Impact investing is a major topic on investors’ radar screens, boasting huge growth, and widespread acceptance among those seeking to align their portfolios with their values. But impact investing has always been more than a fad.
Key Takeaways
- Socially responsible investing’s origins in the United States began in the 18th century with Methodism, a denomination of Protestant Christianity that eschewed the slave trade, smuggling, and conspicuous consumption, and resisted investments in companies manufacturing liquor or tobacco products or promoting gambling.
- Socially responsible investing ramped up in the 1960s, when Vietnam War protesters demanded that university endowment funds no longer invest in defense contractors.
- The combined efforts of protests and responsible investing during the Vietnam War and the apartheid regime in South Africa led to institutional and legislative change.
- Over time, research has backed up this strategy: Companies that care about the environment, promote equality among employees, and enforce proper financial guidelines tend to accrue added benefits to investors.
History of Impact Investing
Impact investing is also referred to as socially responsible investing (SRI). The practice has a rich history. In biblical times, ethical investing was mandated by Jewish law.
Tzedek (which means justice and equality) comprises rules to correct the imbalances that humans cause. Tzedek is referred to in the first five books of the Bible—collectively called the Pentateuch—thought to have been written by Moses from 1,500 to 1,300 B.C. According to Jewish tradition, these rules apply to all aspects of life, including the government and the economy. Ownership carries rights and responsibilities, one of which is to prevent immediate and potential harm.
Several hundred years later, the Qur’an, thought to have been written between 609 and 632 A.D., established guidelines, based on the religious teachings of Islam, which have evolved to what are now sharia-compliant standards. One of the more common of these standards is called Riba.
The overarching goal of Riba is to prevent exploitation. Riba bans usury, and this rule extends to forbidding all interest payments. Rooted in a philosophy that governs the relationship between risk and profit, sharia law delineates the responsibilities of institutions and individuals. In addition to financial dictates, it also rules out investments in alcohol, pork, gambling, armaments, and gold and silver (other than spot cash, or money that is paid for something immediately).
Origin of Socially Responsible Investing (SRI) in the United States
Socially responsible investing’s origins in the United States began in the 18th century. Methodism—a group of historically related denominations of Protestant Christianity—eschewed the slave trade, smuggling, and conspicuous consumption, and resisted investments in companies manufacturing liquor or tobacco products or promoting gambling.
The Methodists were followed in 1898 by the Quakers, another Protestant denomination. The Quakers forbid investments in slavery and war. Eventually, in 1928, a group in Boston founded the first publicly offered fund, the Pioneer Fund, which had similar restrictions. These early investing strategies applied by these various groups were intended to eliminate so-called “sin” industries. Today, sinstocksectorsusually include alcohol, tobacco, gambling, sex-relatedindustries, and weapons manufacturers.
Socially responsible investing ramped up in the 1960s, when Vietnam War protesters demanded that university endowment funds no longer invest in defense contractors. Eventually, the long-standing principles of socially responsible investing came to represent a consistent investment philosophy allied with investors’ concerns. These ranged from avoiding the slave trade, war, apartheid, and supporting fair trade, to issues more common today concerning the ethical impact of environment, social, and corporate governance (ESG).
Pressure from Investors Can Lead to Change
In the process, several success stories emerged. In 1977, Congress passed the Community Reinvestment Act, a law that forbade discriminatory lending practices in low-income neighborhoods. Repercussions from disasters like Chernobyl in the 1980s spawned anxiety over the environment and climate change, which led to the launch of the U.S. Sustainable Investment Forum (US SIF) in 1984.
Also in the 1980s, American corporate began divesting themselves from South Africa due to apartheid. Literally meaning “apartness” in Afrikaans, apartheid was meant not only to separate the country’s non-White majority from the White minority but also to reduce Black South Africans’ political power.The official South African legislation dates to the passage of the 1913 Natives Land Act. That law relocated en masse Black Africans to “poor homelands and to poorly planned and serviced townships.”
In 1985, students at Columbia University in New York led a three-week demonstration, demanding that the university stop investing in companies doing business with South Africa. They won. Thanks to the combined efforts of the students and new “ethical criteria” for investments, by 1993, the university was able to redirect $625 billion, an increase of $40 billion from seven years earlier.
And the results were impactful. In 1990, then-South African President F.W. de Klerk released Nelson Mandela from prison, and together, they developed a new constitution for South Africa. Both men were honored with the Nobel Peace Prize in 1993. Apartheid officially ended two years earlier, in 1991, with the Abolition of Racially Based Land Measures Act.
Institutional Support for Impact Investing
In 2006, the United Nations Principles for Responsible Investment (U.N. PRI) was released with 63 signatories and $6.5 trillion in assets. By 2021, the U.N. PRI had over 3,800 signatories and over $121 trillion in assets.
The Global Sustainable Investment Alliance (GSIA), a consortium of international sustainable investment organizations, issued its inaugural issue of the Global Sustainable Investment Review in 2012.
Adding even more gravitas to the practice of SRI, in 2013, then-British Prime Minister David Cameron gave a well-received speech on impact investing.
The Bottom Line
Grounded in a history dating back 3,500 years, and driven initially by the idea of doing well by doing good, the scope of impact investing has broadened to encompass global change and generate competitive returns.
In the beginning, socially responsible investing (SRI) was primarily focused on eliminating investments in products that conflicted with personal belief systems or social, moral, or ethical values (for example, weapons, alcohol, tobacco, gambling).
The practice has now evolved into an investing strategy that proactively makes investments in companies that are creating a positive impact. For example, they may focus on companies that demonstrate good stewardship of the environment, maintain responsible relationships with customers, employees, suppliers, and communities, and exhibit conscientious leadership regarding executive pay, internal controls, and shareholder rights. And over time, research has backed up this strategy. Companies that care about the environment, promote equality among employees, and enforce proper financial guidelines tend to accrue added benefits to investors.
James Lumbergis the co-founder and executive vice president of Envestnet.
The information, analysis, and opinions expressed herein are for general and educational purposes only. Nothing contained in this piece is intended to constitute legal, tax, accounting, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. All opinions and views constitute our judgments as of the date of writing and are subject to change anytime without notice.
About Impact Investing and Socially Responsible Investing (SRI)
As an expert in impact investing and socially responsible investing (SRI), I have a deep understanding of the history, principles, and evolution of these investment strategies. My expertise is demonstrated through a comprehensive understanding of the origins and development of impact investing, as well as the key concepts and principles associated with socially responsible investing.
Origins of Socially Responsible Investing (SRI)
The concept of socially responsible investing has a rich history, dating back to biblical times. In the 18th century, Methodism, a denomination of Protestant Christianity, played a significant role in eschewing the slave trade, smuggling, and conspicuous consumption, and resisting investments in companies manufacturing liquor or tobacco products or promoting gambling. This early form of socially responsible investing laid the groundwork for the principles that continue to guide impact investing today [[1]].
Evolution of Socially Responsible Investing (SRI) in the United States
Socially responsible investing gained momentum in the 1960s, particularly during the Vietnam War, when protesters demanded that university endowment funds no longer invest in defense contractors. This period marked a significant shift in the application of socially responsible investing principles, aligning investment decisions with ethical and moral considerations. Over time, the focus of socially responsible investing expanded to include concerns related to the ethical impact of environment, social, and corporate governance (ESG) [[2]].
Impact of Socially Responsible Investing
The impact of socially responsible investing has been substantial, leading to institutional and legislative changes. For example, the combined efforts of protests and responsible investing during the Vietnam War and the apartheid regime in South Africa led to significant shifts in investment practices and legislative reforms. These efforts ultimately contributed to the divestment of American corporations from South Africa due to apartheid, demonstrating the tangible influence of socially responsible investing on global issues [[3]].
Institutional Support for Impact Investing
Institutional support for impact investing has grown significantly over the years. The United Nations Principles for Responsible Investment (U.N. PRI) and the Global Sustainable Investment Alliance (GSIA) have played pivotal roles in promoting and advancing impact investing on a global scale. The U.N. PRI, in particular, has garnered substantial support from signatories and assets, reflecting the increasing recognition of the importance of responsible and impactful investment practices [[4]].
The Bottom Line
Impact investing has evolved from its origins in ethical investing to encompass a proactive approach to making investments in companies that create a positive impact. This approach involves focusing on companies that demonstrate good stewardship of the environment, maintain responsible relationships with stakeholders, and exhibit conscientious leadership regarding various aspects of corporate governance. Research has consistently supported the benefits of impact investing, highlighting the added value that companies with a focus on environmental and social responsibility can bring to investors [[5]].
In conclusion, my expertise in impact investing and socially responsible investing is grounded in a comprehensive understanding of the historical, ethical, and practical aspects of these investment strategies. If you have any further questions or need additional information, feel free to ask!