Heightened Awareness, Broader Definition Boosts SRI Holdings

The Canadian Socially Responsible Investment Review by the Social Investment Organization (SIO) claims that since the publication of their last Review in 2004, assets invested according to socially responsive guidelines have increased significantly, from an estimated $65.46 billion in 2004 to $503.61 billion, as of June 30, 2006.   The report says the vast majority of this increase is due to the recent adoption of socially responsible investment practices by several major pension funds, mostly in the public sector.   Also responsible for at least some of the growth – a dramatic shift in the definition of what qualifies as a socially “responsive” investment.   

Negative Rethinking

For example, the report notes that the first SRI mutual funds emphasized strict negative screens, an emphasis that reflected the thinking at the time, “rooted in values-based choices about environmental sustainability, human rights, international development, worker rights and corporate responsibility.”  

However, since then the SRI concept has broadened considerably, and now includes positive screening, shareholder activism, community investments, analysis and integration of environmental and social issues, sustainable venture capital and ethical lending.   The study’s authors say this shift reflects “not just a change in society’s attitudes toward corporate responsibility, but a deeper understanding of the relationship between environmental and social issues and investment risk and return.”   A relationship that the study’s authors claim has been excluded from “traditional” financial analysis.

The report breaks down growth patterns in a number of key SRI segments including:

• Core SRI , which include screened investments, community investment, andsocially responsible lending, rose dramatically in the period under study, from $37.9 billion twoyears ago to $57.4 billion in 2006, a 52% increase. The study’s authors say that most of this growth is attributable to an increase in assets by managers managing money under social andenvironmental screens, a sector that increased from $21.2 billion in 2004 to $36.5 billion.   The Core category’s holdings are derived from screening based on exclusionary or inclusionary criteria, such as tobacco, alcohol, environmental performance, human rights violations, community involvement and employee relations.

• Broad SRI , which includes ESG integration with traditional financial analysis strategies, ESG corporate engagement and proxy voting, and sustainable venture capital, experienced growth from a base of $27.6 billion in 2004 (a base which had not changed significantly in the previous four years, according to the report) to $446.2 billion in 2006.   Most of the increase is due to the addition of assets from large public pension funds, many of which have adopted SRI policies and practices in the last two years, according to the report.   However, that estimate also includes a new sub-category of asset managers integrating environmental, social and governance (ESG) factors into their portfolios, which has also increased the Broad SRI estimate by about $12.7 billion.

Removing community investment and socially responsible lending assets from the total (assets that are considered outside of total assets under management), total SRI assets represent 19.6% of the combined retail mutual fund market and the institutional investment market, a shift that the report says is directly attributable to the inclusion of Broad SRI assets from the pension fund sector, primarily public pension funds.

In 2004, the $65.46 billion estimated in SRI assets represented just 3.6% of those markets.   Broad SRI as a share of total assets under management is 17.4% and Core SRI assets have a 2.2% share of the market, according to the report.

The report is available online at http://www.socialinvestment.ca/documents/SRIReview.pdf