Classifying Responsible Investment

Responsible investment strategies incorporate environmental, social, and governance (ESG) factors in pursuit of responsible investment objectives: Values Expression, Influence Change, and Return Enhancement.

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When investors choose to invest in responsible investment (RI) strategies, we believe they are trying to accomplish one or more of the following objectives. First, they may be seeking alignment between their invested capital and a personally held principle or ethic; we'll refer to this objective as Values Expression. Second, investors may be using their capital to affect outcomes in a broad range of interests; we'll label this objective or motivation as Influence Change. Finally, there are those investors who believe that integrating environmental, social and governance (ESG) information with traditional investment processes can positively impact risk-adjusted returns; we'll refer to this objective as Return Enhancement. It is important to note that these objectives are not mutually exclusive; on the contrary, RI strategies often emphasize several objectives simultaneously.

Values Expression describes the intent of investors for whom there are benefits to having their investments aligned with an extra-financial principle. When client capital is invested in a way that directly or indirectly supports practices that conflict with the client's views, there is a misalignment of interests. Strategies in the Values Expression category give clients an opportunity to align their investments with personal extra-financial principles; common criteria center on mission, faith, and human rights principles. In practice, Values Expression portfolios are often constructed by using front-end exclusionary screens; it is from this type of exclusionary strategy that socially responsible investment (SRI) has its roots.

While the benefits of a Values Expression mandate accrue mostly to the investor, the motivation for clients in the Influence Change segment reaches beyond individual interests as invested capital now becomes a means to drive organizations to pursue sustainable business practices that affect multiple constituencies. These sustainable business practices introduce the concept of shared value, where a company's business operating policies and procedures look to enhance the economic and social conditions of all stakeholders, e.g., employees, customers, and the communities in which the business operates. This triple-bottom-line framework for allocating capital evaluates prospective investments by their social, environmental, and financial performance. Strategies in the Influence Change category can produce two types of outcomes. These strategies can either seek positive impact on the ESG practices of businesses (i.e. driving change within an organization) or attempt to advance the objectives of organizations with impactful business models that address environmental and social challenges (e.g. startups building innovative education tools or sustainable energy technology). Investment strategies in the Influence Change category can be characterized further by the Scope and Magnitude of their impact. Here we use scope as a reference to the breadth of a strategy's influence and magnitude as a subjective measure of the depth of influence a strategy may achieve. For example, a strategy with broad scope may affect multiple stakeholder groups across a multitude of material environmental, social, and governance issues. Scope in effect answers the question: "How many people are we impacting?" Magnitude, on the other hand, speaks to the intensity of change brought about by the investment strategy; it answers the intuitive follow-up inquiry: "How deeply are target stakeholders affected?"

Investors who look to RI for Return Enhancement believe that environmental, social, and governance issues may affect the performance of a company and ultimately the price of its publicly traded securities; in essence, ESG risks and opportunities represent an additional data source that may enhance the investment decisions of a research analyst or portfolio manager. This position, which is held by many RI investors and is the basis of a growing body of academic research2, contends that ESG factors represent material risks and opportunities to business that should be integrated with traditional fundamental research in support of portfolio risk-adjusted performance.

RI Classification Flow Chart

Classification of responsible investment objectives from the perspective of both an investor and an investment manager. Clarification of RI objectives may be useful in matching investor motivations with investment strategy outcomes.

1The Forum for Sustainable and Responsible Investment.

2 Khan, Mozaffar and Serafeim, George and Yoon, Aaron S., Corporate Sustainability: First Evidence on Materiality (November 9, 2016). The Accounting Review, Vol. 91, No. 6, pp. 1697-1724. Available at SSRN: or

All investments involve risk including loss of principal. Certain investments involve greater or unique risks that should be considered along with the objectives, fees, and expenses before investing. Socially responsible portfolios may forego opportunities to invest in other securities when advantageous, or may sell securities when disadvantageous for it to do so while pursuing its socially responsible criteria.

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