Refinement of SRI has also helped move it from the fringe towards the mainstream. Early on, SRI was characterized by the ethical concerns of churches and similar organizations. Exclusion or negative screens filtered out investments in areas such as alcohol, gambling, pornography, tobacco, military involvement and nuclear power. Yet, SRI initially had little impact on the asset management industry. There was a concern that SRI could conflict with fiduciary duty (Redefining the business of business) and anyway, fund managers in hot pursuit of alpha had little time for moral or ethical quandaries. The result, one US analyst explained, was that before 2000, “SRI funds were seen as a ‘ghetto.’ They quickly capped out at about 2% of the market and then went nowhere.”

According to the Financial Times (August 2008) ESG has emerged from an alphabet soup of acronyms to “best describe the off-balance-sheet factors that influence company performance.” The argument is that while analysts are well versed in using financial metrics, nonfinancial factors play an increasingly critical role in determining true corporate value.

By integrating analysis of ESG issues into their strategy, investors gain an enhanced appreciation of opportunities offered by companies, as well as the long-term operational, reputational and legal risks that could impact on performance. Investors in US car manufacturers and Europeans who were without heat as a result of the recent Russia-Ukraine pipeline squabble can perhaps better appreciate the need for longer-term risk and opportunity analysis.

While climate change dominates headlines, other environmental issues can influence a company’s long-term performance or offer opportunities for growth. Depending on the sector and company, these could include pollution, water scarcity, renewable energy opportunities and the use of toxic chemicals.

The cost of bankruptcy and litigation from unforeseen issues may take years and billions to resolve. Asbestos payouts of $5.2 billion by Owens Corning and the Bhopal disaster associated with Union Carbide are two high-profile cases. Issues such as child labor, animal welfare and discrimination provide risks to a company’s reputation. Enron, WorldCom, Tyco and Parmalat drew governance and accounting issues to the attention of investors not long ago. The recent rash of bailouts and failures will further underline the importance of corporate governance risk and bring such issues as “corporate malfeasance,” as Alan Greenspan once described it, to greater public attention.

To avoid risks or seize opportunities, investors must know more than just the financial figures of companies in their portfolio. ESG analysis is also increasingly acknowledged by firms such as UBS, Goldman Sachs and Société Générale. Supporters believe that a more thorough and systematic integration of ESG into portfolios will lead to outperformance in the long term. However, this remains a thorny topic. Current evidence suggests asset professionals could indeed do well by doing good, but they shouldn’t expect to do better than mainstream investors – though ESG may assist in reducing risks (The value of values).

Of course, outperformance and risk management are not the only reasons why investors apply ESG. Leading public pension funds, such as the French Fonds de réserve pour les retraites (FRR), the Norwegian Government Pension Fund, the California Public Employees’ Retirement System (CalPERS), because they are concerned with the retirement interests of civil servants, also believe they have a long-term interest in promoting the common good. But whether for money, principles, legislative and regulatory pressure, one thing seems sure, SRI will be a constant theme in the near future as the world tries to kick-start the economy while cooling down the planet.

Robeco thinks so. It predicted the SRI market will grow to 15-20% of total global AuM by 2015. Factors driving growth include: increased social awareness of “irresponsible” corporate behavior and the media attention and pressure this attracts; increasing prices of energy and raw materials; changing legislation such as mandatory CO2 reductions; the established track record for SRI performance; and technological innovation. While retail share of the market will increase, Robeco says, it will remain below the institutional share. Against this, SRI retail funds will be a growing source of revenue for asset managers, compared with mandates, which are currently the dominant product.