There are plenty of investment styles and fads out there. And plenty of them have gone the way of the dodo. But when it comes to socially responsible investing (SRI), the fad has turned into fascination.
While the approach of “profits with a purpose” has been around for decades, SRI has gained an enormous following in recent years. So much so that trillions of investor dollars now sit in various SRI mutual funds, insurance pools and even exchange-traded funds (ETFs).
The real beauty is that SRI is just getting started.
Several trends will continue pushing socially responsible investing into the investing lexicon and general public’s attention. And this is one trend that investors should seriously consider following.
For a full list of Socially Responsible ETFs, click here.
Old Concept, New Money
The idea of SRI investing is an easy one to understand. Find not only the good companies but also those that do good. In the early days that was as easy as getting rid of tobacco, firearms makers, alcohol producers and gambling-related firms from larger indexes. Today, SRI portfolios and indexes are marked by a series of various environmental, social and governance (ESG) metrics. By analyzing how a firm treats its employees or how much carbon it emits, investors can align their personal values with their financial goals.
Essentially, matching their lives and portfolios together.
And investors have taken the concept and run with it. These days, SRI and ESG factors are no longer outliers in the investing community. In fact, they are the headliners – if assets under management have any say in the matter.
According to mutual fund and ETF manager Oppenheimer Funds and trade group U.S. SIF Foundation, more than $8.1 trillion, as in T, is invested in ESG portfolios as of last year. That’s basically around a fourth of all assets professionally managed in the United States. Globally the number sits at more than $21.96 trillion. What’s striking has been the growth of ESG/SR assets, which you can see by the following chart.
When looking strictly at managed assets – mutual funds, variable annuities, ETFs, closed-end funds, etc. – there were more than $2.6 trillion in investor capital sitting in ESG/SRI-focused vehicles at the end of last year. That was more than ten times the “measly” $202 billion recorded in 2007. These sort of asset gathering makes socially responsible investments one of the fastest growing segments of the overall market.
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Why the Big Leap In SRI?
So, why exactly have investors gone gaga for ESG investing and moved some big-time bucks into the strategy? The answer is actually a multitude of reasons. The first of which focuses on who’s doing the buying.
Millennials are leading the charge into SRI indexes and funds. Driven by the generations passion of social justice and equality, many millennials have taken a shine to SRI’s focus on environmental, social and governance requirements. The vast bulk of the generation believes their portfolio, through the value of dollar voting, is a way to express social, political and environmental values. They are willing to support an organization with their money and boycott those that don’t align with their values.
Likewise, women are continuing to push ESG into the mainstream. Several recent studies, such as a 2014 paper by Morgan Stanley, found that women are more than two times likely than men to consider investments that both deliver positive returns and make a positive impact. That’s an important figure to understand as the Harvard Business Review pegs that women will control $22 trillion in personal wealth by 2020.
But it’s not just demographics that are driving SRI investing; the corporate and government world is getting into the act. As investors have realized the importance of various ESG factors on society and major pension plans, government organizations have begun implementing them into their investment decisions and corporate actions. The U.S. Department of Labor (DOL) has issued new guidance that ESG metrics “are proper components of the fiduciary’s primary analysis of the economic merits of competing investment choices.” The world has taken ESG one step further, with many nations requiring that pension plans incorporate such factors into their plans.
Finally, returns for ESG/SRI investing are living up to the hype. Historically, old-school-styled SRI funds and indexes focused on exclusion. And, typically, what was excluded – sin industries like cigarettes, booze, gambling, etc. – have been some of the best-performing sectors over the long term. However, with more firms integrating ESG into their corporate actions, investments in the sector have gained some serious mojo. Morgan Stanley looked at the performance data of over 13,000 mutual funds and separately managed accounts. The investment bank found that those looking at sustainability issues often exceeded the performance of comparable traditional investments.
Check out this page to find out more about how SRI investments tend to provide better returns than their traditional counterparts.
Where Are Investors Looking for ESG?
The rise of ESG investing and the rise of ETFs have gone hand in hand. As investors large and small have looked to incorporate SRI aspects into their portfolios, ETFs – through their low costs and transparency – have become a major recipient of investor money. After all, it’s easy to quickly hone in on an index or sub-index with using ETFs. That could help explain why there are over 30 different ETFs that focus on sustainability and ESG metrics.
The most popular of which is the $825 million iShares MSCI KLD 400 Social ETF (DSI ). DSI is a classic example of a traditional ESG index in that it “kicks-out” or removes the tobacco, gambling, firearms/weapons, nuclear power, adult entertainment and GMO seed producers from the broader U.S. Investable Market Index. The remaining firms are then scored based on various ESG metrics to craft the portfolio of 401 top SRI large-, mid- and small-cap U.S. stocks. The slightly less popular at $534 million in assets – iShares MSCI USA ESG Select ETF (KLD ) – hones in on the top 100 ESG scoring large-cap stocks in the U.S. Both make great core choices for investors looking for broad ESG exposure.
Compare two socially responsible ETFs such as DSI and KLD using ETFdb.com’s Head-to-Head Comparison tool. Compare ETFs across a variety of criteria such as performance, AUM, trading volume, and expenses.
While governance and social issues are important, investors have been particularly drawn to ESG to focus on the environment. This has included a hefty dose of climate change, renewable and anti-fossil fuel energy bias. Both the iShares MSCI ACWI Low Carbon Target (CRBN ) and SPDR S&P 500 Fossil Fuel Reserves Free ETF (SPYX ) have garnered impressive assets as they focus on eliminating fossil fuels from their mandates, as has the renewable energy-focused PowerShares WilderHill Clean Energy Portfolio ETF (PBW ).
Finally, with women turning to SRI in spades, it’s not surprising that gender diversity is a big focus for ESG investors and that SPDR SSGA Gender Diversity Index ETF (SHE ) has gathered more than $300 million in assets. But “Fearless Girl” aside, this gender diversity isn’t a marketing gimmick. The data shows that having more women on board is an asset and leads to better returns.
Find out why dividend investors can’t afford to be sexist here.
Matters of Pressing Concerns for ESG Investors
Not everything is all rosy for ESG however.
There are few concerns investors should be made aware of. While firms scoring high on various eSG metrics are presumed to be “good” it is not that they don’t necessarily have their faults. For example, Volkswagen scored very high on many ESG metrics, but was lying about its emissions data. Additionally, some sin stocks have made their way into various ESG indexes thanks to their work on governance and environmental issues. Investors may be buying stocks that they never intended to, if they aren’t carefully looking how an SRI/ESG index is structured.
The Bottom Line
Socially responsible investing is quickly becoming mainstream. No longer the realm of “hippies,” ESG and its factors are now driving investment decisions in both large and retail portfolios. Several elements have caused the shift. But one thing is sure: ETFs continue to get more and more of those assets.
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