We can imagine a time when our grandkids might say, ‘You mean you knowingly invested in companies that were polluting or using sweatshop labor?’
If you haven’t already moved your portfolio, here are THREE REASONS NOW'S THE TIME to consider Sustainable, Responsible, Impact (SRI) investments.
First, demand for SRI investments has been steadily growing for over two decades and today more than ever, there is a tremendous amount of evidence that SRI principles have a positive impact on long-term risk-adjusted returns.
People have been investing this way and studying this approach to investing for decades now. There are numerous studies and even meta studies documenting the long-term performance benefits of investing consistent with SRI principles.
One 2012 study1 examined more than 100 studies of sustainable investing and found that high SRI ratings were correlated with lower cost of capital in 100% of the studies; with market-based outperformance in 89% of the studies; and with accounting-based outperformance in 85% of the studies. Another meta study concluded that of 36 performance studies, 20 found evidence of a positive relationship between SRI factors and financial performance and only three found evidence of a negative relationship.2
Another reason to make the SRI switch is that SRI strategies have evolved to focus on positive attributes. The investment focus of SRI has moved far beyond its origins in the late 1800s, when this approach was primarily about avoiding “sin stocks” in portfolios held by religious organizations. SRI is no longer merely about passive avoidance of companies in industries such as tobacco or firearms. Instead, the emphasis is on finding companies with certain quality attributes — e.g., environmental and product safety, workforce diversity, employee retention and strong corporate governance — that will have a positive impact on future shareholder value. Through proxy voting and shareholder engagement, investment managers now also seek to improve SRI practices among companies being considered for investment.
Finally, the number of high-quality SRI investment options is increasing within and across asset classes. SRI has grown not only in assets under management but also in the number of choices being offered. Consultants and financial advisors have seen an explosion in new SRI-oriented investment strategies and vehicles — from index and smart beta funds to SRI quant strategies offering different approaches to shareholder engagement. As a result, it is becoming easier to build an entire asset allocation consistent with SRI principles, including public and private equity, fixed income and alternative assets. The choices have increased both in number and in quality.
In light of the recent market volatility following a six year bull run, you may already be reviewing your investment strategy. And if you’re reading this article, you’re likely intrigued with the idea of aligning your investments with your social and environmental values. Perhaps now is the time to act by incorporating a prudent SRI approach with your own portfolio.
1. “Sustainable Investing: Establishing Long-Term Value and Performance,” Deutsche Bank Group, June 2012.
2. “Shedding Light on Responsible Investment: Approaches, Returns and Impacts,” Mercer, November 2009. Of the 36 studies reviewed by Mercer, 20 showed evidence of a positive relationship between SRI factors and financial performance, two showed evidence of a neutral-positive relationship, three showed evidence of a negative-neutral relationship, eight of a neutral relationship and three of a negative relationship.