The returns on SRI
You’ve likely heard and read it many times: diversity and inclusion is good for business as well as for society. You may even have a strong interest in doing what you can to promote diversity and inclusion. Who would have thought, however, that one way to do so is through your investing strategy?
Socially responsible investing (SRI), also known as impact investing, ethical investing, principles-based investing, sustainable investing, and other names, is a strategy that incorporates environmental, social, and governance (ESG) factors into the investment process. The idea is that by investing in companies that promote social responsibility or have socially responsible business practices — such as strong diversity and inclusion programs, you can have a positive effect on society. At the same time, you can potentially improve the risk/return characteristics of your portfolio.
There’s evidence to suggest that both could happen.
Using shareholder resolutions and their voting power, for example, socially conscious investors have succeeded in encouraging companies to change their ways in regards to areas such as the diversity of their boards.
In July 2018, a 10-member investor coalition with a combined $300 billion in assets publicly announced efforts to increase racial, ethnic and gender diversity through model checklists and best practices. In the 2018 proxy season, State Street indicated it voted against directors at more than 500 companies that failed to address board diversity, while simultaneously noting gender diversity improvements at over 150 companies that it addressed through either a withhold vote or engagement.
There’s also a growing body of research showing a positive connection between the ESG factors that shape SRI and corporate financial performance. Among the takeaways from those studies: bonds issued by companies with better governance practices often outperform the market and sovereign ESG profiles can be indicative of future spreads.
In addition, there are studies showing a relationship specifically between firms that embrace diversity and firm profitability. For example, a 2015 Peterson Institute analysis of nearly 22,000 public companies in 91 countries showed a significant correlation between an increase in the number of women at the C-suite level and firm profitability.
SRI goes mainstream
With ESG factors now integrated into portfolios at a growth rate of 17 percent a year, it’s clear that SRI isn’t just a passing fad. Part of it may be due to changing societal norms and political polarization in the United States, which are spurring many investors to align their investments with their social views.
Millennials may also be driving some of the growth. Defined as individuals 18 to 35 years of age, millennials are twice as likely as other investors to invest in companies or funds that target social or environmental outcomes. They are also expected to have $19 trillion to $24 trillion in assets by 2020, positioning them to have a significant impact on the investment world.
The growth in SRI may also be attributed, in part, to women who have decision-making control over an estimated 40% of the nation’s investable assets and constitute 48% of its millionaires . In studies conducted by U.S. Trust and Morgan Stanley, more than 70% of female investors in each study cited ESG factors as important considerations when making an investment.
Not surprisingly, the growing popularity in SRI has generated an increasing number of mutual funds and exchange-traded funds (ETFs) with socially responsible investing mandates. Also available are individual stocks of companies that qualify as ESG investing candidates.
Some target a specific cause, while others focus on many. For example, some may look for companies that support LGBT equality in the workplace. Others may use a “gender lens,” picking investments that specifically address women’s issues.
The increasing popularity of SRI, combined with limited data, has also led to the develop of a number of tools to helps investors, investment managers, and financial professionals better evaluate companies on factors such as workplace diversity and equality. Among them: Thomson Reuters Diversity & Inclusion (D&I) Index, the Human Rights Campaign Corporate Equality Index, and the MSCI ESG Indexes.
More about SRI
SRI works. It’s growing in popularity. It can be used to support diversity and inclusion, among other social issues. But is it right for you? It could be if you’re interested in a more conscientious approach to investing, especially if you want to have a positive societal or environmental impact or avoid ties to organizations involved in questionable activities.
However, it’s not an easy endeavor to take on yourself. There are many forms of SRI, and their implementation can vary greatly based on the role of ESG factors in the overall investment process. Few of us have the time or expertise to research and objectively assess those factors. It can be even more difficult if your interests lie in a specific area such as diversity and inclusion. There’s also not much historical performance data for ESG funds in general compared with the broad market.
The best solution may be to work with a trusted financial professional well versed in SRI. Depending on the values and the issues that matter to you, you may also want to seek out a financial professional who shares your perspectives.
When considering a financial professional, ask questions similar to those that follow:
- What is your experience in SRI?
- Can you provide an example of how you build portfolios around social issues of interest to your clients?
- What kind of due diligence do you conduct on asset managers to learn more about their investment processes and to identify managers who employ ESG analysis?
- What resources or tools do you use to find and assess SRI options?
- How does your company incorporate ESG factors into its own business operations and values?
If your focus is on diversity and inclusion, don’t hesitate to ask the financial professional about it specifically. Because it’s still an emerging area, many financial professionals may not have a lot of direct experience with it. However, if they understand the overall concept of SRI and express an appreciation of the benefits of diversity and inclusion, you’ll have a greater comfort level.
You may also feel better educating yourself on SRI. A good place to start is the website for the Forum for Sustainable and Responsible Investment (US SIF). It offers a variety of information on SRI, including five handbooks under its "How Do I SRI" series. One is a primer for individual investors to get started in sustainable and impact investing. The other handbooks provide a brief background on an issue, explore how SRI can be employed to address it, and provide informational resources.
Important Note: The returns on Socially Responsible Investments may be lower than if an adviser or portfolio manager made decisions based solely on investment considerations.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial professional prior to investing.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not ensure against market risk.
Investing in mutual funds involves risk, including possible loss of principal. An investment in Exchange Traded Product (ETPs), structured as a mutual fund, note, or unit investment trust should be considered as part of an overall program, not a complete investment program. An investment in ETPs involves risks such as: market, non-diversification, price volatility, liquidity, competitive industry pressure, international political and economic developments, possible trading halts, and index tracking error.
Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal and potential illiquidity of the investment in a falling market.
 1 Board Diversity Developments, Harvard Law School Forum on Corporate Governance and Financial Regulation
Posted by Arthur H. Kohn, Elizabeth K. Bieber, and Maria I. Maldonado, Cleary Gottlieb Steen & Hamilton LLP, on Tuesday, August 21, 2018
 “ESG and financial performance: aggregated evidence from more than 2,000 empirical studies,” Gunnar Friede, Timo Busch, and Alexander Bassen, 2015. Measures of corporate financial performance include accounting-based performance, market-based performance, operational performance, perceptual performance, growth metrics, and risk measures.
 “ESG Investing in Credit Markets,” Barclays, 17 November 2016, Figures 26 and 31.
 Did ESG Ratings Help to Explain Changes in Sovereign CDS Spreads?” MSCI, October 2017.
 Is Gender Diversity Profitable? Evidence from a Global Survey Marcus Noland, Tyler Moran, and Barbara Kotschwar, Peterson Institute, February 2016
 From ‘why’ to ‘why not’: Socially responsible investing as the new normal. October 26, 2017. Sara Bernow, Bryce Klempner, and Clarisse Magnin.
 http://www.morganstanley.com/pub/content/dam/msdotcom/ideas/socially responsible-signals/pdf/Socially responsible_Signals_Whitepaper.pdf
 millennial-wealth-management-banking-digital-cx-trends, Deloitte Inside Magazine, Issue 9, June 2015
 BCG, The Shriver Report, Catalyst, Center for American Women and Politics,
American Council on Education, Source Media, Oppenheimer, Time Magazine
 “2015 U.S. Trust Insights on Wealth and Worth.” 2015. U.S. Trust.
 “Socially responsible Signals: The Individual Investor Perspective.” February 2015. Morgan Stanley Institute for Socially responsible Investing.