Responsible Investing: Past, Present and the Next 25 Years

By Benjamin E. Allen, President, Parnassus Investments and a portfolio manager for the Parnassus Core Equity Fund

As President of Parnassus Investments, I often think about what responsible investing might look like over the coming decades. The future is anchored in the past, so I believe the best way to begin an answer to this question is with a look back at the early years of responsible investing.

The Origins of Values-Based Investing

The modern movement to link investors’ values with their portfolio holdings is rooted in the 1970s. During this period, social concerns like the Vietnam War, civil rights, women’s equality and environmental protection became passionate causes for many members of the Baby Boomer generation. At this early stage of the movement, some idealists were willing to accept lower returns in exchange for investments that aligned with their views on social issues.

The key feature of these early responsible investment strategies was the application of screens to limit the investment universe. The idea was to avoid companies that were perceived as harmful to the environment and society. Many observers concluded that a limited universe would necessarily diminish returns over time. This notion that responsible investing would, by definition, under perform persisted for many years.

Parnassus Investments began with a different vision. The firm’s founder, Jerome L. Dodson, launched Parnassus in 1984 with the idea that a well-designed responsible investment strategy could outperform traditional investment strategies. Starting with this mission of delivering “Principles and Performance®,” Parnassus developed a process that evaluated both the financial merits and the Environmental, Social and Governance (ESG) characteristics of each potential portfolio company. The result was an investment strategy designed to uphold shareholders’ values and to perform as well or better than non-ESG strategies over the long term. 

Sustainability Joins the Mainstream 

Thanks to vocal consumers, shareholders and responsible investment firms, a growing number of companies are now promoting their sustainability, workplace and other social achievements as essential aspects of their brands. At the same time, many corporate leaders have come to realize that pursuing social responsibility can reduce litigation and reputational risk, while also improving innovation and efficiency. In addition, recent academic studies have demonstrated that investing in companies with strong ESG profiles can improve portfolio returns.

In the context of these developments, it is not surprising that responsible investment strategies have grown dramatically. Morningstar now tracks more than 200 socially conscious mutual funds with combined total assets in excess of $100 billion. Many of the new offerings have been launched by large investment managers, who hadn’t traditionally been associated with the responsible investing movement. For example, Natixis, Eaton Vance and BlackRock have developed sustainable fund lineups over the past three years.

The Baby Boomers who grew up with the responsible investment movement now have more options than ever to align their investments with their values. Meanwhile, their children, the generation dubbed “millennials,” have demonstrated a keen interest in ESG investment options.

Expectations for Broader and Deeper ESG Influences

Given this backdrop, I expect two developments in responsible investing going forward:

• First, ESG research will be incorporated at some level into investment processes that aren’t primarily marketed as ESG solutions. This is because investment managers will recognize the performance advantages of companies with positive ESG profiles.

• Second, as traditional asset managers get comfortable with using ESG research, they will continue to look for ways to offer ESG versions of their traditional investment products. This is the natural response to the increased desire by shareholders to align their investments with their principles.

Both trends should increase the demand for even more ESG research from third-party providers. This research will likely come from traditional brokerage firms that already provide fundamental research, as well as from research firms that specialize in ESG analysis. Eventually, demand for ESG data should lead to more transparency and standardization of ESG metrics, expanding on the work that the Sustainability Accounting Standards Board (SASB) is already doing. In turn, corporate executives and board members will become even more savvy about ESG issues. These improvements in measurement and transparency should lead to better company and portfolio-level ESG performance over time.

Read more from Ben on Risks and Opportunities for Responsible Investment Managers; Company Engagement; Responsible Wealth-Building for the Long Term in the full article here- http://greenmoneyjournal.com/responsible-investing-past-present-and-future/