The yesterday, today and tomorrow of socially responsible investing

19 October 2022
The yesterday, today and tomorrow of socially responsible investing

The seed of socially responsible investing was planted in the last century, with the efforts of pioneering companies and groups that saw financing as a mechanism to transform society and protect the environment. These first steps paved the way for what is now known as ethical investment. But this phenomenon is not static: it changed and adapted to new social contexts.

Socially responsible investing has revolutionized the financial scene in just a few decades. A hundred years ago, there wasn't even a name for the timid attempts to improve the world through finance. Today, one in every three dollars of assets managed by professionals in the United States falls under the ethical investing criteria.

This is according to a report published in 2020 by US SIF: The Forum for Sustainable and Responsible Investment. This figure represents an increase of 42% compared to the previous study, conducted just two years earlier. In fact, since 2012, the growth of this alternative has skyrocketed significantly.

The mere existence of associations of this nature denotes the growing interest of the financial community in driving conversations around these issues. But how did this come about, how did socially responsible investing come about, and what does the future hold for it?

The origins of socially responsible investing

To understand how it has gained such prominence, it is necessary to understand what socially responsible investing (also known as SRI) is and why it has captivated so many individuals.

This financing type is characterized by including social, environmental, and good governance criteria in the investment decision-making process. In this way, individuals or institutions do not limit themselves to valuing the economic aspect, a widespread practice in the past. Ethical investment goes further and advocates considering the impact of the organization's activity on the environment rather than just its economic profitability.

Public awareness of the importance of caring for the planet or encouraging communities has boosted the popularity of this investment method, as funding appears to be a springboard for promoting such causes. But society has not always welcomed socially responsible investing with open arms.

Throughout history, there have been people who, through their capital, have supported specific causes. But the first organized effort, considered the germ of ethical investing, dated back to the mid-18th century and came from the Quakers. This religious community forbade its members from doing business in the slave market since it went against their fundamental values. Two centuries later, they took another significant step, targeting companies related to tobacco, alcohol, and gambling, which they considered harmful to human beings. Although substantial progress was made, these initiatives were occasional and sporadic.

It was not until the 1970s that socially responsible investing captured the media's attention. Precisely the sparks that triggered its explosion were the anti-apartheid protests in South Africa and the assassination of Martin Luther King.

Many voices were raised against the companies profiting from the situation in the African country and put pressure on U.S. pension funds to withdraw these securities from their portfolios. The latter relented as a show of support for the cause. Although this divestment strategy was widely criticized and generated significant opposition, it represented the landing of socially responsible investing in the corporate landscape.

The yesterday, today and tomorrow of socially responsible investing

Socially responsible investing today

Gradually, ethical investing flourished. The first indexes focused on sustainability and equality appeared, such as the Dow Jones Sustainability World Index, the MSCI KLD 400 Social Index, and the FTSE4Goood Global Index. Likewise, funds and banks that invest based on ethical criteria were created, such as Pax World Funds, Allianz Global Sustainability, and Triodos Bank.

The establishment of institutions such as the Global Reporting Initiative, CSR Europe, Business for Social Responsibility, or Spainsif clearly shows how this phenomenon has been spreading its roots. Even the United Nations has published its own set of Principles for Responsible Investment. This provides a very accurate measure of the extent to which this issue has escalated and is now a priority issue at the highest levels.

Conventional banking institutions have already joined this trend, having seen the number of savers interested in investing their capital in businesses of this nature. While in the past, some rejected ethical projects, they are now developing financial products that introduce sustainability or equality and place them at the center of the equation.

Companies have also begun to make inroads in this world. For example, it is becoming increasingly common for companies to devote chapters in their annual reports explaining their social, environmental, and good governance activities. Some are even publishing specific manuals, recognizing the power of ESG criteria to enhance their reputation and attract a considerable sector of potential clients.

However, this can be dangerous. Ethical investing cannot be reduced to a publicity strategy; organizations must commit to these aspects.

From a negative to a positive approach

Despite its short history, socially responsible investing has evolved over the years. In its early days, it targeted businesses with negative activities and punished them by withdrawing funds. This strategy was intended to discourage companies from engaging in harmful behavior, such as animal experimentation, arms trading, gambling promotion, or selling alcohol and tobacco.

In the past, the negative was given priority. Today, however, more importance is given to the positive. The focus has shifted from exclusion to inclusion. This was a great help in improving the public image of socially responsible investing. Now, companies that positively impact the environment or society, take care of their employees or develop products and services that benefit people are rewarded.

Moreover, it is not reserved for large financial institutions, as even the most modest savers can incorporate ethical investing at the individual level. Many already diversify their assets and design their investment portfolio according to ESG guidelines. To find the most committed and best-valued firms, they can be guided by international treaties, use the best-in-class system or opt for thematic or impact investing, some examples of ethical investing.

The outlook for the future is optimistic, as it predicts further growth in this type of alternative financing method. Society is showing greater interest in socially responsible investing, and organizations are showing greater transparency and commitment to these issues.

Just as the work done decades ago has made the present situation possible, the planet and future citizens will reap the rewards of today's efforts.

ethical investing socially responsible investing SRI
Inversa Team
Inversa Team

If you would like to contribute to Inversa's Blog as an expert, become a knowledge partner.

Sign in