Socially responsible investing (SRI) is coming of age. The numbers show SRI investment vehicles continue to be some of the fastest growing in the industry. According to The Forum for Sustainable and Responsible Investment, in the U.S. alone, at least $7 trillion (up from $3.7 trillion in 2012) is invested in SRI – strategies focused on environmental, social and corporate governance (also known as ESG).
In late 2015, the Department of Labor (DOL) changed their stance on SRI in 401(k) plans, solidifying this shift in attitudes regarding SRI. The DOL’s updated guidance to fiduciaries allows for proactively applied ESG screening factors when making investment decisions – a huge shift from their previous 2008 recommendation that investments in SRI mutual funds should be “rare.”
On a local level, we currently incorporate some level of ESG screening for around 35 percent of our client base and many SWM clients ask about incorporating SRI into their own investment portfolios.
With the growth in SRI and acceptance by the DOL, is it time for you to consider these types of strategies for your investment portfolio or company 401(k) plan?
Socially responsible investing is an investment discipline that considers environmental, social and corporate governance (ESG) criteria in addition to traditional financial criteria when making investment decisions. Many investors do this by purchasing mutual funds or exchange traded funds that do ESG screening when buying stocks, bonds and other investments. SRI options vary widely in strictness of screening criteria, allowing investors to customize screenings.
For example, there are a growing number of funds that are completely fossil fuel free or that screen out alcohol, tobacco and firearm companies. Most SRI options are in the middle, seeking to give investors a higher monetary concentration in companies they deem more “ethical.”
Another factor to consider is SRI returns. Most of us would likely prefer to support what we consider ethical companies, but does that come at a cost of lower returns or additional risk? And if so, is that cost so high that we are willing to support what we feel are unethical companies?
While all investing involves some form of risk, recent studies by TIAA-CREF Asset Management and Deutsche Asset & Wealth Management would suggest that incorporating ESG criteria in security selection does not create additional risk. They also found that the majority of studies show positive findings between ESG and corporate financial performance (CFP).
When advising our clients on the subject, SWM generally suggests people consider SRI. Whether they want to have a positive impact with their portfolio, or they wish to avoid what they consider to be unethical companies, the studies suggest you can do good for the world without sacrificing potential returns. We call that a win-win.
Todd Pisarczyk is the founder of Vancouver-based investment management and financial planning firm Sustainable Wealth Management. He can be reached at 360.597.4570.