This article was co-authored by Maria Umbach and Marc Stoiber of Maddock Douglas, a leading innovation agency based in Chicago. Thanks go to Michael Jantzi, CEO, Jantzi-Sustainalytics for his invaluable contribution.
Our journey to sustainability has not been smooth. Instead, we've moved forward in fits and starts, spurred to action (or more appropriately, reaction) by natural disasters and societal crises.
As we stand in the rubble of our latest financial meltdown, perhaps it's appropriate to consider a sustainability-focused innovation that may be getting more headlines in the coming years - the socially responsible investment.
In truth, socially responsible investing (SRI) is nothing new or radical. It began as a faith-based movement years ago, when groups like the Quakers started screening out 'unsavory' companies from their portfolios.
What slowly came to light was that portfolios with socially responsible investments were not just ethically sound; they also tended to outperform their non-ethical competitors.
In addition to the financial argument, an enlightened interpretation of fiduciary duty began to emerge. Seen narrowly, this duty binds companies to maximize profit for shareholders. But as the connection between ethical intransigence and risk to profit became more pronounced, fiduciary duty became a tool that boards used to hold corporations to a higher ethical standard. Lo and behold, it worked - these companies became models of both better corporate citizenship and profit.
Leadership from around the world
As humanity's role in provoking global climate change began to dawn on us, we were also slapped in the face with bad corporate behavior on an international scale. Companies like Enron in the US, Nortel in Canada and Parmalat in Europe played out the perils of questionable governance for all to see.
The investment world was in dire need of socially responsible innovation, and the unlikeliest collaborators stepped up to the plate.
The UN, not generally characterized as a leader in financial reform, introduced the UN Principles for Responsible Investment (UNPRI). These six principles incorporated environmental and social governance into corporate governance - identifying, implementing, optimizing, reporting and encouraging good behavior in investment.
The road to the UNPRI was paved in the US by the Social Investment Forum, and in the EU by Eurosif. Together, these region-specific guides helped SRI develop internationally, where a 'one size fits all' approach might have stifled innovation and participation.
Take Canada as an example. If SRI indexes had summarily excluded all the 'bad' companies in this resource-rich economy, it would've taken away any incentive for these companies to lessen their pollution. As it is, SRI in Canada has become 'best of sector' investing. This encourages polluting companies in places like the Alberta oil sands to clean up their acts, and join the mainstream movement towards better corporate citizenship.
What do you say, USA?
Old habits die hard. And the US obsession with quarterly results, mixed with an outdated model of fiduciary duty, has hindered the development of SRI in the mainstream US market.
Perhaps, as mentioned at the beginning of this article, the US is not feeling enough pressure to shift thinking to a longer term results model...yet. It remains to be seen if the bad taste left by Goldman Sachs et al will spur the movement to SRI.
It's easier, however, to see opportunities for corporate investors wanting to get ahead of the trend. A great start would simply involve putting a savvy young upstart with long term investment horizons in a leadership role. Younger, individual investors with long term horizons and concern for the environment may see this as an appropriate match for their investment needs, while simultaneously allowing them to be seen as trendsetters.
The North Star to steer toward is a longer term, more socially responsible and transparent investment category for the US. Making a genuine effort to identify environmental and social risks, proactively declare them, and manage them is a key to profitable growth and respect in the investing community. The SEC's recent moves on environment disclosure are a step in the right direction.
It's a whole new way to think about making money. With a whole new world of innovation opportunities.
Thoughtstarters for SRI innovation in the US.
1. The best of sector approach to identifying the most socially responsible investments,
2. Transparency and disclosure on environmental practices / weaknesses as part of the investment process,
3. Long term horizon and sustainability thinking incorporated into corporate definition of fiduciary responsibility.