The Origins of Socially Responsible Investing

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Table of Contents
Table of Contents

If you haven't heard of corporate social responsibility (CSR) before, you're not alone. This concept stems from the belief that businesses and corporations should act responsibly in the communities and environments they operate in.

Taking action to protect the environment and promote human rights and equal employment opportunities are some examples of corporate social responsibility. Businesses can also act to promote educational opportunities or women's and minority rights as socially responsible actions.

Socially responsible investing (SRI) is an investing interest strategy in which investors develop strategies and standards to invest only in businesses that strive to abide by acceptable social values.

Key Takeaways

  • Socially responsible investing is an old idea of only investing in companies that are considerate of people and the environment.
  • A socially responsible investing strategy promotes change by only providing funding for socially responsible and environmentally friendly companies.
  • Socially responsible investing has gained traction throughout the last few decades as more people become aware of sustainability, climate change, and human rights issues. 

The Roots of Socially Responsible Investing

Socially responsible investing in the U.S. is believed by some to have roots that date back more than 200 years ago to the money management practices of the Methodists. Others suggest this practice goes back to the ideas long championed in Jewish investing.

John Wesley, the founder of the Methodist movement, urged his followers to shun profiting at the expense of their neighbors. Consequently, they avoided partnering or investing with those who earned their money through alcohol, tobacco, weapons, or gambling (sometimes referred to as sin stocks). These actions essentially established social investment screens.

Religious beliefs are a common theme in the origins of socially responsible investing.

Shariah—or Shari'a—compliant investing also goes back hundreds of years, following the principles of Islamic finance. Shariah-compliant investing avoids investments that are related to activities prohibited by Islam.

Regardless of the origins of SRI, it wasn’t until the sixties that socially responsible investing vaulted forward as an investing discipline in the U.S.

The '60s

Dissatisfaction among students and other young people led to protests against the Vietnam War and the boycott of companies that provide weapons used in the war. Meanwhile, civil rights and racial equality rose in prominence.

Community development banks that were established in low-income or minority communities were part of a movement that produced the Civil Rights Act of 1964 and the Voting Rights Act of 1965.

The '70s

During the seventies, social activism spread to labor-management issues at corporations, while protection of the environment also became a consideration for more investors. The first Earth Day was celebrated in 1970. As the decade wore on, concerns that many activists had over the threat of pollution from nuclear power plants were heightened with the accident at the Three Mile Island nuclear power plant.

In the U.S. at this time, remaining sentiments about war, emerging environmental issues, and racial inequalities influenced socially responsible investing along with religious beliefs.

A significant breakthrough for socially responsible investing occurred in 1970, when Ralph Nader—a consumer advocate, environmentalist, and later independent candidate for president of the United States—succeeded in getting two socially based resolutions on the annual meeting proxy ballot of General Motors, the country’s largest employer at the time.

Although both votes failed, it was the first time that the federal Securities Exchange Commission permitted social-responsibility issues to appear on a proxy ballot.

The '80s

Progress continued for SRI during the eighties, most notably through the effort to end the racist system of apartheid in South Africa. Individual and institutional investors pulled their money away from companies with operations in South Africa.

The investment decisions of churches, universities, cities, and states moved many U.S. corporations to divest themselves of their South African operations. That led to economic instability within South Africa and contributed to the eventual collapse of apartheid.

International human rights and the treatment of workers were added to the list of concerns for U.S. investors.

The early 1980s were also a time when several mutual funds were founded to cater to the concerns of socially responsible investors. These funds applied positive and negative screens—or filters—to their stock selections. Some funds that did so were the Calvert Social Investment Fund Balanced Portfolio and the Parnassus Fund.

The filters included the basic concerns of the Methodists—weapons, alcohol, tobacco, and gambling—but also more modern issues, such as nuclear energy, environmental pollution, the treatment of workers.

The '90s

By 1990 there had been sufficient proliferation of SRI mutual funds and growth in popularity as an investing approach, to warrant an index to measure performance. The Domini Social Index, made up of 400 primarily large-capitalization U.S. corporations, comparable to the S&P 500, was launched in 1990.

The companies were selected based on a wide range of social and environmental criteria and provided investors with a benchmark to measure the performance of screened investments versus their unscreened counterparts.

Over time, the Domini Social Index would help to disprove the argument that investors were settling for lower returns by limiting the companies they could include in their portfolios.

The activism that led to the identification of specific screens and the engagement of dialogue with companies with questionable corporate behavior also propelled the growth of community investment, another major element of socially responsible investing. Support for community development financial institutions (CDFIs) grew during the 1960s as a way to address racial inequality.

Activists argued that there was a positive social impact by investing in CDFIs, which in turn would inject that money into small businesses and housing programs in low-income communities. Loans were made to poor people, who paid them back with a rate of interest, providing a return for investors beyond knowing their money was used in a socially positive way.

Present-Day Responsible Investing

Fast forward to the present day, there has been an acceleration of positive approaches to sustainability challenges being embraced by socially responsible investors. Such modern approaches include impact investing, and the mainstreaming of sustainable investing, which continues to evolve.

With social issues continuing to manifest—some recent additions are income and wealth inequality, climate change, pollution, and corruption (to name only a few), you can expect corporations and businesses to continue to address their impact on social issues, and strengthen their stances going forward. As sustainability and corporate social responsibility strategies continue to add perceived consumer and investor value to companies, more investments will be designed with these concerns in mind.