Socially responsible investing (SRI) is the broad term for an investment approach which seeks to consider investments in companies delivering both a financial return and a social benefit.
The most common approach is for SRI funds to utilise a ‘negative screening’ process. This specifically seeks to exclude certain companies or industries assessed as having a negative impact on society. At an industry level this often excludes industries associated with armaments and tobacco, and potentially others.
Some SRI funds also include a focus on shareholder advocacy, whereby the investment manager takes a proactive role in ensuring a company acts responsibly on a range of environmental, social, or governance (ESG) issues.
In addition, SRI funds can also consider other criteria such as the level of community investment, whereby companies are assessed on what financial and other support they provide to different segments of the community.
Investment managers seeking to put together SRI portfolios may assess companies on some of these criteria and then rank them. Once the SRI screening process identifies which companies to avoid, investments are finally able to be selected from the remaining socially responsible universe.
One of the challenges associated with building SRI portfolios is that investments are selected at least partly on qualitative factors (whether a company is deemed to be suitably socially responsible) as well as on more quantitative factors (whether a company also has prospects of delivering a strong financial return).
The dilemma is, the more companies that are excluded from the potential investment universe, the more we can expect the investment outcomes from investing in the remaining companies may be impacted.
The second challenge when providing a SRI solution is to clearly state the criteria being used to construct the underlying investment portfolios, because individual investors will never all unanimously agree on whether certain companies engage in practices that are sufficiently socially responsible.
Therefore, any SRI offering needs to clearly spell out the investment criteria it employs so that potential investors can easily determine whether that criteria is consistent with their own personal preferences.
Thorner Investment Services SRI approach
Thorner Investment Services has developed a relationship with Synergy Investments and can now offer four SRI portfolios which place an emphasis on supporting higher levels of social responsibility whilst remaining faithful to the prized investment attributes that the Synergy Investment Programme was founded on – that is, favouring low cost, widely diversified and non-speculative investments.
Due to the degree of subjectivity surrounding the merits of different SRI strategies, Synergy Investments is not necessarily attempting to satisfy the highest possible SRI objectives of all potential investors. To do so would require the adoption of the most restrictive investment criteria possible which, in turn, would limit Synergy Investments ability to build and deliver robust investment portfolios from the allowable universe. It is for this reason that Synergy Investments portfolio construction approach will focus on the removal of investments that have a negative impact on society i.e. weapons and tobacco. This approach may evolve over time as additional investment options become available in this area.
To ensure Synergy Investments SRI portfolios are not unduly restricted from delivering an attractive investment outcome, the portfolios’ focus is on excluding equity investments in companies with more than an incidental proportion of revenue generated by:
- The production, manufacturing or significant sales of tobacco
- The production, manufacturing or significant sales of controversial weapons
- The manufacturing of nuclear weapons
- The manufacturing of components developed or significantly modified for exclusive use in nuclear weapons
- Providing auxiliary services related to nuclear weapons
While the above represent minimum exclusions, certain equity funds within Synergy Investments portfolios will also consider additional environmental and sustainability factors when considering their investments. Where applicable, these additional factors may include some or all the following:
- Carbon and other greenhouse gas emissions or potential emissions
- Land use
- Involvement in toxic spills or releases
- Operational waste
- Water use
- Child labour
- Factory farming activities
In designing the Synergy Investments SRI portfolios, some care needs to be taken when describing specific investments as being “ethical” or “socially responsible”. The implication of this language is that companies not adopting the same policies may be “unethical” or “irresponsible”. In practice, most companies listed on major global stock exchanges are not operating unethically or irresponsibly; shareholder and customer advocacy would typically ensure that such companies would not be supported or listed for long.
In managing Synergy’s Investments portfolios, the intention is to continue to review and enhance the level of socially responsible screening in its SRI portfolios over time without compromising the quality and robustness of its expected investment outcomes.
To learn more about these portfolios talk to Peter today.