Q&A: How to Use SRI & ESG Screening to Support Your Mission

December 2, 2014

Institutional investors are looking to these screening strategies to tie organizational values to their investment process

In light of several events over the past few years, industry press has placed increased focus on the concept of Socially Responsible Investing (SRI). Institutional investors interested in more closely tying organizational values and missions to their investment processes are beginning to take interest, as well.

Here are some of the most commonly asked questions we're asked about the different SRI and ESG strategies available to foundations and endowments.

What is socially responsible investing?

SRI is the practice of incorporating ethical and moral criteria into the investment process. SRI gained global traction in the 1980s, with the movement to divest investments from South Africa in protest to its system of racial segregation known as Apartheid.

The practice has evolved into what is often perceived as a type of negative screening used to limit holding certain securities, such as alcohol, tobacco, fire arms or terrorist stocks — often referred to as “sin stocks” — within the investment portfolio. Because this type of screen shrinks the universe of potential investments, some investors might be concerned with the potential negative impact on returns.

Over the past decade, several benchmarks have been created to track SRI performance, including the KLD Indexes and Dow Jones Sustainability Indexes. In looking at the analysis below, the MSCI KLD 400 Social Index slightly outperformed the S&P 500 over the past 10 years, demonstrating that SRI allows investors to align their investment philosophies with their core values, without sacrificing quality investments and goals.

MSCI KLD 400 and S&P 500






How is SRI different from Environmental, Social and Governance Screening?

The positive screening process of ESG strategies adds the stocks of companies
committed to responsible business practices.

Unlike SRI, ESG strategies involve a positive screening process that adds the stocks of companies that are committed to responsible business practices, without sacrificing portfolio diversification or long-term performance. ESG started with what some have termed “engagement” or “shareholder advocacy” — a dedicated effort by investors or shareholders to visit with a company in order to influence some of their business practices.

Because more and more companies are reporting their good business practices at the security level, investors are able to identify companies making positive contributions to society. For example, companies with good employeremployee relations, strong environmental practices, safe products and operations that respect human rights. There are several benchmarks available in the industry that rank companies based on these ESG factors; for example, MSCI ESG Research's Intangible Value Assessment (IVA). Some studies have shown that companies with better ESG practices carry less risk and generate superior performance than their counterparts with less of a focus on ESG factors (such as companies that use sweatshop labor in poorly developed countries).1

Climate change: SRI or ESG strategy?

The movement for climate change is a specific effort taking place, often seen cited in the higher education endowment space, to help bring about positive change in regard to global warming. The answer to the above question is both.

Fossil fuel divestment is an example of a climate change SRI strategy using a negative screen to remove securities that have large reserves of oil, coal and natural gas. Additionally, investors interested in supporting this movement might chose to apply a positive ESG screen to overweight allocations to companies with a low carbon footprint.

What is impact investing?

Often misunderstood for SRI or ESG, impact investing is a very unique approach to investing that most closely ties an organization’s mission to its investment strategy. For example, a private foundation dedicated to helping vulnerable children in low-income areas invests directly in a company that provides healthy school lunches. For investors using impact investing, better serving the mission often trumps returns.

Legal Note

1De, Indrani and Clayman, Michelle (2014). "The Benefits of Socially Responsible Investing: An Active Manager’s Perspective." Retrieved 1 December 2014 from http://ssrn.com/abstract=2464204.

Information provided by SEI Investments Management Corporation, a wholly owned subsidiary of SEI Investments Company. This information is for educational purposes only. Not intended to be investment, legal and/or tax advice. Please consult your financial/tax advisor for more information.