how to integrate SRI into mainstream investmentJune 2001
Mainstream investors are not interested in weighing moral dilemmas, but in assessing the management capabilities of companies, says Chris Burgess
Socially responsible investment (SRI) has gained significant momentum over the last 12 months. In which direction will this momentum drive SRI in the future?
Following our recent survey of how fund managers are responding to SRI, we have held a series of more detailed meetings with 15 fund managers. The following comments are based both on the survey and on the discussions that took place at these meetings.
Amongst the larger fund management organizations, there is a perception that SRI involving ‘ethical’ screens will remain a niche area of the market. Fund managers will provide specific solutions where clients demand this approach, but their real interest lies in whether there is a value proposition arising from good management of environmental, social and ethical issues. They appear more willing to integrate SRI criteria with the other criteria they use when making investment decisions, than to apply a moral viewpoint.
Fund managers say they are reluctant to use ethical screens for two main reasons. First, such screens limit the total investment universe; there is concern how this would impact on risk and on clients’ fiduciary duties. Second, they are uncertain whether it is appropriate for investment experts to make the complex moral choices involved. Fund managers expressed concern that they might be seen to be taking arbitrary decisions on investment, and so jeopardizing financial returns.
These findings have a bearing on the development of the FTSE4Good family of ethical indexes, whose consultative document proposes, among other things, a system to screen out certain businesses involved in activities such as tobacco or arms. FTSE’s independent committee met late last month to decide criteria for selecting companies for inclusion.
Large fund managers are more likely to engage on SRI on the premise that investing in companies that are superior at managing environmental, social and ethical matters will produce better returns. SRI then becomes a question of assessing management capability rather than balancing moral dilemmas.
The FTSE4Good committee is to finish its deliberations this month. If it adopts an exclusionary approach, it may deter mainstream investors. If it does not, it may be seen as ‘betraying’ the pioneers of SRI, a number of which use screens. The challenge for FTSE4Good is to cater for specialist SRI fund managers – while leading the process of integrating SRI into the mainstream of investment.
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