The Continuing Evolution of SRI and ESG Investment Processes

By Blaine Townsend, CIMA®, CIMC®, Executive Vice President / Director, Sustainable, Responsible and Impact Investing

September 30, 2020


Morris Milgram said, “Life is too short to do anything but build the kind of world one believes in.” Milgram was the founder of M-REIT, a real estate investment trust established in the 1960s to acquire residential properties with the goal of racially integrating them. Milgram’s mission landed his company on a 1972 list of “responsible stocks,” and is an early example of what we now know as socially responsible investing (SRI).


Milgram’s message in 1972 is more relevant than ever now, as our country and world face a global pandemic and a national reckoning with systemic racism. Close to home for Bailard, the recent wildfires across the West Coast are also poignant reminders of the cost of climate change on our local communities and economy. With these national events changing the way we live and think, it is understandable that a rise in socially responsible investing has come along as well, as investors realize the true impact and economic costs of inequality and climate change.


While now is the time for investors to incorporate social impact into their portfolio, this is actually just the latest chapter of a decades-long shift towards socially responsible investing. Over the course of history, SRI evolved from avoiding “sin stocks” (such as alcohol, tobacco, gambling, and other enterprises that conflicted with certain religious morals) to encompass a wide variety of sustainable, responsible and impact investing tactics. For instance, in 1971, objections to the use of Agent Orange as a chemical weapon in the Vietnam War led to the launch of the Pax World Balanced Fund, which avoided direct investment in the supply chains for Agent Orange. During the 1980s and 90s, the environmental movement and growing interest around investing in companies that displayed “best in class” characteristics fueled the growth of the SRI industry.


Along similar lines, ESG investing rose to prominence in Europe in the mid-2000s. ESG investing employs a forward-looking analysis of environmental, social, and governance (hence the acronym ESG) factors to determine which companies are best prepared to compete in a world with dwindling natural resources, higher regulatory burdens, a growing human population, and climate change. These factors were generally not included in traditional Wall Street analysis.

...this is actually just the latest chapter of a decades-long shift towards socially responsible investing.

From social justice to the environment, the modern SRI landscape empowers investors to align their portfolios with their values, and is a legitimate influence on the capital markets and broader financial services industry. Today, investors in SRI and beyond are looking at how systemic injustice—from environmental justice to corporate governance to systemic racism in the U.S.—can be addressed in their investments.


Climate Change


The 1989 Exxon Valdez oil spill in Prudhoe Bay Alaska prompted a coalition of institutional investors, environmental organizations, and socially responsible investors to demand greater transparency and accountability with respect to large companies’ impact on the environment. Concerns around climate change as an investment risk continued to mount in the wake of severe weather events including Hurricane Katrina in 2005 and Superstorm Sandy in 2012, particularly among investors exposed to the insurance industry. The evolving view of the materiality of climate change has been a huge driver in the credibility and demand for ESG.


Corporate Governance


To understand why corporate governance is a critical component of SRI and ESG investing, consider the subprime mortgage crisis and the subsequent Great Recession. The 2008 crash exemplified how the evolving complexity of the capital markets, coupled with the speed at which capital flows around the planet, have raised the stakes for all investors when bad behavior hits the markets. Inadequate disclosure, lack of transparency, insufficient checks and balances, and epic ethical failures in the financial sector led to a market collapse that wrought havoc on the global economy. ESG investing takes into consideration factors such as separation of board CEO and chair, board independence, oversight committees on sustainability issues, transparency, political giving, and other governance-related issues that can be material to the ethical operation of a company as well as the long-term performance of its stock.


Racial Justice


The murder of George Floyd in May of 2020 turned a spotlight on America’s decades-long reckoning with systemic racism. Racial inequalities threaten the recovery from COVID-19, long-term economic growth, and the well-being of the nation. SRI and ESG investors will likely lead the charge to address these issues on the investment playing field by demanding greater attention to diversity and inclusion, strategies to combat income inequality, and commitments from the technology sector to crack down on biased algorithms and the spread of racist disinformation. One of ESG investing’s most compelling ideas is to “future proof ” portfolios for the world into which we are heading. Hopefully, that world looks very different for Black Americans.


SRI and ESG investment processes are continuously evolving to reflect the growing interest (and investment volume) from the investing community. Within the scope of Bailard’s quarterly newsletter, I offer this brief introduction to these frameworks and how the landscape is addressing the issues facing our world today. But, for more insights on the history, details, and performance of SRI and ESG investing, please visit the Bailard website to view the more fulsome report titled, “From SRI to ESG: The Origins of Socially Responsible and Sustainable Investing.”