Of the $ 46.6 trillion dollars currently managed professionally in the US, the Forum for Sustainable and Responsible Investment estimates that about $ 12 trillion – or 26% – of Environmental, Social and Governance (ESG) criteria when choosing investment vehicles. Although new ETFs that follow sustainable and responsible investments (SRI) have come to fruition in the past year, with some seeing the cash inflow double and triple, can SRI match the return on non-limited, conventional investments?
Socially responsible investing, for those unfamiliar with the concept, not only takes into account the potential financial return of an investment, but also its social impact. Some funds, such as the (CAAPX) focus on negative screening. Others, such as the (CIOAX), want to invest in companies with an observed positive effect on society. However, most funds do both negative and positive screening.
Negative screening usually means that fund managers avoid companies whose shares are sometimes referred to as & # 39; sin stock & # 39 ;, suppliers of alcohol, tobacco, gambling and weapons, for example. Companies are also avoided that may have been involved in a form of government corruption. Conversely, positive investing seeks companies with a good track record in the field of human rights, environmental protection and / or employers with equal opportunities
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The fund with the highest global profile that contains ESG criteria is the Norwegian Wealth Fund of Scandinavia, a government pension fund with an estimated value of more than $ 1 trillion. They are actually two separate funds, one that & # 39; the oil fund & # 39; is called, which invests surplus income from the petroleum sector of the country, and a second, smaller sovereign wealth fund, the Government Pension Fund Norway that invests in shares traded on the.
The fund, which is not available in the US, focuses on human rights, climate change and transparency and has blacklisted companies such as Boeing (NYSE :), British American Tobacco (1945) and another 150 other companies unethically label the Norwegian Ethics Council. Over the past five years, Norwegian Wealth Fund equity investments have lagged the world market, as represented by the. Although the index yielded a return of 39.6% over the years 2014-2018, the Norwegian fund returned only 31.6%.
ESG investment, however, is not limited to governments. ETF issuers have created different vehicles that are available to private and institutional investors. The (PRBLX), which is available separately for retail and (PRILX), has $ 17 billion in assets under management.
The top three companies are Microsoft (NASDAQ :), Disney ] (NYSE 🙂 and Linde (NYSE :), an Irish chemical company known for its compliance with the SRI principles. Over the past ten years, this fund has returned 407%, compared to 426% for its reference index, the.
Parnassus Core Equity Fund
The 19% discrepancy above, over the course of a decade, can of course not be regarded as a strong underperformance. Nor can the difference between Parnassus's return and the index, although some claim that losing extra profits of 19% or even 9% every few years could ultimately be a serious amount.
Similarly, Calvert (CISIX) performed well. It also closely follows the Russell 1000. The three most important companies for CISIX are Microsoft (NASDAQ :), Apple (NASDAQ 🙂 and Amazon (NASDAQ :). Given the variety of complaints about working conditions at Amazon that have emerged in recent years, you should bear in mind that the selection criteria of a fund may differ from those of an individual investor.
In ten years, it has surpassed the market by 0.2%. New socially responsible ETF & # 39; s by established issuers are also in the spotlight, including the iShares ESG MSCI USA Leaders ETF (NASDAQ 🙂 which in the two months since its inception was $ 1.5 billion has attracted assets, making it one of the most successful ETF launches in history. In general, the ESG ETF industry is growing rapidly and today all major investment firms offer their clients special ESG instruments.
Academic studies confirm the fact that there appears to be no statistically significant difference between the return of conventional investing and the return of SRI, while all other things are 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 1990 to 2004. He discovered that the SRI indexes outperformed the S&P, although the results were not statistically significant enough to be definitive. Plus, as with any investment, past performance is not an indication of future performance.
Conclusion
Although SRI returns do not differ statistically from the results of conventional investing, for some SRI offers a non-financial dimension that is lacking in conventional investing – the sense of satisfaction that comes from owning an interest in companies that you believe represent your values. If that resonates, although there is no noticeable financial benefit from socially responsible investing, shareholders are also not negatively affected by taking a moral stance.
