Historically, investors pursuing socially responsible investment (SRI) strategies have been forced to choose among imperfect investment solutions.  An evaluation of current investment products which incorporate Environmental, Social, and Governance (ESG) criteria reveals some seeming contradictions.  Are SRI funds truly meeting the needs of socially conscious investors by excluding Starbucks – a company respected by many for its sustainable supply chain practices and strong employee relations – because the company licensed its brand to promote an alcohol product?  Should CSR ranking systems honor international oil firms – many of which operate in emerging regulatory climates – among the Top 10 most socially responsible companies simply because they have more sophisticated risk management systems?  Many people think not. But when will there be a better alternative?

According to a recent Mercer survey of investment managers, better SRI investment products are expected to hit the market in 5-10 years.  73% of respondents predict that social and environmental performance indicators will become mainstream in 10 years and 80% believe that active ownership will occur in the next 5 years.  There is greater disagreement, however, on the timeline for standardized implementation.  40% of respondents believe screening on negative and positive indicators will occur in the next 5 years, whereas 35% believe it will never happen.

Whether it’s driven by policy change at the government level, examples of early adopters’ success, or shareholder activism, SRI will continue to move away from “ethical screening” toward a “source of alpha” mentality.  Why shouldn’t we be able to invest in truly socially responsible companies and expect returns that beat the market?