How does SRI deliver?
The sort of growth SRI now enjoys can only be maintained by good performance. The notion that SRI funds yield less returns is steadily receding. SRI invests to promote sustainable development, gaining returns for shareholders by respecting the well being of society and the environment. CEO of Morley Fund Management (Morley), Keith Jones, explains the SRI philosophy:
“As investors, we increasingly believe that good environmental and social practice is synonymous with good management of companies and, in turn, good share price performance.”
Instead of negative screening, SRI is oriented to the future. The premise is that the necessary shift by world economies from environmentally and socially unsustainable growth to sustainable growth will be one of the key forces in the 21st century. Therefore, companies most likely to grow consistently over the next few decades will be those that are promoting or benefiting from sustainable economic development.
Where screened funds exclude companies for shortcomings in one area, the SRI fund management teams engage with the company to enable the evolution of increasingly sustainable business practice.
In order to judge the sustainability of a company, the Morley SRI team has developed a matrix which grades a company on its business sustainability and its management vision and strategy
Business sustainability is rated from A–E. An A grade shows that a company's core business is a sustainability solution, such as renewable energy, healthcare and educational services. An E grade shows the business is fundamentally in conflict with sustainable development, such as tobacco products and armaments manufacture.
Management vision and strategy is graded from 1–5. 1 is a rating of excellence showing the company has a clear vision of sustainable development and is working hard to achieve it. As the poorest grade, 5 shows the company is hostile to the concept of corporate social responsibility.
Companies within the approved segment of the matrix must then meet rigorous financial criteria dictated by the fund manager. Therefore companies within SRI funds must demonstrate social, environmental and financial performance. This means they are more likely to be companies with excellence in governance and have strong brand or reputational capital, crucial factors to sustained financial returns.
By using SRI as an investment style fund mangers are equipped with a tool to identify both risk and opportunities that meets the increasingly sophisticated challenges facing companies today.