Can investors help save the world? 

 

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Historically, the rule of thumb has always been that you can invest to realise profit, or you can invest to do good (or, at the very least, to do no harm) – but you can’t do both in the same portfolio. 

But today, things have changed. The world is getting more crowded. In China, for instance, you can be one-in-a-million and still have another 1,360 other people like you. In India, the top 28% of the population by IQ is greater than the whole population of North America. 

By 2050 there will be nine billion people on the planet, two billion more than today; all looking to sustain themselves from the same finite resources. Within 15 years, the demand for food, water and energy will rise by 35%, 40% and 50% respectively, according to the Institute for Sustainable Investing

It’s becoming clear that pollution, climate change, population growth, poverty and inequality are huge issues that need to be addressed – and that companies and organisations who seek to reduce environmental and socio-economic harm from their operations are the ones who are going to succeed in a world where sustainability and social responsibility matter. 

Along with recycling and trying to reduce our carbon footprint, the way we invest can help make a difference.  It is estimated, for example, that today $1 out of every $6 under professional management in the US (around $6.6 trillion) incorporates socially responsible investing (SRI) strategies.  

SRI is a catch-all term for investment strategies that focus on social or sustainability issues. It is an investment discipline that takes into account the environmental, social and corporate governance (ESG) criteria of companies around the world when investing money, with the aim of generating strong, long-term financial returns, whilst delivering a positive societal impact. 

If you’d like to find out more about SRI, it’s an issue we’ve covered in Volume 27 of our Acuity series of newsletters. 

Each individual investor who invests in an SRI fund is helping to finance firms which espouse a strong ESG approach. In the long term, as impetus continues and ESG criteria becomes more integrated into company analysis and stock selection, passive investors will participate in this reallocation of capital as the market capitalisation of favoured companies will rise relative to other less favoured companies with less sustainable strategies.  

If you want to act sooner on SRI issues, but still want to see a healthy return on your investment, your best route is probably to  incorporate a ‘best-in-class’, diversified SRI fund(s) into a traditional portfolio, accepting that not all asset classes lend themselves easily to SRI investing.  On top of that, additional non-core allocations can be made to important issues and causes that are closely aligned with your firmly held values.  

Costs are likely to be a slightly higher than non-SRI funds on account of the additional work to capture, assess and rank the ESG criteria of firms.  But for many, this is a price worth paying for the sake of future generations. 

Image: The Value Web