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Share Why the World's Largest Investors are Embracing Sustainable and Responsible Investing

Pension plans, college endowments and charitable organizations are some of the largest and most astute investors in the world.  As individuals, should we take lessons from their actions?

In recent years, institutions who manage trillions of dollars have begun to take a new approach to investing.  They have determined that resource scarcity, climate change, activist consumers and even the speed of social media have changed the investment landscape.

Company reputations are damaged in an instant, and billions of dollars can be wiped away by reckless actions.  These institutional investors are increasingly employing a "Sustainable and Responsible Investment" model to help them manage this array of new risks, while positioning themselves to pursue additional opportunities.

Disciples of an SRI approach care about how a company manages the details of its business.  They examine a wide array of non-financial factors to assess a company's environmental, social and corporate governance performance.   It takes extensive research to distinguish real actions from mere PR.   Yet, companies who meet the most stringent SRI criteria read like a "Who's Who" of the best managed companies.  No company is perfect, yet firms such as Intel, Procter and Gamble, Starbucks and Johnson & Johnson regularly receive high marks for their management of these issues.

Sustainable investors employ an array of tools and services to look deeply at corporate policies and performance, but what are they looking for?  They are concerned, for instance, that companies who fail to address abusive labor practices in their factories, besides the obvious human aspects, are at risk of tarnishing the value of their brand.  Likewise, a firm whose safety or pollution record shows ineffective controls is not only damaging the environment, it is also more likely to have an accident, financial penalty or other negative event.  Large carbon emitters are at risk of legislation that may regulate these gases, thereby costing them billions to retrofit their facilities.  These are just a few of the issues that these investors scrutinize.

Many SRI investment managers interact with companies, encouraging them to improve performance on sustainability metrics.   They are essentially saying, "We may invest in your company if you could just improve your..."  At the same time, these advisors are systematically investing in those companies who are less at risk from such issues.  When properly structured and diversified by industry, these portfolios often look like typical equity funds that just happen to have a smaller carbon footprint, better labor relations, superior board oversight and/or more efficient resource management.

The performance of modern SRI portfolios has been competitive -- even though these companies are treating their employees better, or are polluting less than their competitors.  That sounds like a win-win", but it hasn't always been this way.  The early performance of socially responsible investment funds was spotty, and the perception of giving up profit to do well persists today.  Over the past five years, however, SRI funds have outpaced the market indexes.  Their relative outperformance was especially evident in the bear market periods of 2008 and 2009.

There are many different reasons why investors may choose to follow a sustainable model.  For institutional investors, it may be advantageous to make their sustainability claim openly.  Endowments donors, for instance, often look favorably upon their alma mater for actions that also provide a societal benefit.   For individuals, the power of SRI can be even stronger -- by incorporating one's personal beliefs and causes into their investment strategies.  Environmental, social, religious and other considerations can be part of any investment plan --institutional or individual.

With such a variety of elements to an SRI investment plan, the final result will be both unique and personal. The common thread among sustainable investors, however, is this belief:  A successful investment provides an attractive financial return today without compromising potential returns for future generations.  With the level of disclosure that many companies now provide, investors are better equipped than ever to put this belief into action.