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A Short History of Socially Responsible (SRI) and Environmental, Social, and Governance Investing

The origin of SRI and ESG dates back centuries.

Both Jewish law (Torah) and the religious teachings of Islam (Qur’an) had mandates about investing ethically. For the most part, those mandates focused on social justice and the avoidance of interest from banking and investments in liquor, pornography, and gambling.

Over two hundred years ago, Quakers and Methodist immigrants brought the concept of values-based investing to the “new world”, avoiding investing in businesses that profit from products designed to enslave or harm fellow human beings.

In the 1960’s, concerns regarding the Vietnam War, civil rights, and women’s equality, helped escalate sensitivity to issues of socially responsibility and investment accountability. In the 1980’s, concern over the racist system of apartheid in South Africa lead churches, foundations, and other institutional investors to create investment strategies that sought to put pressure on the white minority government.

Environmental calamities at Bhopal, Chernobyl, Valdez, and the Gulf of Mexico heightened investors’ concerns. School shootings, climate change, human rights, working conditions in factories producing goods for our domestic consumption, and the introduction of genetically modified foods have had a substantial impact on directing investment capital towards investments directed at creating a sustainable future.  

SRI investing started to evolve beyond simply deselecting “sin stocks” (stocks that often contributed to outsized gains in the broad market benchmarks), towards investing in companies engaged in best practices around a host of environmental and corporate governance concerns that could lead to better business performance. Whereas SRI was essentially a passive form of investment, this newer, more active, approach sought higher, risk adjusted, returns. This approach became known as ESG investing.

ESG (Environmental, Social, and Governance) has now become shorthand for investment methodologies that use a “prism” of sustainability factors as a means of identifying companies with superior business models. While all investors look for profit potential, ESG focuses on both quantitative and qualitative analysis to design portfolios that also align with personal values and social priorities. ESG is one of the fastest growing trends in financial management. Since 1995, ESG managed asset pools have grown from $639 billion to over $6.6 trillion in 2014. As of early 2014, nearly one out of every six dollars under professional management in the United States was directed at some form of ESG investing.