g., labor issues at supplier factories].”

The Freshfields report then concludes: “Conventional investment analysis focuses on value, in the sense of financial performance. As we note above, the links between ESG factors and financial performance are increasingly being recognized. On that basis, integrating ESG considerations into an investment analysis so as to more reliably predict financial performance is clearly permissible and is arguably required in all jurisdictions.”

“What was once considered a niche area is set to become mainstream, as institutions with trillions of dollars under management embed ESG thinking into their investment approach,” said Klaus Toepfer, executive director of UNEP, commenting on the release of the report.

And with ESG considerations gradually being adopted worldwide, don’t be surprised if, one day soon, banks and institutional investors even find themselves facing legal liability for profiting at the expense of the environment and the patrimony of future generations — a “green” litigator’s dream; a CEO’s nightmare.

The Freshfields study is available in pdf format at: www.unepfi.org For more information about the Worldwatch Institute, visit www.worldwatch.org Stephen Hesse can be reached at: stevehesse@hotmail.com

A small international nonprofit organization in Tokyo has a very big idea: to design and build a revolutionary solar-powered boat to serve sustainable development. The Greenheart Project aims to build a zero-emission, fuel-less cargo ship small enough to serve the poorest communities and efficient enough to thrive in the global marketplace.

Though the vessel’s technology is not cutting-edge, the group’s mix of traditional and modern techniques could make a huge difference to marginalized, struggling communities around the world.

“A project like this has the potential to change so many lives in developing countries, and to also inspire and educate people all over the world — even before the first ship is built,” says Chris Kozak, the group’s spokesperson.

And inspiring people is exactly what the Greenheart Project has in mind with their Green Power Poster Contest. The contest encourages students from around the world to share their vision of a clean and sustainable future through posters, postcards and Macromedia Flash animations.

If you have ever thought you should be doing something for the environment, check out the contest at www.greenheartproject.org