Socially Responsible Investing
Existing Financial Alternatives (1 of 4)
From sustainable bonds to credit unions and a pluriverse of digital platforms, there is a great deal of innovation happening in the banking and investment sectors. Given the vast diversity of players and the considerable overlap between their proposals, I initially restricted my analysis to a few categories I deemed most relevant to my masters thesis. Common to all the financial institutions presented in this and the following 3 articles is their focus on offering something traditional banks do not — be it a value proposition other than profit maximisation, investments in the real economy, stakeholder engagement, financial inclusion, transparency, accessibility, ecological conservation or other. Strongly relying on partnerships amongst themselves, these organisations are increasingly gaining competitive power, challenging mainstream banking, and establishing new asset classes such as community shares, peer-to-peer lending, and investments in renewable energy. Although they tend to be smaller players still, they have taken a lead in this space and are growing in number and in connections.
The start-point of banking or investing according to our values, however, does not necessarily mean moving money between financial institutions. After all, this shift requires an availability of alternative options, which inevitably vary from country to country. The most accessible first step possible could be choosing a socially responsible fund in a traditional investment bank, for example. I will, therefore, showcase a few existing alternatives and in later articles, I will offer considerations we should add to the discussion.
Tracing as far back as the 1970s, Socially Responsible Investing (SRI) marked the beginning of a movement towards conscious investments. Pressured by investors wishing not to allocate their capital in harmful industries such as armaments, tobacco, alcohol, and gambling, a couple of investment companies started to screen out these practices of their portfolios. Throughout its evolution and adherence worldwide, the process of screening widened and adopted the Environmental, Social and Governance (ESG) indicators. According to the United Nations Principles for Responsible Investment (PRI), SRI is defined as the “integration of ESG criteria into mainstream investment decision-making and ownership practices”. Nonetheless, there seems to be no consensus about terminology, since SRI is often used interchangeably with ‘sustainable investing’, ‘impact investing’, or even ‘ethical investing’.
In the early 2000s, with the increasing awareness around the consequences of climate change, demand grew not only for screening out harmful companies, but also for screening in socially and ecologically conscious ones. As explained by Hessius (2018): “At that time, to make a sustainable portfolio was to exclude companies, not to invest in green projects”. As a result, the World Bank Treasury, together with a group of Swedish pension funds, the SEB bank (Skandinaviska Enskilda Banken AB), and the Centre for International Climate and Environmental Research (CICERO) issued the first green bond in 2008. Green bonds can be issued by governments and companies in order to fund low-carbon projects, including renewable energy, clean transportation, and energy efficiency. Following the creation of green bonds, emerged the social bonds (tied to social metrics) and the sustainable bonds (aligned to the Sustainable Development Goals).
In response to the increasing number of socially and environmentally aware investors, the climate emergency, and the market opportunity spotted by finance experts, SRI investments rose significantly, totalling USD 30.7 trillion in assets under management globally, as reported by the Global Sustainable Investment Alliance. Today, big banks and wealth management firms continue to enlarge their SRI portfolios, offering green and sustainable bonds, loans to renewable energy and energy efficiency projects, affordable mortgages to low-income segments, micro financing for small enterprises, and pension funds aligned to the UN’s PRI framework, amongst others. The awareness has also reached the stock market and, as of 2017, twelve stock exchanges require listed companies to disclose ESG information, improving transparency and accountability.
As we can see, SRI in traditional finance institutions is now a consolidated option for retail investors who wish to begin aligning their money with their values. Although these funds are being offered by the same players who have largely contributed to today's state of affairs, one way of seeing this investment option is as a push for change coming from the traditional institutions — perhaps something similar to sustainability projects led by intrapreneurs in large corporations — and thus making them open their eyes to the environmental and social challenges of the 21st century. In addition, this is likely to be the easiest, if not the only, possible step to take considering countries or regions which are still underserved by the following alternatives.
References used for this article:
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