Matthew Griffith, CFA, Senior Research Analyst
Socially responsible investing (SRI) is becoming an increasingly important topic as investors evolve their thoughts on which corporate attributes will deliver above-average returns for shareholders. In fact, Pension and Investments recently reported that market share for SRI funds in Europe accounts for over 50 percent of assets under management, indicating an increasing willingness for investors to make SRI allocations within their portfolios.1
All else equal, there are few who would argue that a corporate strategy favoring behaviors that improved the world around us would be preferable to one that caused harm. This trade-off becomes more difficult in the real world, where conventional wisdom has long held that investors are best served by management teams that focus exclusively on maximizing value for shareholders. If corporations operated in a world where corporate strategy impacted only a company’s financial results, this may be an appropriate approach. Yet, in practice, a business is a complex system, and actions that benefit shareholders also exert force on other stakeholders, including customers, employees, regulators, creditors and society as a whole, in addition to owners. For example, for a company that mines gold, the cost to clean up the site following the removal of the resource does not improve the profitability of that particular mine. A lack of attention to the environmental impact, however, would damage the quality of life for the local residents and leave the company with a reputation that could lead other communities to avoid working with the company in the future.
Corporate strategy could also have a negative impact on productivity. Reducing employee pay by 20 percent at a company that designs consumer technology products would increase the earnings available to shareholders in the short-term. But this action by management also would have an impact on other aspects of the business that would not be immediately recognized in its financial statements. Unintended consequences of the salary reduction could include:
- an adversarial working relationship between employees and management;
- lower levels of productivity and innovation from an increasingly disengaged workforce; and
- a less-desirable working environment where current employees are motivated to pursue more financially-rewarding employment elsewhere while attracting lower-quality candidates for new jobs.
Companies that do not view customers as stakeholders are also susceptible to favoring short-term results over long-term sustainability. Recently, a small group of pharmaceutical companies has been in the news related to excessive price increases for life-saving drugs. The negative press from these incidents coupled with the threat of increased government regulation could impair the long-term franchise value for these companies and the pharmaceutical industry in general.
Other variations of socially-responsible criteria include avoiding certain industries (tobacco, gambling, and defense are some common examples), promoting strong corporate governance, or proactively investing in companies with a primary corporate goal of having a positive impact on society. If one wishes to avoid non-sustainable industries, there are funds available that invest with SRI-related goals in mind. When looking at these funds, it is important for the investor to verify that the fund’s criteria are aligned with their own. Alternatively, one can simply exclude specific companies or industries from his or her investible universe.
From a governance standpoint, each investor can also use his or her proxy vote as a way to directly influence management. While historically this has been a less-effective method for shareholder activism, corporate governance monitors have become increasingly prominent in advocating for socially-responsible policies in boardrooms, and proxy votes are no longer just a “rubber stamp” of management policy. Though each investor has different priorities with respect to SRI, there are many viable options if investors wish to increase the prominence of social responsibility in their portfolio. For more information on SRI, feel free to reach out to your D.A. Davidson financial advisor.
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The information contained herein has been obtained by sources we consider reliable, but is not guaranteed and we are not soliciting any action based upon it. The views and opinions expressed in this article are those of the author and based on the data available at the time of the original publication.