As socially responsible and impact investors, you are certainly interested in helping people and the planet, but you also want your investments to generate sufficient return. Decades ago, when there were only a handful of managers willing to conduct ethical screening and shareholder advocacy, it was more difficult to create fully diversified portfolios that offered competitive financial returns.
Today, however, with hundreds of socially responsible funds and managers across virtually every asset class, it is possible to design and maintain investment portfolios that consistently perform similarly to conventional investments. In fact, dozens of SRI mutual funds regularly earn 4- and 5-star Morningstar® ratings for solid financial performance.
In addition to mutual funds, there are separate managed accounts, exchange-traded funds, index funds, individual stocks and bonds, community development investments, and private equity and alternative investments, all of which make it possible to honor the diversification tenets of modern portfolio theory and the industry guidelines for prudence and fiduciary responsibility, which can reduce volatility and improve long-term returns.
But don’t just take our word for it! There’s plenty of research available to those who want objective evidence that integrating environmental and social factors has a neutral-to-positive impact on financial performance.
- A study examined more than 800 shareholder engagements on ESG issues over a 10-year period and concluded that successful engagements positively affect sales growth without changing profitability and that a portfolio of targeted firms outperform non-engaged peers significantly.
- MSCI: Foundations of ESG Investing Part 1: How ESG Affects Equity Valuation, Risk and Performance, links financial performance to various risk metrics, company valuation, and profitability to illustrate that changes in a company’s ESG characteristics are a useful financial indicator.Part 2: Integrating ESG into Benchmarks, added the MSCI ESG Leaders Index to a benchmark to conclude that doing so enhanced risk reduction and led to better risk-adjusted returns.
- The Market Performance of Socially Responsible Investment during Periods of the Economic Cycle—Illustrated Using the Case of FTSE, examined SRI and conventional stock performance through a full economic circle of economic boom, recession and recovery from 2004-2011 and discovered that the SRI portfolio performed better and recovered its value quicker in post‐crisis than the non‐SRI portfolio.
- An extensive review of 2200+ studies in 2016 by Deutsche Asset Management found that the large majority showed positive financial performance.
- A 2016 academic study in the Journal of Sustainable Finance & Investment, on risk factors and performance, found that companies that include ESG (environment, social, governance) factors have lower volatility and generate higher returns.
- A research effort by MSCI, Insights into ESG Investing, that aggregates 2000 studies, linking positive financial performance to a company’s ESG characteristics.
- An article by Morningstar on the February 2018 “correction” showing that sustainable funds outperformed the S&P 500.
- An analysis by TIAA, Responsible Investing: Delivering Competitive Performance, found no statistical difference in performance, and that using ESG criteria did not add risk.
- A commentary by Pax World Funds on the materiality of ESG reporting, as well as the rigor needed in reporting standards.
- A Morgan Stanley report from its Institute for Sustainable Investing concluding that investing in sustainability has usually met and often exceeded the performance of comparable traditional investments, both on an absolute and risk-adjusted basis, across asset classes and over time.
- An indication of the competitive performance of SRI funds is the performance of individual SRI products, including the MSCI KLD 400 Social Index, the oldest and best-known SRI stock index, which has outperformed the S&P 500 by around 0.45% per year on average since its inception in 1990. To see additional performance information, US SIF: The Forum for Sustainable and Responsible Investment, the SRI industry association, maintains a Mutual Fund Performance Chart of its member funds.
While this research illustrates the financial viability of socially responsible and impact investing, please remember that past performance is no guarantee of future results. All investments can lose value.