A Short History of Socially Responsible Investing
Investing from the Methodists to South Africa to Domini
Practitioners of sustainable or socially responsible investing (SRI) take note of its roots dating back more than 200 years ago to money management practices of the Methodists. Others suggest this goes back to the ideas long championed in Sharia investing if not beyond.
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 – essentially establishing social investment screens.
While the Methodists and members of other faiths applied particular principles to their investments through the years - Muslims did not invest in banks, for example - it wasn’t until the sixties that socially responsible investing vaulted forward as an investing discipline.
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.
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.
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.
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 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.
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 to their stock selections. The funds included Calvert Social Investment Fund Balanced Portfolio and the Parnassus Fund. The screens included the basic concerns of the Methodists - weapons, alcohol and tobacco and gambling – but also more modern issues, such as nuclear energy, environmental pollution and the treatment of workers.
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 index would help to disprove the argument that by limiting the companies they could include in their portfolios they were settling for lower returns than traditional investors.
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 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.
Fast forward to the present day, and we are seeing an acceleration of positive approaches to sustainability challenges emerging as a form of SRI 2.0 including Impact Investing, the Mainstreaming of Sustainable Investing, and which continues to evolve.
With issues continuing to manifest from income and wealth inequality to climate change, expect these trends to only continue and strengthen going forward especially as sustainability strategies continue to add financial value for companies and their shareholders.