Global Investor Study

A short history of responsible investing

We take a look at the history of responsible investing and explain why it has gained momentum in the new millennium.

11/28/2016

Responsible investing dates back as far as investing itself. In the 18th Century, Quakers and Methodists had both laid out clear guidelines to followers over the types of companies in which they should invest, as did a range of other religious groups.

In modern day markets, responsible investment became more formalised in the 1960s around the time the mutual industry started to expand into widespread use. Questions around responsible investment reflected the social issues of the day, including the rise of the civil rights movement, and have continued to evolve as those demands from society have changed.

As the fund management industry grew, activists recognised the opportunity that shareholders had to influence corporate behaviour. Between the 1970s and 90s for instance, pressure on fund managers to avoid investing in companies operating in South Africa is held up as one of the factors that helped end apartheid.

In the 1980s and beyond, environmental concerns gained more attention in the wake of disasters such as Bhopal and Exxon Valdez, while there was an awakening about the threat from climate change.

The global financial crisis of 2008/09 provided a stark reminder of the interdependence between societies, economies and financial markets. It also provided clear evidence that market pressures do not always result in ideal outcomes for the wider good.

The financial crisis nearly brought the world to its knees, but it has helped re-emphasise the role of investors, as long-term owners of companies, to ensure good stewardship.

Increased regulation and pressure from the millennial generation, those most affected by the fallout of the financial crisis, has reinforced the involvement of corporations with the society in which they operate, and the duties they have to all stakeholders.

The chart above shows the sharp increase in recent years of news coverage of sustainable investing (the grey line), the growth of responsible investment assets (the blue line) and the number of signatories to the Principles for Responsible Investment (PRI) (the black line), supported by the United Nations.

Assets covered by the PRI hit $59 trillion in April 2015, up 29% on a year earlier. Schroders was an early signatory in 2007.

What does it mean to be a responsible investor?

It means many different things to different people, but all are grounded in recognition of the links between the companies in which we invest and how they (and stakeholders) interact with the environment and society in which they operate.

These links mean the future profits of companies will be affected by changes in the society in which they operate. Understanding how those changes will play out, and which companies will thrive is an important part of any long-term investment decision.

This doesn’t necessarily mean that an investor is placing ethics ahead of sound financial decisions; it is just good investment practice.

Active ownership

As owners, investors can influence companies to take actions on issues to manage risk and help drive better performance.

This might mean avoiding companies with activities they find disagreeable or applying strong pressure on management teams to stop certain activities.

The focus is identifying businesses positioned for long-term sustainable growth to drive returns for investors and other stakeholders.

Defining sustainability

Confusing matters, terms like responsible, sustainable, impact and ESG (environmental, social and governance) investing are often used interchangeably.

At one end, ethical “screens” eliminate companies engaged in controversial activities.

At the other end of the spectrum, ESG is the application of analysis on key areas of a company’s decision-making – environmental, social and governance ¬– and encouraging better practices.

On environmental matters, this could be considering a company’s “carbon footprint” (the level of emissions from its operations) track record and policies on pollution or conservation; on social, it might mean evaluating a company’s charitable activities or policies on heath and safety for employees; on governance, it is ensuring rules and processes by which a company is managed are robust.

The views and opinions contained herein are those of Schroders’ investment teams and/or Economics Group, and do not necessarily represent Schroder Investment Management North America Inc.’s house views. These views are subject to change. This information is intended to be for information purposes only and it is not intended as promotional material in any respect.