Socially Responsible Investing Quickly Explained
Channel: MJ the Fellow Actuary
Date: 2017-03-28

When investing in a company, you need to make sure they are doing the right thing and that they are profitable. Companies that do the wrong thing expose themselves to massive risks that could have a huge financial impact in the future. I've attached my notes on SRI below:

Involves:
Environmental pollution
Public concerns (Genetically modified food)
Corporate Governance. (Is chairman and CEO same person)
Focus of regulatory framework. (greenhouse gas emissions
Labour issues. (Safe working environment)

SRI is any issue that may not have a short term impact but could have significant negative or positive impacts for asset owners in the long term.

SRI has a financial impact. Its not a Moral Judgement OR an Investment Judgement. It includes both. It is the right thing to do and its in the interest of the investor

Includes:
Ethical business practices
Transparent reporting
Community support
Black economic empowerment

Methods:
Active asset management with regards to voting in board rooms
Enforcing good corporate governance
Aim for investments that have  a positive contribution to society
Also focus on unlisted socially responsible opportunities (Educational Entrepreneurs)

Approaches:
Passive screening. Invest in an ESG benchmark index
Positive screening. Establish a criteria before an investment is included in a portfolio
Negative screening. Exclude companies on the basis of ESG performance.

UN Global Compact:
Human Rights
International Labour Organisation (no child labour)
Environmental issues
No to bribery and corruption

Trustees feel SRI implementation is too difficult and that it goes against their mandate of sole responsibility of maximising investment returns. Some critics say that negative screening is not consistent with Modern Portfolio Theory as it limits the investment universe thus lowering diversification, but benefits of diversification are marginal and fall rapidly. Most important issue is if negative screening causes a big deviation from benchmark, if a tobacco company like BAT is one of the biggest in the index. Others believe business should stick to doing business.

Trustees must:
instruct managers to take SRI into account
instruct managers to engage with firms in which they invest

Independent non-executive directors may not be considered independent the longer they hold their position




Factors pushing ESG into the mainstream
Nexus between ESG issues and financial performance
Stakeholder activism
Reputational concerns
Consumer pressure and public opinion
Pressure from research bodies
Pressure from insurance industries
Introduction of corporate environmental reporting obligations
Rise of the global company
Adoption of investment guidelines by the World Bank
Growing corporate Transparency
IT revolution
Social Media pressure
Regulation mandating disclosure of ESG investment policies


Traits
Discipline
Transparency
Independence
Accountability
Appropriate behaviour
Fairness
Social responsibility
Good stakeholder relations
Communication and disclosure
Effective leadership
Financial and economic performance
Respect for shareholder’s rights
Meeting stakeholder obligations
Embracing challenges of their business environment