The bottom line isn’t always top of mind for some investors.
Socially responsible investing, which takes into account environmental, religious, labor or other social issues of companies in addition to companies’ financial performance, is on the rise.
Last year, the market for sustainable, responsible and impact investing topped $8.7 trillion of professionally managed assets that use strategies related to climate change, human rights, weapons avoidance or corporate governance. That’s up 33 percent from 2014 and accounts for a fifth of all investment under professional management, according to US SIF, the Forum for Sustainable and Responsible Investment.
A survey released in December by consulting firm Callan Associates found that 37 percent of 84 U.S. institutional funds representing approximately $843 billion in assets incorporated environmental, social and governance factors into their decision making, an increase from 22 percent in 2013.
[See: 7 of the Best Socially Responsible Funds.]
“People want to be able to invest in a way that is consistent with their values,” says Blaine Aikin, executive chairman at fi360, a Pittsburgh-based fiduciary education and technology company.
Consumers are seeking this type of investment because they want to put their money in companies with responsible workplace policies and governance and that take societal values into account, Aikin says.
With institutional investors such as endowments and pensions increasingly adding socially conscious wording to their investment policies, asset management firms are having to create products to meet that demand, says Jimmy Lee, CEO of the Wealth Consulting Group, which is based in Las Vegas. Otherwise their clients could go elsewhere, he says.
“It’s a powerful force that’s going on out there,” Lee says. “Assets in sustainable investing strategies have gone up tremendously.”
Such investing includes one approach that focuses on screens that eliminate investments that offend some, such as polluters, gun companies and tobacco firms, while another approach is more about looking to influence outcomes by investing, says Ken Dorger, senior consultant at Fourth Street Performance Partners in Covington, Kentucky.
There are increasing efforts among financial advisors to use environmental, social and governance factors — or ESG — as a way to help manage risk, address client demand, find a proxy for management quality and hew to advisors’ fiduciary duty, Aikin says.
Until recently, that last bit was murky. In 2015, the Department of Labor issued a bulletin easing some concerns advisors had about whether impact investing was appropriate given that they are bound by law to keep the client’s financial interests first, Aikin says.
[See: 10 Energy ETFs That Will Clear Your Conscience.]
But there is still concern about whether these funds are good investments.
“The greatest barrier to funds incorporating ESG into investment decision making continues to be a lack of clarity over the ESG value proposition,” Callan survey author Anna West, a senior vice president and chair of the firm’s ESG Committee, says in a statement. “More than 60 percent of our respondents that said they do not incorporate ESG cited this as their No. 1 reason for not doing so.”
Addressing the lingering notion that focusing on anything besides economic factors or company fundamentals leads to underperformance, Oppenheimer Funds, in a 2016 paper says: “A wealth of research has been conducted to examine this question and the overwhelming historical evidence suggests that socially conscious and ESG-focused practices can actually enhance, not hinder, returns.”
Lee believes this type of investment is not only good for the environment and society, but that it can also improve shareholder returns. After all, good corporate governance likely means fewer lawsuits from activist shareholders, for example, he says.
For investors considering socially responsible investing, products include the Neuberger Berman Socially Responsive Fund (ticker: NBSRX), the Ave Maria Catholic Values Fund ( AVEMX) and the Calvert Equity Portfolio ( CSIEX).
Dorger says the Global X S&P 500 Catholic Values exchange-traded fund ( CATH) has been popular among clients who are religious organizations wanting to follow faith-based guidelines.
Morningstar has also begun rating funds on ESG factors even if they’re not marketing themselves specifically as socially responsible products.
According to a list compiled by Aiken, several funds carry the highest sustainability rating from Morningstar and have also consistently scored well with fi360’s analysis system that includes regulatory oversight and performance relative to peers.
[Read: How to Create a Socially Responsible Investment Portfolio.]
The funds include the Vanguard Wellesley Income Fund ( VWINX), Oakmark Global Select Fund ( OAKWX) and the American Century Mid Cap Value Fund ( ACLAX).”
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