New Investment Trend Bridges the Gap Between Socially Responsible and Mainstream Investors

Many “socially responsible” as well as some mainstream investment companies have begun to consider environmental, social and governance (ESG) factors when investing their clients’ assets.

Carolyn Cui, For Money Managers, A Smarter Approach To Social Responsibility, WSJ.com, Nov. 5, 2007, explains:

Investment managers and analysts are developing formulas that take into account such issues as executive pay, carbon emissions and workplace gender diversity, along with traditional financial fundamentals. The logic: Companies that think creatively about how these issues affect the bottom line are likely to have an edge over rivals that don’t.***

The trend is starting to have an impact on pension plans, mutual funds, exchange-traded funds and other products for individual investors as well. * * *

For now, much of the interest in the ESG approach to investing seems driven by environmental concerns. A slew of so-called green funds that invest in alternative energy, clean technology or water resources have sprung up in the past few years. PowerShares Capital Management LLC, for example, started WilderHill Clean Energy ETF in March 2005, and the fund has since ballooned to $1.28 billion. Through last week, the WilderHill ETF was up more than 40% for 2007, vastly outpacing the broader market. * * *

Oil giants, power plants, mining companies and steelmakers get blamed for contributing to global warming. The business risk is that they will face taxes or penalties as legislators around the world increase their efforts to reduce pollution. For instance, as of January 2009, New York and nine other Northeastern states will start a program to cap and trade carbon-dioxide emissions. * * *

[S]keptics remain as to whether a broad ESG approach to investing actually works. Some say the new approach still shares too much ground with the traditional world of socially responsible investments — the blanket ban on sin stocks — and these funds historically have tended to trail the broader market, as the additional screening process narrows down the selection pool and increases research costs. * * *

Critics of the ESG approach cite a scarcity of corporate information on nonfinancial issues such as human rights, and a lack of methods for quantifying such matters. * * *

Special thanks to Joel Dobris (Professor of Law, UC Davis School of Law) for bringing this article to my attention.