P&I: Socially responsible investing delivers for investors on all levels

As published in Pensions & Investments on February 8, 2016

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…

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