Once dismissed by Wall Street as a feel-good fad, “sustainable and responsible investing” has gained momentum, today attracting nearly one in every nine dollars under professional management in the United States.
First things first: terminology.
Sustainable and responsible investing, aka SRI, is a phrase that’s evolved from “socially responsible investing,” an approach that typically excludes owning certain assets. Some religion-influenced socially responsible investing, for instance, rules out holding “sin stocks” like those of casino companies, distilleries, pornography distributors and tobacco producers. Socially responsible investing can also be overtly political, as when investors preclude themselves from having anything to do with corporations that make weapons or those with questionable environmental or human-rights policies.
Today, socially responsible investing is a subsector of a larger phenomenon known as sustainable and responsible investing, which can still exclude owning certain assets but that has an inclusionary spin, too. Managers of sustainable and responsible investment funds often seek out companies that strive to minimize their carbon footprint, for instance, or companies that actively promote good corporate governance or that invest in low-income communities.
Synonyms for SRI include “values-based investing,” “green investing,” “ethical investing” and “impact investing,” among others.
Whatever you call it, the category has made big strides in gaining market share, fed by popular awareness of climate change, human rights, corporate-governance practices and so on. The Social Investment Forum, an industry group, estimates that SRI-driven investing totaled $3.7 trillion at the end of 2011, up 22 percent since year-end 2009 and representing more than 11 percent of $33 trillion in total assets under management.
Is there a cost to investors who try to do good? Maybe not. Theoretically, SRI has built-in performance drawbacks -- limiting potential investments lies in the face of conventional wisdom, which says that if you’re limited in what securities you own you’re subjecting yourself to either lower returns or higher risks, or both.
Mark Sloss, executive director and senior manager of UBS Wealth Management Americas, says that’s not always the case. “It’s not an automatic penalty, it doesn’t automatically introduce more risk, unless you pick a bad money manager,” he told Bloomberg News.
By some measures, SRI has underperformed the broader market. Since its inception 23 years ago, the MSCI KLD 400 Social Index -- one of the oldest SRI indexes -- has gained 8.1 percent a year on average versus the 9.4 percent average annual return of the S&P 500 Index. Likewise, the Dow Jones Sustainability Index -- another widely-used SRI proxy but with more of a bias toward including certain “good” rather than excluding “bad” ones -- has generated average annual returns of 3.47 percent since its founding in 1998. Over that 15-year timeframe the S&P 500’s return by comparison was 3.73 percent.
On the other hand, many studies suggest SRI funds perform as well as non-SRI funds. A review by consulting firm Mercer of studies exploring the link between the inclusion of environmental and social-governance factors versus performance came out on the side of SRI. Of 36 studies reviewed, 20 found evidence of a positive relationship between SRI and performance and only three found evidence of a negative relationship. Mercer’s conclusion was that the integration of SRI-related selection criteria was more likely to help than hurt portfolio performance.
SRI investing is transitioning from niche to mainstream investing. As it gains attention and assets, investors might do well to consider it.
Kevin Sullivan is an investment strategist at BloombergBlack, a personal wealth management service.