RTE Dragons’ Den 21st April 2013 – Socially Responsible Investments

Wednesday, January 8th, 2014

Are investors increasingly choosing sociably responsible investing and how can they do this without it being detrimental to their portfolio? 

While watching an episode of Dragons’ Den recently, it dawned on me that lately, it seems that investors are increasingly choosing to invest their money towards Socially Responsible Investments (SRI). In the last two years SRI investing has grown by 22% to $3.73 trillion in management assets worldwide. This is not just a trend seen abroad, but also here in Ireland.

SRI is also growing in popularity in Europe, despite different regulations and institutions. SRI assets under management in that continent reached €1.03 trillion in 2005 and the growth of the SRI market between 2003 and 2006 was 106%. It has slowed down in the last 5 years but is really making a comeback.

Here in Ireland, on Dragons’ Den, Sean O’Sullivan and Ramona Nicholas both refused point blank to consider investing in Éanna Ó hIorua’s business Oddball because it was part of the gambling and gaming industry. In Ireland where we have a gambling sector that has massive potential and is growing rapidly especially online, this reaction makes for interesting reflection. It makes one wonder is this becoming a real trend here among some Irish investors who are steering their investments towards those who promote certain actions or eschew those, whose actions offend.

What is SRI investing?

SRI is sometimes referred to socially, sustainable, green or ethically responsible investing. The Social Investment Forum lists 12 types of screens for company exclusion. These screens include the following industries or issues: alcohol, tobacco, gambling, defence/weapons, animal testing, product/service quality, environment, human rights, labor relations, employment equality, community investment, and community relations.

According to Forbes magazine in March, $1/9 under professional management in the US is a SRI investment.

While we do not have the exact figure for Ireland, Sean O’Sullivan and Ramona Nicholas demonstrated that there is a growing awareness among influential Irish investors about SRI, in line with the international trend towards SRI investments increasing in share portion of international investment.

Moral conflict

Is there a moral financial conflict of SRI and if so would we be willing to financially underperform as a result?

According to the research, the trick to having an efficient and sound investment strategy means building a diversified portfolio. This means including not just ‘mission’ investing. This is modern portfolio theory that believes the benefits of diversification are stronger when risk is distributed over firms from different industries.

To reduce the moral dilemma, socially responsible investors could turn their attention from screens on industries to screens on companies. So instead of avoiding broad industries, an SRI investor can opt for a less drastic option: excluding within each industry the least responsible companies. This is often called the “best-in-class” approach by many responsible funds. The resulting portfolio will still have companies in industries such as gambling. This approach could provide powerful incentives for all companies to improve their responsibility standards. Industry exclusion does not, since companies from sin sectors are banned without any possibility of “appeal”. If you give them a chance to be included by getting a higher SRI rating, you give them a reason to improve.

Oddball was denied investment by two important Dragons not because his business model wasn’t sound or potentially a great investment opportunity, but because of the broader gambling industry’s negative reputation.

If this trend continues, investment pitches on Dragons’ Den and elsewhere will become increasingly challenging for companies that fall outside the Social Responsible Investment category.