From Socially Responsible Investing to Sustainable Investing

{Editor's Note: This is the second in a weekly series of articles by experts on sustainable business originally published in the "GreenMoney Journal."}

By Joe Keefe

PORTSMOUTH, New Hampshire, August 6, 2007 (ENS) - Over the next 15 years, I think we will see a transition from the old world of socially responsible investing, SRI, to the new world of sustainable investing. By sustainable investing, I mean the full integration of environmental, social and governance, ESG, factors into financial analysis and decision-making. This transition is critical if our industry is to broaden its market and maximize its impact on corporate behavior, on financial markets, and on global society itself.

The transition from "socially responsible" to "sustainable" investing isn't just semantics. While it is to some degree a question of framing, framing is more than just words - it's definitional - and I believe such a re-framing is necessary if our industry is to reach its potential.

Joe Keefe is president and CEO of Pax World Management Corp. and Pax World Funds (Photo courtesy PAX)
There are also substantive distinctions between socially responsible investing, as historically framed, and the more contemporary notion of sustainable investing.

Socially responsible investing is largely understood as an alternative investment strategy for those who choose to invest with their values.

Sustainable investing, I believe, has the potential to be a transformative investment strategy that revolutionizes investing itself - at a time when market capitalism must of necessity undergo a sustainability revolution equal in significance to the industrial revolution that ushered in the modern period.

Let me be more specific about the differences, as I see them, between socially responsible and sustainable investing:

Although the conventional wisdom is that socially responsible investing has grown rapidly, in my view it has grown very slowly, and this slow growth is due in part to the way it has been framed and presented to the public. I believe there is a much broader market for a socially engaged investment approach if: The case for sustainable investing is compelling. A growing body of evidence demonstrates positive links between ESG performance and financial performance. See, e.g., Marjorie Kelly's article, "Holy Grail Found: Absolute, positive, definitive proof CSR pays off financially," Business Ethics magazine, (vol. 18, no. 4, Winter 2004), summarizing recent meta-studies demonstrating a positive correlation between corporate social performance and financial performance.

A recent UNEP Finance Initiative Report, "Show Me the Money," concluded with CRA RogersCasey commentary stating, "We were impressed by the quantity of reports that showed a strong link between ESG issues, profits, business activities and, ultimately, stock prices."

There is mounting empirical evidence that companies with better corporate governance practices carry less risk and outperform poorly governed companies over time; that companies with strong environmental performance carry less risk and outperform environmental laggards over time; that companies with good workplace practices enjoy higher productivity, higher morale, lower turnover and increased profitability.

Therefore, wouldn't an investment approach that seeks out such companies for investment - and, once invested, actively engages those companies to improve their performance even further - be in a position to make a strong case that it is simply a better, smarter way to invest over the long term?

I think so.

But SRI by definition can't make this case. As an alternative investment approach for those "investing with values," it defines itself largely through negative screens emphasizing what it doesn't invest in rather than what it does invest in. Moreover, its agnosticism with respect to "values" results in social screens that are all over the map - and silly arguments about what constitutes a "socially responsible" company (e.g., Joe Nocera's recent article in "The New York Times").

There is simply no singular lesson that can be derived from the performance - good, bad or ugly - of SRI funds. There is no commonality, - nothing to measure. I think that's one reason there are so many studies of corporate social responsibility, CSR, and of companies' ESG performance, but so few studies of SRI.

SRI really isn't a financial discipline at all, but rather the marrying of various financial disciplines with various values based on the premise that "you don't have to sacrifice performance" in order to do so.

Sustainable investing, by contrast, is a financial discipline. It's about performance. It's about aligning ESG performance with financial performance - combining rigorous financial analysis with equally rigorous environmental, social and governance analysis in order to invest in forward-thinking companies with sustainable business models.[2]

Moreover, as ESG research and analytics become more robust, rigorous and quantitative, sustainable investing will lend itself to sophisticated attribution analysis that I believe will demonstrate its superiority as a long-term investing approach. Given an equal playing field, companies that integrate strong ESG performance into their business models will be more likely to outperform their less enlightened competitors over the long term. I am convinced of that, and sustainable investing, in a sense, is based on that premise.

Not that it's only about money.

I am not saying that the only way to judge an investment approach is whether it produces higher returns, or that growth at any cost is a value our civilization should continue to espouse. Indeed, it will be our undoing unless we change course.

So, although it's essential for any investment approach to make a compelling financial case - and sustainable investing, unlike SRI, is able to do this - I think the concept of sustainability is actually much richer than this.

In fact, I think the notion of sustainability implies a new conception of wealth, and may even offer a solution to the crisis of capitalism.

Why? Because it insists on an alignment of financial outcomes with environmental, social and governance outcomes - not with "values" mind you, but with outcomes.

The sustainability imperative requires that corporations and markets behave differently; it demands that wealth-creation strategies be made, well, sustainable - that we no longer tolerate poverty and injustice and environmental degradation as the necessary byproducts of market capitalism.

Every few generations, market capitalism undergoes a period of transformation - Populism, the Progressive Era, the New Deal, the Great Society.

These great periods of reform yielded child labor laws, the minimum wage, the eight-hour day, workers compensation laws, unemployment insurance, antitrust and securities regulations, Social Security, Medicare, the Community Reinvestment Act, the Clean Air Act, Clean Water Act, Environmental Protection Agency, etc. All of these reforms were essentially public and stakeholder attempts to address the worst excesses of corporate capitalism.

The next great period of reform will be the Sustainability Revolution, and it will be greater than any of these - indeed, it will be akin to a second industrial revolution that transforms human society itself.

The Sustainability Revolution is coming. It will be felt in architecture and urban design, energy policy and tax policy, transportation and water use. Our task over the next 15 years is to make sure it is felt in investing as well, and that our industry plays a leading role in ushering in this great transformation.

SRI paved the way but it now needs to transform itself. Sustainable investing - the full integration of environmental, social and governance (ESG) factors into financial analysis and decision-making - is the natural successor to SRI, and our goal should be nothing less than the transformation of investing itself.

Article Notes:

[1] This neutrality - really agnosticism - with respect to values can be seen on the Social Investment Forum's website,, where socially responsible investing is defined as "integrating personal values and societal concerns with investment decisions." Under this definition, political and social conservatives who wish to integrate their values and societal concerns into investment decisions through conservative screens and shareholder activism would presumably be practicing "socially responsible investing." If this is so, then I'm not sure what our industry is all about.

[2] Traditional SRI exclusions can still play a role, of course, in a sustainable investing approach. At Pax World, for example, we exclude tobacco, weapons manufacturers and companies who's main line of business is gambling. Other firms may apply other exclusions based on differing value judgments. I simply believe the industry as a whole can accelerate its growth and impact by adopting an ESG - or sustainability-focused approach, and that values-based exclusions should be understood as additive or collateral to the primary financial focus, which should be on sustainability.

{Joe Keefe is president and CEO of Pax World Management Corp. and Pax World Funds. For more information go to}

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