The Green Advisor: SRI & Green Investing Grow Up

Another factor that helped bring the SRI movement more into the mainstream was the issuance of U.N. Principles for Responsible Investment in 2006, which addressed environmental, social, and corporate governance (ESG) issues. There were 50 original signatories to the document, including First Affirmative, but according to the PRI Initiatives 2009 annual report, in three years that number has "soared…to 500, representing $18 trillion of assets and 36 countries."

"They coined the ESG terminology so it would appeal to investors around the world," says Schueth of the U.N. document. "They got away from the baggage that the term 'social' had and 'responsible' as well. There was an implication [that if I say] I'm responsible, then that implies that you're irresponsible. There's a bit of baggage around that early terminology that's been replaced with ESG."

One of the other developments that has drawn investors to look at ESG issues in the companies they invest in has been all the talk about sustainability. "Sustainable is not a commentary on where we are today, because nobody believes that we're a sustainable society today," says Schueth, "but where we're going, we'd like to change the way money is used and use it in a positive, transformative way to get us from where we are now ultimately to a truly sustainable society."

When asked to rank the E, S, and G factors, Schueth gave precedence to the environmental issues. "There's a fair amount of academic research now that strongly suggests that in the environmental arena, those companies that have the best environmental management tend to be the best managed companies in each industry sector. So I'd say the E is the most important," he says.

"Second most important is the G because again there's a fair amount of academic research that suggests that those companies that have the best corporate governance are more profitable than their competitors," Schueth continues.

The social factors have to do with issues like how the company treats its employees, or the people in the communities where it operates. "I'm not sure it's less important, but we have less data, less empirical evidence to suggest that managing around the 'S' has a direct link to bottom line profitability, whereas with the E and the G we have a lot of empirical data that suggests that the companies that do good in those areas are more profitable than their competitors."

The Performance Penalty Debunked

At first glance many investors still think that taking ESG factors into consideration is more likely to hurt portfolios than to help. According to Schueth, however, that hasn't been the case. "If we look at the past 12 months, I think we had a little different experience than most of our conventional competitors in the sense that very few of our investors panicked and bailed," he notes. "[They] tend to be bigger-picture thinkers and maybe more long-term oriented. They're into investing for more than just the short-term gains. They want to make money and make a difference at the same time, so they have more patience…Relative to the major conventional benchmarks, we've done quite well."

Schueth also thinks there are some positive lessons that investors of all stripes can learn from the last 18 months. "If I were to pick a few of the positives, the first one is that in every down market cycle it reminds us all that we've got to have diversified portfolios," he says.

"As people become more aware of the big picture and the interconnectedness of all of this stuff, they begin to realize that the money that they spend and the money that they invest has power, and so you can think about it as economic democracy. You vote for companies by spending money to buy their products. Or not. And you vote for companies by putting money into their stocks and bonds. Or not. You have a say. Then, of course, you can vote your proxies, but it's a way for investors to feel more empowered; many more are [doing so] every day."