Picture in your mind, for a moment, the Monopoly man. You know, the guy in the Parker Brothers board game who has a top hat and white handlebar mustache. He makes his money in real estate and railroads. Think how he probably invested that money.
Now, imagine that Monopoly man has a grandson, a twentysomething hipster. How would you guess he invests the inherited fortune? Would he be content with maximizing profits like his grandfather? Or would he strive to “make a difference” by channeling his money into renewable energy and Third World development?
Increasing numbers of people are taking that latter approach, which they consider modern and enlightened: investing in companies that strive to make the world a better place. That surge of interest is creating a cottage industry within the financial world. Financial companies are hiring specialists, crunching data, and creating more investment options aimed at those who consider themselves “socially responsible.”
This approach goes by many different names, most commonly “sustainable” or “impact” investing. The tactics can vary. It can be as simple as refusing to invest in companies or sectors perceived to be poor corporate citizens, like tobacco companies or those that traffic in “conflict minerals.” Or it can be more complex, actively steering money to firms operating in poor countries, or in fields such as renewable energy and education, or that are woman-owned or meet other employee-diversity benchmarks. It is also known as applying “environmental, social and governance” (ESG) criteria.
This style of feel-good investing seems to be taking off, even in the Trump era. The overall market has surged roughly 10 percent since the election, but the new administration is promising to help old-line industries, many of which are out of favor with this new investor class. “Will Trump derail the ESG investing momentum?” one analyst with BlueBay Asset Management wondered in March in a research note. “He’s certainly influential, but perhaps ESG has now grown too big for Trump to tackle.” Now that’s big.
Assets under management using “sustainable, responsible, and impact” strategies have more than doubled since 2012, to $8.7 trillion in 2016, according to US SIF, the trade group for sustainable investment. That’s more than one-fifth of the money under professional management in the United States. There are now more than 150 U.S. mutual funds that consider “environmental, social, or govern-ance” criteria in selecting companies, according to Morningstar, a leading investment-research company.
In a free society, of course, people can spend and invest their money however they like. And there’s some entertainment value in watching social justice investors learn the economic realities of pouring money into woman-owned sub-Saharan wind farms. The effect, though, is much broader.
This new surge of interest in considering nonfinancial criteria in investment decisions shows how politically minded people can apply yet another layer of pressure to U.S. corporations. Companies have always been sensitive to pushes from their customers. Now, though, these demands are emanating from the top down, from increasing numbers of institutional shareholders and potential investors. Odds are that other people’s politics are creeping into your portfolio, too.
As you would expect, companies are rising to the challenge to prove their social responsibility bona fides to investors interested in such topics—and to the many new companies that have started up to judge and rate firms on the new metrics. Some 81 percent of S&P 500 companies published a corporate social responsibility report in 2015, four times the number just four years earlier, according to the Govern-ance & Accountability Institute. This may simply be savvy public relations. Activists acknowledge the possibility that corporations are merely projecting an environmentally friendly image, known derisively as “greenwashing.”
For instance, if you were thinking twice about investing in a beer company because alcohol production doesn’t seem socially redeeming, AB InBev wants you to know that it is so much more than the maker of Budweiser and other international beers. According to its 45-page global citizenship report, “Growing Together for a Better World,” AB InBev builds soccer fields and helps villagers sell bamboo in China. It also refuels its delivery trucks in Argentina with an eco-friendly biodiesel derived from soybean oil. And that doesn’t even include the fine work the company is doing to help barley farmers and ensure clean water supplies worldwide.
As if these voluntary disclosures were not enough, some in the sustainable investing field are asking the Securities and Exchange Commission to adopt mandatory reporting requirements on ESG topics for public companies. That development, they say, would standardize reporting and help investors make better decisions about a company’s long-term viability.
The obvious question in all this is how do the returns of sustainable investing strategies stack up? How would Monopoly man’s returns compare with those of his status-conscious grandson? If this field can establish itself as having no financial downside while making a better world, it could really take off.
Logic would suggest that money invested with no restrictions would tend to outperform money invested with restrictions. Because many of the investment funds are so new, there are few studies comparing them with their unrestricted peers. One such study by the Global Impact Investing Network in 2015 found that private “impact” funds earned an average annual rate of return of 6.9 percent between 1998 and 2014, compared with an 8.1 percent return from funds with no restrictions. The difference can be greater if investors steer clear of entire economic sectors. Although it is possible to cherry-pick favorable data, average returns generally range from mildly worse to significantly worse.
Over the years, that’s a risk some investors have been willing to take. Colleges risked returns in the 1980s by divesting in companies that did business in South Africa, just as their endowments are now likely to see lower returns by pulling investments in fossil fuels. The California Public Employees’ Retirement System (CalPERS) voted to stop investing in tobacco stocks in 2002—and missed out on up to $3 billion in returns through 2014, according to a consultant’s report last year.
The debate over corporate responsibility goes back decades. Milton Friedman argued that the only responsibility of business is to act legally and ethically and to make money for its shareholders. The profit motive, he said in his 1962 classic, Capitalism and Freedom, ensures that society’s resources are efficiently distributed. For corporations to embrace charitable, nonfinancial goals maligns profit-making, he said—a “suicidal impulse” that eases the way for government intervention.
He expanded on that view in the 1970 article “The Social Responsibility of Business Is to Increase Its Profits,” published, of all places, in the New York Times Magazine:
It might be that the most “sustainable” path is for businesses to pursue profits unabashedly and for activists to stop using companies as vehicles to achieve political aims.
Tony Mecia is a senior writer at The Weekly Standard.
