[BETA] Fortnightly

Not unlike Oscars Wilde’s play, The Importance of Being Earnest , in which British Victorians came to grips with internal conflicts of honesty, morality, and purity of principle, the idea of sustainability and socially responsible investing evokes self-examination and reassessment of strongly held beliefs.

Those Victorians turned to well-intentioned rules to guide them on matters of right and wrong. And during their milieu, Victorians accomplished great things across the globe, though not without a few royal hiccups.

Today, more than a century later, the socially responsible investment (SRI) community is likewise well-intentioned, striving to invest only in companies that do the right thing and are sustainable. And like the Victorians, the SRI community also engages in values-based decision-making on a global scale. However, the values on which those investments are made aren’t necessarily shared among all investors. And, neither are the investments made necessarily more profitable than those made by traditional investors.

Fulfilling the mandate to be both socially responsible and produce attractive total returns is quite challenging. A big part of that challenge involves SRI investment criteria that are frequently too strict and cripple the range of investment opportunities. Not that social investment criteria are wrong in any way—they are, after all, inspired by the social good—it’s just that they’re difficult masters. As a real-world consequence, energy utility companies are nearly always screened out of SRI portfolios because of preconceived notions about the utility industry. This prima facie , exclusionary behavior isn’t particularly helpful in encouraging utilities to improve sustainable performance and limits potentially attractive SRI opportunities in the half a trillion-dollar U.S. utility equities markets.

The Importance of Being Nuanced

Sustainability and SRI are joined at the hip, but aren’t identical conjoined twins. Understanding the relationship between sustainability and SRI provides deeper insight into SRI decision making and expands the universe of investment opportunities. For example, relaxing the absolutely-no-nuclear screen typically found in many SRI funds in favor of a more nuanced screen—that recognizes both the benefits and costs of nuclear technology and discerns distinctions among design, seismic and vintage risk factors—would no doubt result in including certain highly sustainable utilities with excellent long-term total returns. Such nuanced understandings and sector-informed screens represent a win-win for both SRIs and utilities. That would lead to an expanded set of SRI opportunities, where utilities are more appreciated as sustainable investments, with the concomitant benefits of higher stock market profiles, enhanced analyst coverage, a broadened investor base with longer-term investment horizons and potentially improved stock performance. With SRI assets under management rapidly approaching $9 trillion sometime around 2015, ¹ SRI fund managers already are seeking new investment opportunities.

The Triple Bottom Line

Sustainability can