NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Thursday, May 21, 2015

Socially responsible investing is gaining major traction, thanks in part to the emergence in the U.S. of “impact investing,” a concept that started in the U.K.

“It has been a more galvanizing force for more sophisticated institutional investors – like the state of California’s CalPERS that makes purchases of certain investments for a greener state,” says Amy Domini, founder of the Domini Funds and one of the nation’s chief architects of SRI.

In 1986, pension funds globally moved to oppose apartheid in South Africa by divesting of some $200 billion in companies that supported it. And more recently, impact investing has caught on with traditional wealth management firms. Large banks, fund companies, and boutique investment firms catering to people with a high net worth are all getting into the game with teams dedicated to addressing the environment, women’s rights, the environment and more.

According to the Financial Times, the difference between the two is that “socially responsible investing is about avoiding investments that are inconsistent with the values of the investors,” while “impact investments actively pursue a positive impact.”

The enthusiasm for impact investing in the U.S. hasn’t only led to more financial institutions producing investment products with a social tilt, but to a new focus on academics with seminars, professors and even programs churning out graduates who hope to pin their careers on the movement.

Why performance has improved

The question of whether an investor will sacrifice returns by doing good “is a question that will always be asked, “ says Domini, even though times have changed. When she started the Domini 400 in 1989 to track socially responsible companies, performance lagged behind the S&P SPX, +0.23% . But since 1990, the social index (MSCI KLD 400) returned an average annual total return of 10.46% compared with the S&P 500’s 9.93%.