April 23, 2012 | last updated June 1, 2012 2:01 pm
Q&A

Social responsibility investing gains traction

Q&A talks about socially responsible investing with Francis Brown, partner in the Boston office of the audit and consulting firm of Grant Thornton.

Q: What is the state of socially responsible investing (SRI)? How is it doing compared to standard investing and why?

A: SRI continues to grow faster than other investment groups, especially as an alternative to foundations and endowments. SRI has historically netted results comparable to widely used benchmarks such as the S&P 500. The larger the number of funds designated as SRI, as well as the increase in the number of companies looking to be classified as ESG (Environmental, Social and Governance) focused companies, will, almost by default, create a more diversified portfolio that should match standard benchmarks.

Q: What is a good definition of what makes a company socially responsible? Is it a global definition or one unique to the United States? Is SRI more prevalent domestically or overseas?

A: The Forum for Sustainable and Responsible Investment uses ESG practices of a company as a measure. Environmental, Social and Governance (ESG) practices are used to describe a company and its suitability for an SRI fund or portfolio. SRI and ESG are global as marketplaces become increasingly international and global.

Q: Your company quotes The Forum for Sustainable and Responsible Investment, which says SRI encompasses an estimated $3.07 trillion out of $25.2 trillion in the U.S. marketplace and related assets have increased more than 34 percent since 2005. How much of this growth is dedicated to being SRI and how much to good business practices in general?

A: It is a combination of additional SRI funds as well as more companies seeking to identify themselves as ESG companies. Companies are more concerned now than ever before as to the perception that they are ESG companies.

Q: Is SRI just a feel-good term? Do investment advisors include them in investment portfolios more for marketing than results? After all, haven't there always been socially responsible investments?

A: SRI was originally a feel good term for many investors, especially foundations and endowments. Now, however, it is viewed (and is authentically) a legitimate way to influence corporate behavior. Foundations and endowments are typically charged with carrying out the mission of the donors and/or the institutions they support. Now they can point to the level of SRI and ESG investing that they are doing as a way to placate the stakeholders. In today's electronic age of instant and worldwide communications, a foundation or endowment manager, or trustee could be thrust into the public spotlight (or worse "twitter sphere") and be shown to be investing in a way that is incompatible with the organizations mission.

Q: Another element of this is venture philosophy. What's a good definition of venture philosophy and where have some of its biggest impacts been?

A: Venture Philosophy (or Philanthropy) is not as prevalent as SRI. Venture capital has typically been known to look for homeruns with relatively short exit strategies. Venture Philanthropy is more concerned with social impact and a sustained lower profit. This area is still being defined. Micro-financing is also a trend to watch in this sphere. It empowers individual investors and allows them to directly interact with the companies they're funding.

Q: How does SRI dovetail with venture philosophy? Are returns on VP significant enough to attract large investments? Or does VP mean small investments?

A: SRI, and to a smaller extent, VP are used by foundations and endowments to help achieve mission-based goals while being a prudent investor. Another way that endowments and foundations are using SRI and VP is through a relatively new concept — The L3C. The L3C is an investment vehicle that combines SRI and VP and allows for for-profit members to participate. Ostensibly, the vehicle is a foundation that makes a high risk investment in a program that will qualify for "Program Related Investment" (PRI) under the IRS regulations. (This relates to the Foundation rules requiring 5 percent of a foundation's assets be spent on charitable purposes.) The L3C is then able to attract investors who are willing to take on a reduced risk along with a reduced rate of return in the hopes of achieving a social goal. This is the true heart of VP. It allows for foundation assets to leverage for-profit interests in achieving a social goal on a very local model. The L3C is very new and not widely used, however there is pending legislation that could make it a more feasible (and desirable) strategy.

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