Featured News

Email This Article To A Friend

Diversification And Socially Responsible Investing

In the old days of socially responsible investing (SRI), following your conscience tended to come at the cost of at least a few percentage points in lost returns. SRI funds were few in number, and they tended to focus on avoiding broad swaths of the investing universe. Staying away from companies that slaughtered animals for food or provided feed for slaughterhouses, for example, would mean not investing in many large multinational firms—and in the large-cap mutual funds that hold those companies. Or objections to Asian labor practices would rule out putting money in many promising international stock funds that invested in that region. If you wanted to have a broadly diversified portfolio, you could pretty much forget about SRI.

Recently, though, several changes in socially responsible investing are making it much easier to diversify. Many SRI funds have shifted their emphasis from passively avoiding objectionable investments to an approach that actively seeks investment in profit-driving fundamentals—and that leads the funds to previously unexplored corners of the corporate world. Rather than simply shunning companies that profit from tobacco, polluting industries, child labor, or other frowned-upon products or behaviors, today’s SRI funds invest in companies that embrace socially positive behaviors that may also boost the bottom line. Many SRI investment managers look for companies that focus on environmental sustainability and responsible governance, which they believe will foster success and reward investors.

This trend has led to a new acronym, “ESG,” for “environmental, social, and governance.” Today’s SRI investors believe companies that focus on these three characteristics will perform better in the long term, partly by reducing their potential liability amid rising tensions in these areas.

Another factor in SRI’s evolution is a rapid growth in the number of SRI funds. Increasing concerns about the environment and moral issues ranging from abortion to gun violence are prompting more fund managers to offer SRI-focused choices that may specialize in a particular area. Having more mutual funds and exchange-traded funds built around SRI principles makes it easier to tailor investments to your concerns and helps you to diversify. And whereas in the past most SRI funds concentrated on large-cap stocks—and usually considered only a narrow range of those big companies—now investors can also choose from among small-cap and mid-cap SRI funds.

One widely cited study, the Social Investment Forum’s 2007 Report on Socially Responsible Investing Trends, showed that between 2005 and 2007, the amount of money committed to SRI funds rose at an 18% annual rate. More than 10% of all investment dollars under professional management in the United States, or $2.7 trillion, was invested in SRI funds in 2007, the report said, and more than 260 socially screened mutual funds were available in the United States, up from just 55 in 1995. A number of recent studies have shown that funds screened for social concerns have performed comparably to non-SRI funds in terms of average annual growth.

If you are interested in SRI, or ESG, what do you need to know? Here are some questions to explore, courtesy of Morningstar:

We can help you consider these and other questions related to social responsible investing and work with you to create a portfolio that addresses your priorities, financial and otherwise.