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  • Writer's pictureEran Peleg, CIO

The Path to Successful SRI

Eran Peleg, CIO and Joseph Adler, Analyst December 4, 2018

 “Socially responsible investing just received a big endorsement, but what it really needs is some CLARITY”

- “Yale Champions Social Investing (Whatever That Is)”, Nir Kaissar (Bloomberg Opinion column, October 19th, 2018)

Yale University recently declared that it might exit its private investments that are unethical by its standards, adding to its longtime policy for investing in public markets. Yale ($29.4 billion endowment) is a leading US institutional investor and considers itself a pioneer in the ethical investment sector. This is another step in what has become a strong trend towards more socially-conscious investing by institutions in both Europe and the US.

ESG (Environmental, Social and Governance) is a set of standards for a company’s operations in fields such as leadership, executive pay, audits, internal controls, shareholder rights, environmental protection, climate change, gender and cultural diversity, human rights and consumer protection. Investing in companies that operate in compliance with these standards furthers the development of these global agendas. $22.89 trillion (26%) of assets under management globally are now invested according to ESG standards, according to the Global Sustainable Investment Alliance’s 2016 Investment Review report. Larry Fink, CEO of Blackrock, one of the world’s largest asset managers, recently predicted that soon, all investors will be using ESG metrics to determine the value of a company.

SRI (Socially Responsible Investing, also known as: Sustainable, Socially Conscious, "Green" and Ethical Investing) casts the net even wider than ESG investing. This investment strategy follows an investor’s personal values to make investments. It provides the investor with a personalized, mission-focused investment portfolio while steering away from placing capital in areas that are not aligned his or her values.

ESG and SRI have also caught the attention of private investors. One of the driving forces is Millennials. Millennials’ wealth is growing and with it, their investing power (Millennials are expected to inherit approximately $41 trillion, based on information from Investopedia). A study by Spectrum Group shows that to nearly half of Millennials with a net-worth of more than $1 million, social responsibility is a factor in choosing an investment. This compares to 43% of Gen X, 34% of Baby Boomers and 27% of seniors.

A common concern about socially-conscious investing is that it leads investors to sacrifice returns. The concern stems from the perception that ESG, for example, is focused exclusively on excluding certain types of investments. However, ESG is not just about exclusion – but rather is about thinking differently about risks and opportunities. In a recent report (“Sustainable Signals - Asset Owners Embrace Sustainability”, 2018) published by Morgan Stanley, the firm explains:

“Sustainable investing has enabled investors to think more systematically about the risks of unexpected, costly issues arising from ESG factors, which can hurt long-run returns “.

When comparing multi-year performance of ESG indices to non-ESG market indices, both the volatility and the returns have been similar. For example, according to MSCI index data, since November 2009 (the inception of the index), the MSCI US ESG Universal index returned an annualized 12.1%, while the (non-ESG) MSCI USA index has generated an annualized return of 12.3%. over the past 5 years, the returns have been 10.9% and 10.5%, respectively. During this period, the volatility (standard deviation of returns) of the ESG index was 10.2%, while that of the non-ESG index was a nearly-identical 10.1%. 

In addition, according to Morningstar data, SRI mutual funds have consistently kept very close pace with their non-SRI counterparts in the short, medium and long terms:

(Source: Charles Schwab Investment Advisory, Inc., with data from Morningstar, as of 3/31/2018. Returns represent the average annualized performance of U.S. equity open-end socially responsible and non–socially responsible mutual funds. Past performance is no guarantee of future results.)

So, when looking to invest ethically, while not necessarily sacrificing returns, it is palpable that a socially-responsible investment approach can potentially achieve both an investor’s social and financial goals.


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