Socially Responsible Investing: The New Black

By: Janice Wilken - Partner, Ice Miller LLP

Categories: Business Law, Investment

Like the little black dress, socially responsible investing (SRI) is not new but is ever present and constantly updated. The history of SRI includes boycotting of investments in companies that profited from the Vietnam War, avoidance of investments in South Africa during apartheid and, more recently, investment in companies developing sustainable energy strategies, promoting clean water, preventing climate change, producing organic foods, promoting consumer protection and other categories.

Continued Below...

Top Story: Sunday Alcohol Sales

Last week, we heard why "Hoosiers for Beverage Choices" wants Sunday alc...

HOBNOB: Meet the Candidates

This year’s HobNob: Meet the Candidates takes place on Thursday, Septemb...

Inside INdiana Sports: Indiana Motorsports Association

With the MAC Tools NHRA Nationals at O’Reilly Raceway Park (ORP) and ano...

SRI can be defined in a number of ways, but it generally refers to an investment strategy that considers not only profit but also the social, environmental or other impact of the investment. This "double bottom line" approach is intended to maximize both financial return and social good. Sounds great. Lots of people seem to think so.

According to a recent study by the Social Investment Forum, approximately 11% of assets under management in the United States are involved in SRI. SRI assets increased from $639 billion in 1995 to $2.71 trillion in 2007. That represents a fairly impressive growth rate of more than 324%. So, what's behind this growth trend?

As particular types of social activism (think environmental preservation) became accepted mainstream societal values, venture funds with a socially conscious agenda are becoming more common. These are typically angel funds or funds with limited partners that fall into one of the following three categories: wealthy individuals, institutions concerned about community development and foundations with missions matching the fund's agenda.

There's also the growth of so-called "greenwashing" that has likely contributed to the increase in SRI. Companies wanting to cash in on this societal trend may use environmental protection essentially as a marketing strategy. But, the actual operations of the business may not be carried out in an environmentally friendly manner. Your typical investor would not be in a position to know and may therefore not effectively accomplish their identified goals with their investment dollars.

Will the growth in SRI continue?

Hard to say. Funds in SRI, so far at least, have had to be "patient capital." That is, there are no quick returns and the investor should not expect liquidity on the short timeframe that is typical for private equity transactions. SRI funds and SRI companies seeking investment will have to control expectations of their investors as they strive to meet their double bottom line goals. If the long term picture is that the traditional bottom line must be sacrificed in order to advance the social agenda, I expect that the pool of potential investors will prove to be limited in the long term. Call me cynical, but most of us operate in furtherance of our relatively short term interests

Another concern is that the trend will catch on in a manner reminiscent of the dot com bubble. During that era, we quickly went from a lack of sufficient funds to finance Internet-based companies to a glut of available cash. Many investors funded dot com companies without adequate diligence and, as a result, many of those companies failed to meet their projected returns. The failure cast a dim light on all Internet-based companies, regardless of their merits as investments.

We can only hope the same does not happen to SRI. The idea of SRI is a noble one. I'd hate to see it fail because we all jump on the bandwagon before the underlying premise has been proven to make for a valuable investment.

To view the past 6 months of archived Perspectives, select an article from the dropdown below and hit 'View':

To search the archive of Perspectives articles, go to the Search page