Does It Work? Myth-Busting and Fact-Finding Socially Responsible Investing

Kay Kramer, CFP®
May 15, 2019 10:21:25 AM

socially responsible investingI have been interested and involved in Sustainable, Responsible, Impact investing (SRI) for most of my financial planning career. As a member of the USSIF (Forum for Sustainable and Responsible Investments) for over 28 years, I have seen the industry change significantly as well as an increase of interest from clients to learn more.

Over the years, I’ve heard a lot of misinformation about what Sustainable Investing is and isn’t. Over time, I’ve devoted time to discussing what SRI is through various articles like Understanding the Different SRI Investing Strategies and A Guide to Socially Responsible and Gender Lens Investing.

Now, I’d like to discuss some common myths we hear about SRI.

Investors Are Not Interested

While it’s been widely believed that millennials and women have a certain reputation for being most interested in investments that also do good for the world, a recent survey found that overall 72 percent of the United States population expressed at least a moderate interest in sustainable investing(1). According to the US SIF Foundation, as of year-end 2017, more than one out of every four dollars under professional management was invested according to SRI strategies.  

SRI Means Poor Performance

An ever-growing body of research suggests a strong association between responsible business management and positive financial performance. For example, Morningstar research found that the distribution of star ratings among sustainable investing funds skews in a positive direction, suggesting better risk-adjusted performance than their peers(2).

Researchers at the University of Oxford analyzed 200 studies, reports, and articles on sustainability.  Based on their research, they found that on a firm level:

  • 90% of the studies showed that sound sustainability standards lower the cost of capital in companies(3).
  • 88% of the research showed that solid ESG practices result in better operational performance(3).
  • 80% of the studies showed that good sustainability practices positively influence stock prices(3).

Lastly, a Morgan Stanley study of US-domiciled mutual funds and Separately Managed Accounts (SMAs) concluded that sustainable investments usually met and often exceeded the performance of comparable traditional investments, both on an absolute and also risk-adjusted basis(4).

Investors that Prioritize Sustainable Strategies have an Extremely Limited Investment Universe

If someone were interested in SRI/ESG investing, the choices available to them today far outweigh the offerings even just five years ago. Before, in the 1980s and 1990s, investors only had a handful of SRI/ESG funds to choose from. Today, investors can pick from hundreds of SRI/ESG mutual funds and exchange-traded funds (ETFs). Furthermore, nearly all equity asset classes are represented, with offerings in all U.S. capitalization sizes. SRI/ESG investments are also available to those who are interested in investing internationally, both in developed economies and emerging markets.  It is important to note that the offerings within fixed income securities are not quite as extensive as they are for equities but this is an area that is developing rapidly.  

It Doesn’t Make Any Difference.

As of November 2018, 78% of the companies in the S & P 500 index have corporate sustainability policies or issue corporate sustainability reports(5). This is a huge change from the 1990s when these reports started to be issued.  Shareholder advocacy and engagement, resolutions and proxy voting, all can lead to constructive dialogue with a company to improve its ESG practices.

There’s only one way to do SRI.

Every person will define what issues are important to them, so there is no one definition of what SRI means. For some, it means focusing on negative screens, for others focusing on gender lens only, for others it may be climate change. There is no one size fits all!  

Sources:

1 Source: “The True Faces of Sustainable Investing: Busting Industry Myths Around ESG”, Morningstar, 2018

2 Source: “Sustainable Investing Research Suggest No Performance Penalty”, Morningstar, November 2016

3 Source: “ESG in Focus: Can ESG Enhance Returns?”, OppenheimerFunds, November 27, 2017

4 Source: “Sustainable Reality: Understanding the Performance of Sustainable Investment Strategies”, Morgan Stanley Institute for Sustainable Investing, March 2015

5 Source: “S&P 500 Firms Expand Sustainability Data in Financial Fillings, But are Slow to Adopt Fully Integrated Reporting”, IRRC Institute, November 14, 2018

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Topics: SRI

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