Socially Responsible Investing (SRI)

SRI and Hedge Funds: Odd Bedfellows?

SRI (Socially Responsible Investing, sometimes referred to as community investing, mission investing, or triple bottom line investing) and the alternative investment industry are typically at opposite ends of the investment spectrum. Is there any chance that they may meet in the middle some day? Or are they closer than many investors realize?

Where are the absolute returns?

Of course, hedge funds are known for going for the absolute returns, but this has not recently been the case. Reuters recently reported that hedge funds produced less in absolute returns than investors could have gotten from purchasing stocks and holding on to them (March 24, 2011). In this Reuters' article "Analysis: Hedge funds failing to handle choppy markets," Jeremy Gaunt and Laurence Fletcher of the London Reuters office reported that the "HFRX Global Hedge Fund Index shows a year-to-date gain of just 0.03 percent." This does not say much for the gains that absolute return funds claim to find even in a market downswing.

Another alternative investment strategy: SRI

According to Hedge Funds Review (March 1, 2011), SRI hit $11 trillion in 2010, and the "increase was due to demand from European pension funds, universities and insurance companies and high net worth individuals." While alternatives and hedge fund assets accounted for about 5.6 percent of the European SRI AUM, according to Eurosif "SRI funds could grow by 18% to 20% over the next two years." (2011). If hedge funds are looking for the absolute returns, they may need to look to SRI more in the future if they grow as projected.

SRI investing a definition

While looking for this performance, SRI integrates the impact of an investment's environmental, social, and governance impact on society as one of its criteria for investing. Investors are often active in their influence over the way corporations handle issues such as pollution, gender and racial discrimination, labor practices, and many other topics. They use their power as investors to impact corporate management, to educate the public on issues that are harmful to others, and to make changes in social issues worldwide. Although investors are often passionately aware of these issues and the power of change that they are triggering by not investing in companies that do not take action to stop their negative impact on the world, the bottom line is still to make a profit. SRI Investors, however, want to make competitive profits while influencing positive change in a variety of ways. SRI is not simply an exercise in investor altruism. SRI is now being considered as a valid means to generate superior performance.

What are the principles of SRI?

SRI is an investment strategy that includes environmental, social and governance criteria. SRI uses a pro-active approach while attempting to earn profits with the belief that social issues can be improved at the same time that companies increase their profits. The UN backed Principles for Responsible Investment (PRI) is an investor-led initiative in partnership with the UN Global Compact based around a set of six principles (for more information on the PRI and the 6 Principles, see www.unpri.org ). That also looks at social and corporate governance. PRI's principles were created by the investment community that considers how social and corporate issues can affect the performance of investments, and so they must be considered by investors. SRI is implemented in multiple ways, but there seems to be four major approaches employed within the context of sustainable investing;

• Positive screening - the practice of locating companies that are already adhering to clean technologies and ways to benefit society. Investors interested in SRI look for businesses that demonstrate awareness of human rights worldwide and whose products are safe and useful.


• Negative screening - an exclusion approach to SRI. Companies that produce products that are harmful to individuals or have a negative social impact based on some value-based ethical screen is boycotted by investors.


• Shareholder advocacy is an attempt to influence corporate behavior across certain topics. By filing shareholder resolutions, investors put pressure on company management and attract media attention that brings the problem into the public eye.


• Community investing - directs funds to communities that do not have access to basic banking, such as equity, credit, and other products. Through this action, low-income individuals have access to housing, day care, and business loans.

Moving forward requires overcoming obstacles

Although there are obstacles to be overcome before moving forward, such lack of transparency and additional complexity, resulting from a process that is less measurable than pure quantitative analysis, addressing these problems is not an impossible task. SRI continues to suffer from a lack of understanding of what it involves due to a lack of common definitions of it. SRI needs to perform as well as non-SRI if it will ever be broadly embraced. The investment world has definitely taken notice of SRI, even if there is still a way to go. According to Hedge Funds Review (March 1, 2011), "Hedge fund managers have been urged to stop considering SRI as an eccentric offshoot of the alternative investment industry and instead view it as a major source of fresh capital." As more fund managers realize that being SRI compliant can be useful in fundraising and it can be a competitive advantage to separate a hedge fund from many others, the differences between SRI and alternative investments will not seem so great. Once this adjustment in attitude occurs, socially responsible investing and hedge funds are likely to become good friends.

Source: http://ezinearticles.com/6272676

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