Fake News: Uncovering the Truth behind SRI Investing

Save the earth ~ Live sustainably ~ Protect the working man! These protest mottos, once marginal causes promoted by hippies and dreamers alike, have officially made their way into the boardroom. And just as companies are making sustainable and responsible changes to their businesses, investors are doing the same to their portfolios.

In our continuing series on Sustainable, Responsible, and Impact (“SRI”) Investing, we’re going to take a more in-depth look at the industry by dispelling some myths and taking an analytical look at the performance and growth of this innovative investment discipline. If you’re unfamiliar with the term “SRI Investing”, I would suggest referring back to our introductory piece, Is Your Portfolio Making a Difference?, written by my colleague Michael Fischer, which offers a great background on the SRI investment spectrum and its origins.

Busting the Myths

SRI investment strategies come from humble beginnings, gaining traction in the mid-2000’s, but have grown to a substantial percentage of the US Market held under professional management. Not only has the investment discipline grown in total assets, but its performance has been comparable to, if not outperforming, the broad market[1]. Below we will dispel the myths surrounding SRI strategies and illustrate the benefits of incorporating the investment approach in your portfolio.

Myth #1: Investing in SRI means sacrificing performance

WRONG. Using broad measures in the SRI space, countless studies and examples show that SRI investment performance has actually beaten general market indices over long-term time periods. For example, the MSCI KLD 400 Social Index, an SRI index providing exposure to companies with high SRI ratings and excluding those with low ratings, has outperformed the S&P 500 since its inception in 1990[2]. On a research level, a 2011 Harvard Business School study found that firms given high sustainability ratings significantly outperformed those with low ratings – to the tune of a 46% difference in return[3].

Other studies have shown that companies with sound sustainability standards often have a lower cost of capital, better operational performance, and most notably, increased stock performance[2]. There’s no “sacrifice” being made. Companies embracing a long-term sustainable and responsible agenda are being rewarded with positive investment returns and reduced volatility. The third installment of our series will take a deeper dive into the data side of SRI investment performance.

Myth #2: It’s difficult to find SRI investment choices

FALACY. This burgeoning strategy now runs the gamut of investment options. From exchange-traded funds (ETF’s) and mutual funds to separately managed accounts (SMA’s), the industry has grown from a few investment options to over 1000 investment fund account strategies as of 20161. And that number continues to grow.

The SRI investment world also incorporates various approaches, which tailor to your desired level of impact. These approaches include a value-alignment strategy, which screens stocks and removes investments that do not align with an investor’s values, a thematic approach, which specifically identifies and invests based on an investor’s values in a thematic sense (such as renewable energy or pollution control), and impact investing, which uses funds to invest in the common good with investments return being a secondary consideration (like investing in water wells to aid the development in a third-world community or financing low-income housing). And this list is a mere fraction of all the opportunities available.

Morningstar even offers a sustainability rating system for over 20,000 global funds[4], allowing an investor to gauge SRI measures within their own portfolio and make incremental or broad changes to better align their investments with their values. With such a wide range of investment options available, an investor can personalize their portfolio in coordination with their liquidity needs, risk tolerance, and now – their moral compass.

Myth #3: SRI investing doesn’t really impact company behavior.

FAKE NEWS. Over the last decade, the marketing world has endorsed its fair share of impact based campaigns, from General Electric’s “ecomagination” initiative to reduce greenhouse gases, to Volkswagon’s clean diesel push. And while these marketing campaigns make folks feel good, consumers are left to wonder – are they doing good? Recent scandals have brought this question to light. Well the same question can be asked of impact investing – how can we know the recent growth in SRI investment is making a difference? The answer: disclosure.

By implementing and requiring disclosure of SRI metrics in quarterly and annual reports, companies are held to standards of transparency by both their investors and the public. Disclosure helps dig below the surface of marketing to see what impacts are being made on a broad range of environmental, social, and governance measures. This data can then be analyzed to judge the merits of a firm against competitors and gauge the advances being made within and across industries.  Some markets have even stepped up by requiring SRI transparency in order to be listed on their stock exchange. In 2014, the World Federation of Exchanges (WFE) launched a sustainability working group, of which more than half of participants stated that they require ESG disclosure that goes beyond corporate governance[5].

Interest in the space has also led to the generation of new investment opportunities like “green bonds”, which is debt issued to fund projects that have positive environmental or climate benefits. Apple, Toyota, and various municipalities have issued such debt which promotes programs ranging from energy efficiency to low carbon transportation[6]. SRI investment is making a difference – demonstrated through transparency and new investment opportunities.

What’s Your Impact?

While it is often performance or the level of risk in one’s portfolio that keeps people up at night, a new concern has entered the minds of the investing public: Am I doing harm or doing well with my portfolio? With the global reach of our dollars in an increasingly interdependent world, our actions, purchases, and investments have ripple effects that impact countless people. What kind of impact are you having? And is it time to align your portfolio with your values?

1 “Sustainable and Impact Investing Money Managers 2016.” US SIF, 2016. Web. July 2017

2 “Sustainable Reality: Understanding the Performance of Sustainable Investment Strategies.” Morgan Stanley, Mar. 2015. Web. July 2017.

3 From the Stockholder to the Stakeholder: How Sustainability can drive Financial Outperformance (September 2014)

4 “7 Myths and Facts About Sustainable Investing.” Morningstar, 2016. Web. July 2017

5 World Federation of Exchanges, Sustainability Working Group, Exchanges and ESG Initiatives—SWG Report and Survey (2015), 11.

6 Climate Bonds Initiative, 2015 Green Bond Market Roundup

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2019-07-15T21:44:30+00:00

About the Author:

Eric Thompson is a Director, Wealth Advisor at Round Table Wealth Management. Read Eric's Biography >