Sustainable Investing Strategies of Choice

What specific sustainable investing strategies are often used?

Negative Screens

Screens work to sift out companies which do not measure up to certain investing criteria, such as involvement with tobacco or alcohol or firearms.  Such negative screens are often still used by funds with a religious mandate such as we outlined here, and the roots of the field came from this form of investing.

In SRI, investors design criteria based upon the values they bring to their investing.

Once a short list of companies that meet those SRI standards has been determined, investors can turn to traditional indicators such as sales and earnings, assets and liabilities to make final decisions, but often the idea is to just focus on "the companies you don't like" and otherwise invest in the balance of a strategy.  Such negative screens were recently found to be two thirds of all sustainable investing globally, or $14 Trilion out of $21 Trillion of capital deployed against all possible strategies.  Negative screens weed out poor SRI performers, including those that are polluters or that maintain poor working conditions and beyond, and most recently divestment out of fossil fuel has been the rage, especially the financially under performing coal sector, found to be the large majority of divestment committed to by large investors globally such as AXA and Norges Bank.

Positive Screens

Positive screens identify companies based upon practices that in some way benefit society, such as sensitivity to the environment or exemplary employee relations.

 These are often either "best in class" looking for top performers by sector, or "positive choice" seeking solution providers and not fully aligned to normal sector weightings of benchmark indices.

Fund managers using this type of approach have long been a key focus of our books and research showing particularly strong performance for positive approaches.

 A new University of Edinburgh Business School study also shows out performance most recently for Green Funds versus "brown" funds from 2012 through 2014.  Our own recent study of performance showed positive approaches outperforming the five years trailing 2014 for companies implementing specific value driving sustainability strategies successfully.  Other studies showing strong performance include those coming out of Harvard Business School and Oxford.

Shareholder Advocacy

Rather than passively follow the activities of the companies in which they invest, socially responsible investors often engage management in the issues they consider important. Through shareholder advocacy they exercise their right as part-owners of the company to attempt to influence corporate behavior.

A common practice is to participate in shareholder resolutions, which are petitions drawn up by groups of shareholders that are presented to all the owners of the company for a vote. Typically they urge management or the board of directors to take action on a concern. A resolution might include calling for a company to sever its connections to a repressive government overseas, challenge its executive pay or reveal its political contributions.

While shareholder resolutions have been instrumental in many cases in which companies changed practices regarding workplace conditions for workers, revised projects that harmed the environment and reversed policies that permitted employment discrimination, often they are withdrawn before they are brought up for a vote among all the owners. That can occur for a variety of reasons. Perhaps a resolution has been reached by the company and the petitioners. The company may have successfully argued to the Securities & Exchange Commission, which oversees the process of submitting resolutions, that it failed to meet minimum requirements and so the SEC rejects it.

Community Investing

Low-income and disadvantaged communities are often under served by traditional financial services. Through community investing, investors can have a direct impact by placing their funds in communities in need.

Community investing provides access to credit, equity, capital, and other basic banking products, which can be used for job creation, housing and social services.

This financing is often provided by community development banks, which are similar to traditional banks but focus on community development in needy areas, as well as loan funds and credit unions.

Individual investors can participate in community investing through a variety of community investing institutions (CIIs). They can open savings, checking, money market and individual retirement accounts at banks or credit unions, or make equity or debt investments in venture capital funds and in loan funds.