February 23, 2011
Is SRI 3.0 Ready for Mainstream?
by Robert Kropp
Farnum Brown of Trillium Asset Management argues that improved environmental, social, and corporate
governance data will lead to the mainstreaming of sustainable investing.
Last November, the Wall Street Journal published an article entitled Quants and
Do-Gooders Unite, where it reported that Trillium Asset Management will be providing seed money this
year for a sustainable fund based on quantitative investing, or quant.
In a recent
blog on Trillium's web site, Chief Investment Strategist Farnum Brown
wrote that the new investment vehicle "will rigorously integrate quantifiable ESG (environmental,
social, and corporate governance) risk and opportunity factors with traditional investment metrics
in the stock selection process."
Asserting, "This sort of rigorous quantitative analysis
of ESG factors wasn't possible even three years ago," Brown describes the evolution of sustainable
investing from its origins in negative screening to what he calls SRI (socially responsible
investing) 3.0. Appropriating a statement by the philosopher Ludwig Wittgenstein, Brown wrote that
negative screening, or SRI 1.0, "leaves the world as it is." That is, by refusing to invest in
companies that do not meet their standards, practitioners of negative screening leave themselves
without the avenue to influence corporate behavior that they would have had as shareowners.
According to Brown, shareowner activism represents SRI 2.0. In this phase in the evolution of
sustainable investing, which has in fact been the norm for years, investors use their ownership in
companies to influence corporate behavior through engagement and the filing of shareowner
resolutions. As Brown points out, shareowner activism has itself undergone an evolution, from
appeals based on moral persuasion to engaging "the firm's profit motive by demonstrating a
connection between a social good and improved financial performance."
Brown credits Ceres with "having connected the dots between
environmental issues like climate change and the risks they pose to long term corporate
A notable example of the evolution of shareowner activism can be found at
Calvert, whose Large Cap Value Fund
employs the firm's SAGE
(Sustainability Achieved through Greater Engagement) investment strategy. According to Calvert,
the strategy consists of investment in companies that do not meet the ESG criteria of its other
funds, in order to "make an impact with companies never before held in our longstanding sustainable
and responsible funds."
Now, Brown continued, sustainable investing is on the cusp of SRI
3.0. In large part due to the efforts of the Carbon Disclosure Project (CDP) and the Global Reporting Initiative (GRI), many more companies
are publishing sustainability reports. Furthermore, as Brown points out, "Today, three of the
largest financial data purveyors in the world…Bloomberg, Reuters and MSCI each now have ESG
"Better corporate and investor performance is not a partisan issue," Brown
concluded. "Eventually, we won’t even call them ESG factors. They'll just be things that smart
investors and able corporate managers pay attention to."
According to Trillium, a launch
date for the ESG-quant fund, which will be offered by Auriel Capital Management, has not been set.