More Evidence that Socially Responsible Investing Does Not Harm Performance

More Evidence that Socially Responsible Investing Does Not Harm Performance

by Trailhead Plan… on Apr 26, 2018

Socially Responsible Investing, ESG

Over the past few months, we have been seeing more and more evidence that socially responsible investing can aid investor performance over-time; rather than the common misconception that it necessarily detracts.  As we have written about before, socially responsible investing has evolved into a risk-conscious investing strategy that not only allows investors to invest responsibly, but also in a manner that is aligned with their values.  More, it can have a real impact on the world as socially-conscious shareholders vote for more positive and sustainable company policies - whether that is in regards to a company's workforce, board diversity, or environmental policies.   

Here are a few examples of what's been happening in the socially responsible investing world: 

MSCI KLD 400 Index has Outperformed the S&P 500 since the early 1990's

As you can see from the following chart, the MSCI KLD 400 Social Index, the longest running socially responsible stock index, has outperformed the S&P 500 over a nearly 30-year time span.

Source: Bloomberg

We should note that we think it is important that socially-conscious investors do not invest in socially responsible strategies based on the prospect for continued outperformance.  Like any investing strategy, there are no guarantees that the future will look like the past.  However, it is incredibly important to acknowledge that over the past few decades, socially responsible investing has not harmed investor performance.  In fact, if anything, it may provide a boost to long-term returns.  

Socially Responsible Bond Investing Also Performs Well

According to the WSJ, a new set of international bond indices launched by JP Morgan have shown little performance differential between indices that screen for environmental, social, and governance factors, and ones that do not.  Here's the breakdown from the article: 

But on the performance front, the new indexes—which run back to 2013—suggest that not much else changes. Emerging-market government debt issued in U.S. dollars has returned 22.9% adjusted for ESG concerns, compared with 22.5% without. For local-currency debt, returns were minus 4.5% compared with minus 4.4%. (WSJ)

This is important for two reasons: 

  1. It's further proof that socially responsible investing is a viable framework for bond investing, not just stock investing. 
  2. It's further proof that socially responsible investing strategies can work in international markets, including emerging markets.  

Even Hedge Funds are Entering the Socially Responsible Investment Space 

Let's get this out of the way, you don't need to invest in a hedge fund to get socially responsible investing right. In fact, we'd recommend you don't.  However, it is interesting that large well-known hedge funds, like JANA Partners, are entering the impact investing space (HBR).

Why This Matters

I love this breakdown within the HBR article on why more corporate attention on environmental, social, and governance factors is such a big deal: 

We are witnessing a big, transitional moment – akin to the transition from analog to digital, or the realization that globalization is a really big deal. Companies are beginning to realize that paying attention to the longer term, to the perceptions of their company, and to the social consequences of their products is good business.

We couldn't have said it better (so we won't even try).  Why are JANA Partners and other large insitutional investors, like Blackrock, devoting so much attention to ESG factors?  Because they know what we know - pressuring companies to make progress on their environmental impact, how they treat employees, and corporate governance ultimately creates better companies, which not only creates a better world, but can also lower investor risk and potentially increase long-term investor returns.  It's a Win-Win...WIN! 

To End 

The data supporting socially responsible investing is becoming more and more compelling with every day, month, and year that goes by.  It's evolving from a niche-practice to a broad, risk-based framework for how investors can positively impact both their world and their portfolios.

If you have any questions about how can ESG-optimize your Portfolio, that is, improve how your portfolios score on positive environmental, social, and governance factors, click one of the following links for a free consult with one of our financial planners.  We would love to help you make a difference.  Cheers! 

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