Responsible investing is most commonly understood to mean investing in a manner that takes into account the impact of investments on wider society and the natural environment, both today and in the future. The most visible manifestation of this aspect of responsibility has been so-called ‘socially responsible investment’ (SRI). Initially confined to the negative screening of investment funds managed on behalf of specific religious communities, or targeted at a narrow range of specific issues such as apartheid South Africa, the last decade has seen an extraordinary growth in the scale and breadth of application of SRI. There is over US$ 2 trillion under professional management in the United States linked to some kind of socially responsible investment strategies, a fourfold growth over the last decade.

However, the logic of responsible investment — i.e., the deliberate incorporation of material social and environmental considerations in investment decision-making — has yet to be embraced by the wider investment community. Responsible investing remains a boutique segment of the industry despite widespread, if largely anecdotal, evidence that social and environmental factors affect market valuations both positively and negatively.

Most obvious are instances with direct legal consequences. ABB, for example, is one of many companies facing massiv liabilities associated with asbestos. The financial markets discounted Wal-Mart’s normally buoyant share price on news of the class action related alleged discriminatory labour practices. Market shifts associated with changing societal concerns are ignored at a company’s risk. McDonald’s, responding late but forcefully to obesity and broader health concerns, was duly rewarded with a rise in profits and share price. Broader political risk can be rooted in the dynamics of progressive social change. Sasol’s SEC 2003 filing highlights the slow pace of black economic empowerment as a significant risk that may adversely affect the business, operating results, cash flows and financial condition. Similarly, recent poor performance in Europe of leading US retail brands has been attributed by some business commentators to broader international disenchantment with the US. More positively, shares in Brazil’s top cosmetics group, Natura, offering mid-range products grounded in strong social and environmental credentials, soared upwards on their debut on the Brazilian stock market in June 2004.

Despite these and other examples, attention to non-financial factors within the wider investment community remains largely reactive and episodic. What could propel responsible investing from the boutique to the mainstream? Based on three roundtable discussions involving mainstream investment fund managers, analysts, trustees and advisors convened in 2003-04 by the World Economic Forum’s Global Corporate Citizenship Initiative and AccountAbility, the answer is likely to be found in the major demographic changes sweeping most advanced industrialized countries and transforming the nature of corporate share ownership.