Updated with correction
Money managers practicing “socially responsible investing” now control nearly $6.6 trillion, representing 18% of all U.S. assets under management. That figure has grown 76% in just two years.
Yet some financial experts still don't see the potential profitability of SRI. They believe that investing with an eye toward “social responsibility” — spending money to improve working conditions, reduce pollution or give back to the community — limits portfolios and sacrifices returns.
Fortunately, mounting evidence indicates institutional investors can use SRI to grow their portfolios and promote their beliefs simultaneously.
A foundational principle of SRI — screening out companies that clash with an investor's values — has been around for decades. Increasingly, SRI investors are adding direct engagement to take “active ownership” of their portfolio companies. These active owners invest in firms across all industries, and then use their influence as shareholders to push for improvements in line with their beliefs.
Conventional wisdom holds that investors who bring to bear moral and ethical concerns forfeit potential profits by screening out companies in certain sectors, e.g. defense contractors and tobacco companies.
Real-world results and academic research cast doubt on that wisdom.
For example, from 1990 to 2012, the KLD 400, an index of socially responsible stocks, has maintained a higher return on investment than the S&P 500, according to a report by RBC Global Asset Management.
This finding isn't a fluke. Another study published in the Social Science Research Network in 2014 by Indrani De and Michelle Clayman of New Amsterdam Partners LLC — “The Benefits of Socially Responsible Investing: An Active Manager's Perspective” — suggests portfolios made up of companies with high social responsibility ratings outperform portfolios of lower-ranking firms, even when other factors such as portfolio volatility are taken into account.
Harvard professors Mozaffar Khan and George Serafeim and Harvard doctoral student Aaron Yoon in their study, “Corporate Sustainability: First Evidence on Materiality,” published this year in SSRN, attribute the stronger performance of socially responsible portfolios to the fact that company investments in social responsibility are “shareholder value-enhancing.”
In other words, when companies treat workers better, reduce energy waste or support local communities, they don't just make the world a better place. They can also improve worker retention, save money and generate brand loyalty — thereby increasing their chances of long-term success and boosting their stock prices.
Increasingly, financial heavyweights like Goldman Sachs Group (GS) Inc. and Bank of America Corp. are embracing socially responsible investing. In July, Goldman acquired Imprint Capital Advisors LLC, which utilizes SRI and had $550 million under advisement. The same month, Bank of America reported it has invested more than $8.6 billion using SRI strategies, according to company news releases.
These profit-seeking investing giants aren't using SRI because it's trendy. They're using it because it works.
Charities, foundations and non-profits particularly favor SRI because the “active ownership” approach grows their portfolios while spreading their values.
The U.S. Department of Labor also has noticed this trend, and just gave SRI a new opportunity. The agency recently released new guidelines that allow pension fund fiduciaries to consider SRI principles when investing — without running afoul of the Employee Retirement Income Security Act.
Active ownership doesn't have to involve scolding or arm-twisting. Recently, faith-based SRI investors asked BP PLC and Royal Dutch Shell PLC to start addressing climate change in their annual reports. The resolutions were supported by the companies' management and won 98% of shareholder votes.
Although there are many varieties of SRI, the strategy as a whole is clearly growing. In 2014, 40% of all shareholder proposals dealt with social and environmental issues, compared with just 29% of proposals in 2010. This trend was reported in December 2014 in a Harvard Law School Forum on Corporate Governance and Financial Regulation titled “Shareholder Proposals on Social and Environmental Issues.”
Non-profit and for-profit organizations alike are embracing SRI because of the potential for improved returns.
Francis G. Coleman is the executive vice president for Christian Brothers Investment Services Inc., Chicago.
This article originally appeared in the February 8, 2016 print issue as, "Socially responsible investing delivers for investors on all levels".