Executives around the globe increasingly recognize that the establishment of long-term shareholder value is subject to the ability of an organization to identify and respond to societal demands. This explains the growing importance of socially responsible investing over the last years. Investors seek to integrate sustainability and corporate responsibility into their assessment of an organization's long-term value.
Socially responsible investing (SRI) refers to an investment strategy that focuses on the protection of the environment, human rights, consumer rights and diversity aiming at maximizing both investment returns and social good. Recognizing that business strategy is directly affected by social, economic, environmental and ethical factors, socially responsible investing is becoming particularly significant given the expansion of societal expectations on corporate responsibility. In other words, how organizations attract and retain their human capital, a company's corporate culture and stakeholder-engagement strategies, or how a firm manages the risk and opportunities associated with climate change, all are issues of socially responsible investing.
Socially responsible investing is nothing new. It traces its roots in the mid-1700s when the Society of Friends, commonly known as Quakers, prohibited their members from participating in labor trade and in buying and selling of humans. Since then, SRI has gone a long way and many organizations have implemented investment strategies to promote and sustain socially responsible investing. Initially, SRI was implemented through negative-screening strategies, where investors excluded entire sectors, such as tobacco, based on ethical criteria. Then, positive-screening strategies followed where the best performers of each sector were selected based on social, environmental and corporate governance criteria. In effect, this is the model of socially responsible investing that Dow Jones Sustainability Index follows by tracking the underlying benchmarks of each sector.
At the core of SRI investment philosophy is a certainty that responsible corporate conduct and sustainable investment returns will converge in the near future. However, for this to be realistic, there are some important considerations that need to be addressed.
1. Addressing the social issues of highest importance
Organizations need first to decide what social issues are of the highest importance to their future endeavors. There are institutional investors who take a strong stand about environmental issues, while others are more interested in human rights or diversity. Given that the social expectations are increasingly intense, the implications for organizations go beyond organizational reputation or cost management. On the other hand, this changing environment can create business opportunities for organizations to establish competitive positioning and drive their profitability to the next level, while being socially responsible. Therefore, prioritization of social issues is a key factor for making socially responsible investments.
2. Deciding the level of risk to be undertaken
Another consideration is the risk that organizations are willing to undertake in the context of corporate responsibility. New companies may have high potential, but are not well-established yet and this encompasses a lot of risk. On the other hand, there are organizations that achieve slow, but steady growth and are well-established. For these organizations, socially responsible investing involves less risk because they can take a long-term approach to investing.
3. Focusing on long-term investment strategies
Investing on a long-term horizon is a key consideration in corporate responsibility. Focusing on short-term investment opportunities can be detrimental to an economy and capital markets. Actually, more than 70 percent of a business' value lies in its long-term cash flows. Therefore, organizations interested in socially responsible investing should implement investment strategies that focus on a long-term horizon in order to enhance the value creation of their business.
4. Adapting to the altering business environment
Organizations need to adapt to the expansion of societal expectations on corporate responsibility. Multinational companies are often better equipped than governments to negotiate on issues such as climate change, poverty, or water scarcity. Moreover, organizations can use technological advancements to be responsive where societal demands are challenging.
Conclusively, socially responsible investing requires all organizational members and stakeholders to be part of the SRI investment philosophy. Executives, employees, customers, and investors, all are seeking for higher business value. And socially responsible investing is a perfect strategy to achieve that, provided that every investor becomes part of the solution to social, economic, environmental and ethical issues.