Investors striving to achieve not only a financial return, but a social benefit as well, often turn to socially responsible investing (or SRI). SRI is especially applicable for non-profits that are seeking to ensure that their organization’s investments are fully supporting and are aligned with their mission.
Although there’s no precise definition of what constitutes SRI or ESG (environmental, social, & governance)-focused investing, interest from investors has boomed over the last several years. It’s been estimated that total US-domiciled assets using SRI strategies grew from about $12 trillion at the start of 2018 to $17 trillion at the start of 2020.1
In our view, organizations that want to incorporate an SRI orientation into their investment approach should have a clear understanding of what they are truly seeking to achieve, as well as the range of different investment options available.
The key is to match the organization’s mission, values, and financial goals with an appropriate investment approach. To help with this, we’ve defined three broad ways to approach SRI/ESG and provided examples of each below.
What is it? The exclusion of certain securities or companies based on business practices or industries that fail to meet your organization’s ideals.
Examples: Avoiding companies that derive a significant amount of revenue from “sin” industries such as weapons, alcohol, adult entertainment, etc.; Avoiding entire industries such as coal mining or defense contractors that your organization does not wish to be associated with.
Investment Considerations: Screens can generally be applied across many different investment strategies and portfolios. However, it’s important to assess and understand the impact that screens may have on shrinking an investible universe or otherwise impacting how the investment strategy would normally be applied.
Environmental, Social, and Governance (ESG) Integration
What is it? The direct consideration of ESG factors when evaluating and selecting securities for investment. The idea is to explicitly account for ESG risks and/or opportunities within an investment process with the goal of avoiding unforeseen pitfalls, favoring companies with attractive ESG characteristics, and/or ensuring that all material risks are fully accounted for.
Examples: Many data providers track detailed information about companies’ exposure to various ESG risks and also score companies on these ESG issues. Common factors include environmental (climate change impact, history of fines and regulatory compliance, policies), social (human rights policies, workplace and product safety, workplace diversity, animal testing), and governance (board compensation and independence, board diversity, corporate transparency).
Investment Considerations: Like negative screening, ESG factors can often be applied to many different investment strategies. Unlike screening, however, the investment manager integrates ESG considerations directly into their investment process. This means that while the investment manager places an emphasis on ESG within the portfolio, the investor may have less involvement in what is specifically included in or excluded from the portfolio.
What is it? Targeted investments aimed at directly tackling social or environmental problems. The biggest distinction is that investors are more directly involved in achieving a specific goal with their investment.
Examples: An equity or debt investment might be directed toward a business targeting underserved individuals or communities in the areas of housing, energy, microfinance, food security, or education.
Investment Considerations: Impact investing is most akin to private equity or direct loans. Significant due diligence might be required to effectively vet, monitor, and value investments. Liquidity constraints may also make it difficult to move assets on short notice.
As a signatory of the UN Principles for Responsible Investment (UNPRI), Manning & Napier recognizes the importance of SRI and the value that its different forms can bring to investors – especially non-profit organizations with specific missions. While understanding the SRI investing landscape is important, it is just one key element to consider as part of an overall investment approach. The fundamental strength and financial value of potential investments, as well as their alignment with an investor’s objectives, are of utmost importance as well. We believe it is best to consider SRI/ESG within the context of the organization’s unique goals and as part of a well-rounded process for identifying meeting investment objectives and mitigating risk. This will allow your organization the opportunity to do well both financially and ethically.
Utilizing ESG to Align Financial Goals with Your Organization’s Values
On this recorded webinar we explore how non-profits can navigate and implement the nuanced Environmental, Social, & Governance (ESG) landscape with a focus on both long-term financial goals and on the organization’s values.
This material contains the opinions of Manning & Napier Advisors, LLC, which are subject to change based on evolving market and economic conditions. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy, or investment product. The reader should not assume that investments in the securities identified and discussed were or will be profitable.