Socially Responsible Funds Link Pay to ESG Impact

(3BL Media/Justmeans) – Socially responsible investing (SRI) seeks out companies that are rated high for environmental stewardship, employee diversity, fairness to customers and suppliers, community engagement, and robust standards of corporate governance. According to the Forum for Sustainable and Responsible Investment, one out of six dollars under professional management in the US in 2014 was invested following SRI strategies.

Now, some socially responsible funds are going a step further by tying the compensation of their portfolio managers to the impact their investments have made. Their rationale is that managers’ compensation should reflect how well they achieve the goals of making an environmental and social impact through sustainable investing.

This approach to determining compensation comes with an inherent challenge of how to fairly measure impact. Secondly, the compensation strategy should be designed in a way that the pursuit of doing good does not come at the expense of making profitable returns. Betsy Moszeter, chief operating officer at Green Alpha Advisors, an asset-management firm that focuses on sustainability, says that compensation should create the right motivations for behavior.

Currently, Green Alpha uses financial returns and sustainability data from third parties to help it determine compensation for its portfolio and fund managers. Starting next year, sustainability ratings by fund researcher Morningstar Inc. also will be used to determine compensation for the two managers of the Shelton Green Alpha fund.

Another element at Green Alpha is to look at what managers and analysts are doing to increase investor appetites for socially responsible investments. The thinking is that the more investors that portfolio managers and analysts can bring to the fund, the more investment there will be in socially responsible companies. Efforts of this kind that are encouraged, and rewarded, at Green Alpha include writing blog posts about investment choices and attending conferences to convince others of the merits of socially responsible investing.

For companies looking to tie compensation to social and environmental impact, a key hurdle is how to measure that impact. Joseph Keefe, president and chief executive of the sustainable investment firm Pax World Funds, says that the tools to accurately measure and account for impact are not there yet.

Keefe’s company takes an informal approach when it comes to tying impact to compensation. Impact is incorporated into some salary considerations at Pax World Funds. Employees who write and work on shareholder resolutions, for example, are assessed on how many resolutions they wrote or whether they encouraged corporate dialogues around certain issues. Issues the company focuses on typically have an environmental or social bent, such as climate change and gender equality.


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