Once considered a fringe investing strategy, socially responsible investing (or SRI) is becoming more common these days. Managers of SRI mutual funds and ETFs consider environmental, social and governance (or ESG) criteria when deciding which types of businesses to invest in.
The goal of SRI is to make a positive social impact on the world with investment capital while also earning competitive rates of return. With SRI, you can invest in businesses that are actively involved in supporting causes you believe in. Or, you can avoid investing in companies that are involved in activities that conflict with your values and beliefs — these might include alcohol, tobacco, firearms and gambling businesses, for example.
The sustainable investing marketplace has exploded over the past decade. In 2010, about $3 trillion was invested using one or more sustainable investing strategies, according to the Forum for Sustainable and Responsible Investment (US SIF). A decade later, this had risen to more than $17 trillion. This represents one out of every three dollars in total U.S. assets under professional management.
But you might be wondering: Does investing in a socially responsible way limit your potential returns? Several recent studies indicate that the answer is no. Research performed by Morgan Stanley determined that SRI funds that have been in existence for at least seven years had higher or equal media returns to traditional funds returns 64 percent of the time.
Among the 200 SRI mutual funds and ETFs listed by Bloomberg, a number boast returns of at least 25 percent so far this year. And more than a dozen SRI funds have received 4-star and 5-star Morningstar ratings.
According to a white paper published by the Morgan Stanley Institute for Sustainable Investing, there is “no financial trade-off in the returns of sustainable funds compared to traditional funds, and they demonstrate lower downside risk.” And during a period of extreme volatility, the study found “strong statistical evidence that sustainable funds are more stable.”
Advancing ESG Practices
According to the US SIF, “Sustainable investors aim for strong financial performance, but also believe that these investments should be used to contribute to advancements in social, environmental and governance practices. They may actively seek out investments — such as community development loan funds or clean tech portfolios — that are likely to provide important societal or environmental benefits.”
Sustainable investors run the gamut from average retail investors to high-net-worth individuals and family offices. A wide range of institutions including universities, foundations, pension funds, nonprofit organizations, venture capitalists and religious organizations also practice SRI, notes the US SIF.
Everyone has different values, so the definition of socially responsible investing will be different for each person. So the first step in becoming a socially conscious investor is determining which criteria you will consider when deciding which stocks, mutual funds and ETFs to purchase.
The US SIF is a good place to start your search for socially responsible investments. Its website includes a list of nearly 200 different SRI mutual funds and ETFs across a wide range of fund types ranging from large-cap and mid-cap equities to international global foreign funds. The page includes each fund’s size, type, ticker symbol, month of inception, performance history, management fees and expense ratios and offers detailed guidance on the ESG criteria considered by each fund.
Find the Right Balance
If you decide that you’d like to become a socially responsible investor, you’ll need to find the right balance between choosing investments for socially responsible reasons and maximizing returns on your investment capital. This can be a fine line and only you can decide the relative importance of each of these goals.
Give us a call if you have more questions about socially responsible investing. We can help you devise an investing strategy that balances SRI with your long-term return objectives.