Investing responsibly: what the experts think
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Virtue vs. profits
On the face of it, socially responsible investing seems like a “have-your-glutenorganic-fair-tradecertified-cake-and-eatit-too” proposition, said Owen Davis on Dealbreaker.com. The accepted market wisdom is that “the best investors leave their personal politics and moral attachments locked away in a soundproof chamber while going about their speculative business”. This is partly because “we shouldn’t let our ideas of what ought to be cloud our views of what is”. But it’s also underpinned by the “market portfolio theory” that the more investment options one has, the better one’s returns. Because socially responsible investing (SRI) weeds out “dirty and sinful” companies – tobacco companies, say, or Big Oil – returns made by SRI funds are usually lower. Virtue, in other words, must be its own reward.
Having your cake...
There’s a problem with this theory – it may no longer be true. That at least is the conclusion of a new study called Do ‘Good Guys’ Finish Last?, which assessed mutual funds for their Environmental Social and Governance (ESG) ratings, and then tracked their performance. It turns out that the more socially responsible ones were “basically indistinguishable, return-wise” from any other. This could be because companies which major on ESG principles also tend to practice sound financial management. A BOA Merrill Lynch report last year found that investors choosing stocks with aboveaverage environmental and social scores “would have avoided 15 of the 17 bankruptcies we have seen since 2008”.
“Good” ETFS
One reason that socially responsible investing is “red hot” is that cheap “new exchange-traded funds make the strategy more available than ever before”, said Jordan Wathen on The Motley Fool. One strong performer of late is ishares MSCI KLD 400 Social ETF, which avoids classic sin stocks (alcohol, tobacco, sex, weapons) and majors on big tech stocks. Another is ishares MSCI ACWI Low Carbon Target, which avoids fossil-fuel producers and companies making substantial carbon emissions. And a third is SPDR SSGA Gender Diversity Index ETF, which invests in companies with the highest number of women in senior ranks.