Impact investing is the latest topic on investors’ radar screen, boasting double-digit growth and widespread acceptance among those seeking to align their portfolios with their personal values. But it’s much more than a fad.
Socially responsible investing (SRI) has a rich history. In Biblical times, ethical investing was mandated by Jewish law. Tzedek (which means justice and equality), comprises rules to correct the imbalances in Creation that humans cause, and is referred to in the first five books of the Bible, the Pentateuch, assumed to be written by Moses in 1500 to 1300 BC. According to Jewish tradition, these rules apply to all aspects of life, including the government and the economy. Ownership carries rights and responsibilities, one of which is to prevent immediate and potential harm.
Several hundred years later, the Qur’an, thought to have been written between 609 and 632 CE, established guidelines, based on the religious teachings of Islam, which have evolved to what are now Shariah-compliant standards. One of the more common ones is Riba, whose overarching goal is to prevent exploitation. Banning usury, it extends to forbidding all interest payments. Rooted in a philosophy that governs the relationship between risk and profit, Shariah law delineates the responsibilities of institutions and individuals. In addition to financial dictates, it also rules out investments in alcohol, pork, gambling, armaments, and gold and silver (other than spot cash, or money that is paid for something immediately).
SRI’s origins in the United States began in the 18th century. The Methodists, under the aegis of John Wesley, eschewed the slave trade, smuggling, and conspicuous consumption, and resisted investments in “companies manufacturing liquor or tobacco products or promoting gambling.” The Methodists were followed in 1898 by the Quakers, who forbid investments in slavery and war, and then by a group in Boston who founded the first publicly offered fund, the Pioneer Fund, in 1928. Most of these early strategies applied screens to eliminate “sin” industries.
SRI ramped up in the 1960s, when Vietnam War protestors demanded that university endowment funds no longer invest in defense contractors. Gaining momentum in the 1970s, SRI’s long-standing principles progressed to represent a consistent investment philosophy allied with investors’ concerns. These ranged from avoiding the slave trade, war and apartheid and supporting fair trade, to issues more common today concerning the ethical impact of environment, social, and corporate governance (ESG).
In the process, several success stories emerged. In 1977, Congress passed the Community Reinvestment Act, which forbade discriminatory lending practices in low-income neighborhoods. Repercussions from Chernobyl and Three Mile Island nuclear disasters in the 1980s spawned anxiety over the environment and climate change, leading to the launch of the US Sustainable Investment Forum (US SIF) in 1984.
Fast forward to South Africa’s apartheid—literally “separateness”—designed not only to keep the country’s non-white majority apart from the white minority but also to decrease black South Africans’ political power. Dating back to the passage of the country’s 1913’s Land Act that forced black Africans to live in reserves and barred their working as sharecroppers, apartheid became an impetus to force corporations to divest from South Africa. Again, student protestors played a role. In 1985, students at Columbia University in New York organized a sit in, demanding that the University cease investing in companies doing business with South Africa. The combined efforts of protests and responsible investing paid off—$625 billion in investments was redirected from South Africa by 1993. And the results were far reaching: upon his release from prison in 1990, Nelson Mandela worked with President F.W. deKlerk to develop a new constitution for South Africa, and both shared the Nobel Peace Prize in 1993.
In 2006, the United Nations Principles for Responsible Investment (UN PRI) was released, leading to $45 trillion in signatories’ assets. The Global Sustainable Investment Alliance (GSIA), a consortium of international sustainable investment organizations, issued its inaugural issue of the Global Sustainable Investment Review in 2012. Adding even more gravitas to the practice of SRI, in 2013, British Prime Minister David Cameron gave a well-received speech on impact investing. These and other markers are listed on the timeline below.
The Bottom Line
Grounded in a history dating back 3500 years, and driven initially by the idea of doing well by doing good, the scope of SRI has broadened to encompass global change and generate competitive returns. Rather than merely eliminating investments in products that conflict with social, moral, or ethical values (e.g., weapons, alcohol, tobacco, gambling), SRI has evolved to proactively make investments in companies that are creating a positive impact. For example, ESG investments center on companies that demonstrate good stewardship of the environment, maintain responsible relationships with customers, employees, suppliers, and communities, and exhibit conscientious leadership regarding executive pay, internal controls, and shareholder rights. Research shows that companies that care about the environment, promote equality among employees, and enforce proper financial guidelines tend to accrue benefits to investors.
James Lumberg is the co-founder and executive vice president of Envestnet.
The information, analysis, and opinions expressed herein are for general and educational purposes only. Nothing contained in this piece is intended to constitute legal, tax, accounting, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. All opinions and views constitute our judgments as of the date of writing and are subject to change at any time without notice.