Socially responsible investing (SRI) is the practice of evaluating investments’ social or environmental impact as well as their traditional financial metrics. By doing so, investors hope to direct their money toward companies with sustainable business practices and, equally as important, away from companies who may commit social or environmental injustices. The metrics analyzed for such investments typically fall into one of the categories denoted by the acronym “ESG”: environmental, social or corporate governance. Environmental metrics include carbon emissions or pollution; examples of social issues are labor rights violations or data privacy practices; corporate governance focuses on issues such as board composition and executive compensation.
Several decades ago this type of investing was typically only seen in religious endowment funds or government pensions and, as a result, did not have the scale to drive change in the large corporations of the world. Since 1995, however, the Forum for Sustainable and Responsible Investment (US SIF) estimates that sustainability-focused investing has increased 14-fold to $30 trillion — over one quarter of all managed investments worldwide. Directing funds in alignment with values has given investors a mechanism to effect change they want to see at a scale that can not be ignored. Furthermore, another important influence held by the massive sustainability-minded investor base is proxy voting. By exercising the ownership rights for such a large portion of shares, activist investors have the opportunity to directly propose and vote for policy changes at the companies whose shares they own. Even if shareholder proposals are not eventually voted through, the ability to bring issues into the public spotlight can encourage discussion with decision-makers and bring about external oversight and accountability going forward.
From an investment standpoint, SRI struggled to gain mass appeal initially due to the belief that excluding some investments based on nonfinancial metrics would reduce financial returns. In 1993, Meir Statman performed one of the first studies of its kind, analyzing the performance of SRI investments against those of traditional mutual funds. What he found was that there was no performance penalty — that is, you are no worse off — investing in SRI mutual funds compared to traditional investments. Since then there have been a plethora of studies that show you may actually be better off when considering the nonfinancial metrics that make up an SRI framework. In 2015, a study by Morgan Stanley (accessible via US SIF’s 2018 report) concluded that sustainable equity investments had higher or equal median returns with equal or lower risk than traditional mutual funds in 64% of time periods tested.
One explanation for these superior risk-adjusted returns could be in the mitigation of risks that are not evident through traditional financial metrics alone. Poor corporate governance can lead to the destruction of value through fraud, companies with poor environmental standards are at risk of regulation or litigation, and social violations can lead to scandals that permanently tarnish a company’s brand. BP’s oil spill, Wells Fargo’s false account scandal, Equifax’s data breach, and Volkswagen cheating on emission tests were all preceded by the respective companies having their ESG scores downgraded by data provider MSCI. Those that used ESG metrics in addition to financial analysis may have been able to avoid the catastrophic investment results that followed in each case.
At Parsec, we have invested some portfolios to an SRI mandate as requested by specific clients, which typically involved avoiding “sin stocks,” such as those in the business of firearms, tobacco and alcohol, as well as fossil fuel exposure. Our new SRI portfolio combines our traditional stock selection criteria with numerous environmental, social and governance metrics through one of the industry-leading data providers, Sustainalytics. Additionally, the portfolio includes a proxy voting service through Egan-Jones, which will vote those clients’ shares in accordance with an SRI framework and maximize the value of the rights belonging to shareholders.
We believe this new portfolio will provide those who are so inclined with a way of matching their portfolios with their values. Existing clients should contact their financial advisor to further discuss.
For new clients, we have three financial advisors on staff who specialize in socially responsible investing and understand your socially conscious priorities in order to provide you with this customized SRI portfolio, learn more.