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Fact Check: Socially Responsible Investing Is Noble, But Is It Profitable?

By Investing.com (Clement Thibault/Investing.com )ETFsSep 17, 2019 01:28AM ET
www.investing.com/analysis/fact-check-socially-responsible-investing-is-noble-but-is-it-profitable-200463156
Fact Check: Socially Responsible Investing Is Noble, But Is It Profitable?
By Investing.com (Clement Thibault/Investing.com )   |  Sep 17, 2019 01:28AM ET
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Of the $46.6 trillion dollars professionally managed in the U.S. right now, the Forum for Sustainable and Responsible Investment estimates that about $12 trillion of that—or 26%—incorporates Environmental, Social and Governance (ESG) criteria when choosing investment vehicles. Though new ETFs tracking sustainable and responsible investments (SRI) have flourished this past year, with some seeing cash inflows double and triple, can SRI match the returns offered by non-restricted, conventional investing?

Socially responsible investing, for those unfamiliar with the concept, takes into account not only the potential financial returns of an investment but its social impact as well. Some funds, such as the Ariel Appreciation Fund Investor Class (CAAPX), focus on negative screening. Others, like the Calvert International Opportunities Fund Class A (CIOAX), aim to invest in companies with a perceived positive effect on society. Most funds, however, do both negative and positive screening.

Negative screening usually means fund managers avoid companies whose shares are sometimes referred to as 'sin stocks,' purveyors of alcohol, tobacco, gambling and weapons, for example. Also shunned are companies that may have been involved with some form of government corruption. Conversely, positive investing seeks out companies with good track records on human rights, environmental protection and/or equal opportunity employers.

The fund with the highest global profile that incorporates ESG criteria is Scandinavia's Norwegian Wealth Fund, which is government owned pension fund that has an estimated value of over $1 trillion. It's actually two separate funds, one referred to as 'the oil fund,' which invests surplus revenue from the country's petroleum sector, and a second, smaller sovereign wealth fund, the Government Pension Fund Norway which invests in shares traded on the Oslo Exchange.

The fund, which is not available in the U.S., focuses on human rights, climate change and transparency, and has blacklisted companies such as Boeing (NYSE:BA), British American Tobacco (LON:BATS), and an additional 150 other companies labled unethical by the Norwegian Ethics Council. Over the past five years, the Norwegian Wealth Fund's equity investments have underperformed the global market, as represented by the FTSE Global All Cap Index. Though the index provided a return of 39.6% over the years 2014-2018, the Norwegian Fund only returned 31.6%.

ESG investing isn’t limited to governments, however. ETF issuers have created a variety of vehicles available to retail and institutional investors. The Parnassus Core Equity Fund (PRBLX), which is available separately for retail and institutional investors (PRILX), has $17 billion in assets under management.

Its top three holdings are Microsoft (NASDAQ:MSFT), Disney (NYSE:DIS) and Linde (NYSE:LIN), an Irish chemicals company known for its adherence to SRI principles. Over the past ten years, this fund has returned 407%, compared to 426% for its benchmark index, the Russell 1000.

Parnassus Core Equity Fund
Parnassus Core Equity Fund

The 19% discrepency, above, over the course of a decade can’t be characterized as strong underperformance of course. Nor can the difference between Parnassus' returns and the FTSE index, though some would make the case that, losing out on addtitional gains of 19% or even 9% every few years, could eventually amount to some serious money.

Similarly, Calvert's U.S. Large Cap Core Responsible Index Fund (CISIX) has performed well. It also closely tracks the Russell 1000. Top three holdings for CISIX are Microsoft (NASDAQ:MSFT), Apple (NASDAQ:AAPL) and Amazon (NASDAQ:AMZN). Given the variety of complaints about working conditions at Amazon that have surfaced over the past few years, remember that a fund's selection criteria may vary from those of an individual investor.

Over ten years, it has outperformed the market by 0.2%. New socially responsible ETFs by established issuers are also in the spotlight, among them the iShares ESG MSCI USA Leaders ETF (NASDAQ:SUSL) which, in the two months since its inception has attracted $1.5 billion in assets, making it one of the most successful ETF launches in history. Overall, the ESG ETF industry is quickly expanding, and today, all big investment firms are offering dedicated ESG instruments to their customers.

Academic studies corroberate the fact that there doesn’t seem to be a statistically significant difference between returns from conventional investing and returns from SRI, all other things being equal. In 2006, Meir Statman, a researcher at Santa Clara University compared the performance of four SRI indices—the Domini 400 Social Index, Calvert Social Index, Citizen Index, and the Dow Jones Sustainability Index—with returns from the S&P 500 from 1990 to 2004. He found that the SRI indices outperformed the S&P, though the results weren’t statistically significant enough to be definitive. Plus, as with every investing opportunity, past performance is not an indication of future performance.

Conclusion

So, while SRI returns haven't been statistically different from the results of conventional investing, for some, SRI provides a non-financial dimension that conventional investing lacks—the feeling of satisfaction that comes from owning a stake in businesses you believe represent your values. If that resonates, though there's no appreciable financial gain from socially responsible investing, neither are shareholders negatively affected by taking a moral stand.

Fact Check: Socially Responsible Investing Is Noble, But Is It Profitable?
 

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Fact Check: Socially Responsible Investing Is Noble, But Is It Profitable?

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Comments (4)
Leon Chiang
Leon Chiang Sep 17, 2019 6:30PM ET
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Overall, SRI practitioners should know that their investments are very likely to underperform the market. It's a fight between maximizing wealth and moral values. If an investor chooses the latter, it may be unfair to use traditional investing metrics to evaluate his or her performance. It's like judging a monk by how much money he makes.
Clement Thibault/Investing.com
Clement Thibault/Investing.com Sep 17, 2019 6:30PM ET
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When I started the research, I expected to find a clear indication that SRI was underperforming. I was surprised when I didn't. Many of these SRI funds hold Apple and Amazon, which could explain why they didn't underperform, raises some questions regarding their screening methods given what we know about these companies. Every investor is of course free to maximize any aspect he chooses. No judgement here.
Leon Chiang
Leon Chiang Sep 17, 2019 6:30PM ET
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Clement Thibault/Investing.com  Correct. I noticed the same. Eventually it depends on the investor's definition for SRI. Some may not think Apple and Amazon fit their criteria, but others may.  If an investor puts money in renewable energy in the last few years, I think he/she is very likely to underperform. Personally, I still have many doubts about how modern economy and capitalism can be aligned with socially responsible aspects. Most firms profit by creating new products to replace old ones. On the one hand, it seems humans strive to drive innovation; on the other hand, it seems we are so incline to over-produce and over-consume, which accelerates resource depletion, climate change, and so forth. Therefore, I can't say for sure that investing in mainstream companies = socially responsible. This is almost getting philosophical.
Clement Thibault/Investing.com
Clement Thibault/Investing.com Sep 17, 2019 6:30PM ET
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Leon Chiang  . . . It is indeed a moral dilemma, which ultimately can only be resolved individually. It is amplified by the fact that what looks to be SRI on the surface can and up being a scam (like VW's 'clean diesel'), so you really can't know what's going on behind the curtains.. . . Eventually, as an imperfect human being, all you can do is invest to the best of your morality and ability. This indeed got philosophical. Cheers.
Leon Chiang
Leon Chiang Sep 17, 2019 6:30PM ET
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Clement Thibault/Investing.com  Thanks. Good discussion.
ian manro
ian manro Sep 17, 2019 10:51AM ET
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If everyone would vote with their wallet then we would return to true Capitalism. We wouldn't need QE, we wouldn't need a President to fight with China, we would not have the Republicans fighting the Democrats etc. Who needs true Capitalism anymore? LOL
Prabhu Murthy
Prabhu Murthy Sep 17, 2019 10:40AM ET
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Interesting conclusion. Awesome work.
Clement Thibault/Investing.com
Clement Thibault/Investing.com Sep 17, 2019 10:40AM ET
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Thanks! I expected significant underperformance, but it appears you can be both moral and profitable.
Haggai Chomba
Haggai Chomba Sep 17, 2019 10:35AM ET
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Interesting
 
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