Socially Responsible Investing: Investments May Speak Louder Than Words

Here in the U.S., we take seriously our right to express opinions on political, social, and religious issues.  Interest groups hold demonstrations to try to influence politicians, and individuals occasionally boycott products or services to try to influence companies as well.  However, an increasing number of Americans are beginning to realize that while they might refrain from giving companies the money in their pockets, they might still be supporting those companies with the money in their IRAs.

Whether in retirement or taxable investment accounts, most working professionals have some savings invested in mutual funds, which hold shares of stock in hundreds, sometimes thousands, of companies.  Chances are, you own a small piece of many companies whose products, services, or corporate behavior may be inconsistent with the values you hold.  Investor concerns about supporting companies that violate their cherished values have given rise to the concept of socially responsible investing, or SRI.  Through SRI, individuals and institutions aim to align their investments with their values, seeking out or avoiding investments based on what the company produces or how it operates.

History of SRI.  The idea of tailoring investments based on political, social, or religious views first began in the 1950s and 1960s, in response to concerns about big tobacco, civil rights in the U.S., apartheid in South Africa, and other issues.  According to Kiplinger’s, the first SRI mutual fund opened in 1952, and the number and variety of SRI investment products have proliferated since then.  Now, faith-based funds are available for those wanting to invest in line with Catholic, Protestant, evangelical Christian, Jewish, or Islamic beliefs.  Environmental funds are available for those concerned about carbon emissions or other sustainability issues.  Governance funds focus on child labor, equal pay, and gender diversity.  According to the Forum for Sustainable and Responsible Investment, over $8.7 trillion of U.S. investments are now managed using socially responsible, faith-based, or other screening methods, and this figure is expected to continue growing.  A 2013 survey by U.S. Trust indicated that one-third of millennials consider socially responsible factors when they invest.

Methods of SRI.  Originally, SRI funds were only focused on screening out companies whose products or services violated certain principles.  For example, certain faith-based funds screen out “sin stocks”—companies with significant revenue from alcohol, tobacco, pornography, or gambling.  Many SRI investments now, though, take a broader view—looking at companies’ corporate behavior as well and aiming not just to exclude companies opposed to their values but to positively influence companies that share or promote their values.  For example, they may use their leverage as shareholders to lobby companies to change their policies, or practice “impact investing,” targeting funds at companies or bonds that are particularly in line with investor values.

Investment Performance of SRI.  Many investors shy away from SRI investments out of concern that they will sacrifice growth in their portfolio by doing so.  Some advocates, however, argue that companies with positive environmental, social, and governance practices actually constitute more successful and less risky investments.  What is the answer?  It depends.  Traditionally, SRI funds have had higher-than-average expense ratios and actively-managed investment strategies, so we would expect these funds to underperform relative to the market.  But, there are now a significant and increasing number of passively-managed SRI funds available with low expense ratios.  For example, two years ago, Standard and Poor’s released a Catholic Values ETF and State Street released a Gender Diversity ETF, which both have expense ratios under 0.30% and track indices comprised of U.S. large companies.  Whether or not these investment products beat market benchmarks in any given year depends largely on the relative performance of the types of companies or business sectors they favor or exclude based on their values.

As our clients are aware, at PFS, we predominantly use Dimensional Fund Advisors (DFA) mutual funds for our investments.  DFA offers two categories of SRI funds.  1) The DFA Social Core funds screen out companies whose business activities are focused on abortion, adult entertainment, child labor, gambling, and other social issues.  2) The DFA Sustainability funds weight their investments based on companies’ greenhouse gas emissions and consideration of other variables, including land use and biodiversity, toxic spills, and water management.  Like DFA funds in general, these SRI funds are relatively low cost and follow a passive investment strategy, so we would expect them to produce solid returns over the long-term.  If you have interest in SRI investing and would like to discuss your options, please give us a call any time.