New Insights on SRI Performance
This article is highlighted as part of the 100th issue special, celebrating twenty-five years of quarterly newsletters.
Fifteen years after Natural Investments completed (and excelled in) a long-term investment study by the New York Times, major financial institutions continue to release research supporting SRI as a proven, effective investment strategy.
As a financial advisor focusing on Sustainable, Responsible, and Impact (SRI) investing, over the years, I have spoken with countless people that have questioned the financial performance of SRI investments. These people either believe, or think there’s a good possibility, that investing in SRI means giving up some returns. In my experience, this idea is held by both those attracted to it and those who are not. Why is this? Over the years, many studies and even meta-studies (research analyzing the results of a number of studies on a topic) have shown that SRI is either positive or neutral for performance relative to conventional portfolios. Perhaps our industry has failed to get the good news out. It may also be the case that the mainstream investment industry is spreading mistruths about SRI performance in order to prevent assets from moving to SRI managers. Fortunately, a couple new reports were released earlier this year which shed some new light on this issue, and strongly support our long-held belief that SRI is actually a source of both financial and operational outperformance.
The new reports, Sustainable Signals and Sustainable Reality, were authored by the Morgan Stanley Institute for Sustainable Investing, and they are available for free online. First of all, it’s absolutely remarkable that one of the oldest and most prestigious Wall Street firms, Morgan Stanley, has created such an institute. Of course, results speak louder than words, and it remains to be seen how effective they will be in mobilizing capital toward sustainable companies and projects. But it’s a great start to release some quality research that is unabashedly positive on SRI.
Sustainable Reality dives directly into SRI performance, and offers compelling findings. For example, over 64% of timeframes they examined, sustainable equity mutual funds had both equal or higher median returns and equal or lower volatility than conventional funds. It is rare and special to find investments that can both deliver higher returns and do it with less risk, but apparently this is happening a clear majority of the time with SRI stock funds. They also found that the MSCI KLD 400 Social Index, the oldest and best-known SRI stock index, has outperformed the S&P 500 by 0.45% per year on average from its inception in 1990 through the end of 2014. This sounds like a small difference, but it adds up to a whopping 102% difference over that period of time! Who wouldn’t like to invest in SRI now (or in 1990)?
The report digs a little deeper to discover where this outperformance is coming from. Their conclusion is that the magic is happening at the individual companies that comprise these sustainable mutual funds and the KLD Index. They found that 80% of companies with good sustainability practices had better stock performance, and 90% of those companies were able to raise capital more cheaply. The authors suggest this may be because “firms that are focused on sustainability are also more likely to better manage environmental, financial and reputational risks.” They have more satisfied employees and less costly turnover. They are more efficient with their energy use and operations, which directly boosts profits. Apparently, it really does pay to do good in business.
The other report, Sustainable Signals, studied investor perceptions of SRI through a survey of 800 investors. They found that a strong majority of 71% are interested in sustainable investing, a remarkable 58% felt they had a responsibility to do more than just maximize their own profits, and 72% believed that companies with good environmental, social, and governance (ESG) practices “can achieve higher profitability and are better long-term investments.” Yet, a majority (54%) felt that they would be sacrificing returns to do so. Why the persistent disconnect? While the study doesn’t offer any suggestions, I believe there’s still a fairly widespread perception that the costs of sustainability exceed the benefits. Yet we know that’s rarely the case.
The report offers a great deal of hope for the future. 84% of Millennial investors (aged 18 to 32) are interested in sustainable investing, and they stand to inherit control over the vast majority of our country’s resources in the coming decades. 65% of respondents believe that “sustainable investing will become more prevalent in the next five years.” With the population and cultural trends in our favor, and outperformance tailwinds at our back, let’s hope it’s just a matter of time before SRI is even more widely recognized and practiced as a superior way to invest.
This article first appeared in the Summer 2015 edition of the Natural Investment News