By MICHAEL IACHINI
APRIL 19, 2018
There’s never been a more opportune time to sync your personal values with your investments. Socially responsible investing (SRI)—which seeks to effect positive social change while also generating competitive financial returns—has emerged as a significant, grass-roots trend. According to a 2016 study by US SIF: The Forum for Sustainable and Responsible Investment, 80% of fund managers who have incorporated such strategies into their portfolios did so in response to requests from individual and institutional investors.1
There also has never been more choice. From 2012 to 2014, the number of U.S. investment funds that incorporated environmental, governmental or social criteria increased by 28%, and their assets quadrupled to more than $4.3 trillion over the same period.2 What’s more, great strides in data collection and a slew of new online tools have made identifying such funds a matter of a few clicks and keystrokes. For example, Schwab’s exchange-traded fund (ETF) screener and mutual fund screener both have a “socially conscious” filter that allows clients to search for and compare SRI funds.
But let’s get down to brass tacks: When it comes to returns, can such funds really hold their own against their less socially responsible competition? Let’s take a look.
The SRI advantage
Far from compromising on returns, SRI funds may offer a competitive advantage. The MSCI KLD 400 Social Index, for example, averaged an annual rate of return of 10.44% from 1990 through January 2017, compared with 9.95% for the S&P 500® Index over the same period.3
And according to data from Morningstar, SRI mutual funds have consistently kept pace with their non-SRI counterparts in the short, medium and long terms (see “Doing good does well,” below).
Doing good does well
Socially conscious funds delivered competitive returns over both the short and long terms.
Source: Charles Schwab Investment Advisory, Inc., with data from Morningstar, as of 3/31/2018. Returns represent the average annualized performance of U.S. equity open-end socially responsible and non–socially responsible mutual funds. Past performance is no guarantee of future results.
And although SRI funds were once criticized for their relatively high fees, they’ve become more competitive over time. Out of the 225 Morningstar-listed mutual funds that self-identify as socially conscious, nearly half had lower expense ratios than their category’s average.4
Building a values-based portfolio
One challenge to creating a values-based portfolio is achieving adequate diversification, particularly when it comes to socially conscious bonds. That’s because the lion’s share of the U.S. bond market is made up of Treasuries and mortgage-linked bonds—investments whose impact is difficult to measure, making it challenging to apply SRI standards.
That said, there are SRI funds for corporate bonds, international stocks, and U.S. large- and small-cap stocks. There are even balanced funds that blend socially responsible bonds and stocks within a single investment vehicle.
However, while it’s easy enough to find a like-minded ETF if you’re interested in, say, sustainable energy, what if you have multiple goals—pinpointing sustainable-energy companies with boards that reflect gender and racial diversity, for example? To fulfill this level of specificity, you may need to do a bit of digging. Fortunately, most socially conscious funds are eager to advertise their bona fides on their websites.
The future of investing?
As the once-niche market of SRI investing continues to gain steam and demonstrate solid long-term returns, we’re likely to see more widespread adoption of these strategies in the future. For example, in 2015 the Department of Labor responded to popular demand and cleared the way for managers of 401(k) accounts and pension funds—whose combined assets total roughly $6.7 trillion5—to consider socially conscious factors in their investment decisions.
Millennials, too, are fueling the SRI trend. One study found that two-thirds of those age 22 to 34 are likely to invest in a company well-known for its social responsibility, compared with less than half of those over age 34.6 And as Millennials continue to grow and mature as investors, the SRI market will likely grow with them.
12016 Report on US Sustainable, Responsible and Impact Investing Trends.
3Morningstar, as of 01/31/2017.
52016 Investment Company Fact Book, Investment Company Institute.
6Aflac Corporate Social Responsibility Survey, 10/2015.
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Past performance is no guarantee of future results.
Investment returns will fluctuate and are subject to market volatility, so that an investor’s shares, when redeemed or sold, may be worth more or less than their original cost. Shares are bought and sold at market price, which may be higher or lower than the net asset value (NAV).
The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.
All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.
Diversification strategies do not ensure a profit and do not protect against losses in declining markets.
Charles Schwab Investment Advisory, Inc., is an affiliate of Charles Schwab & Co., Inc.
Indexes are unmanaged, do not incur management fees, costs and expenses, and cannot be invested in directly.
The S&P 500 Index is a market-capitalization-weighted index comprising 500 widely traded stocks chosen for market size, liquidity and industry-group representation.
The MSCI KLD 400 Social Index is a capitalization weighted index of 400 US securities that provides exposure to companies with outstanding Environmental, Social and Governance (ESG) ratings and excludes companies whose products have negative social or environmental impacts.