Money managers and community investing institutions are increasingly using SRI criteria, like environmental, social and governance factors (“ESG”). It’s estimated that 90% of institutional investors find that investment plans that incorporate ESG factors will perform as well as traditional ones.
In the last two years, we’ve discussed how socially responsible investing (“SRI”) has become a bigger player in the investment management field and how new SEC rules regarding access to information electronically can boost investor’s knowledge of company’s social responsibility. As we noted in this blog post from December of 2017, unlike the green investing of Generation X’s time, the Millennial version of profits with a purpose actually involves profits.
In 2017, there were an estimated $8.72 trillion in assets under management with sustainable directives, up significantly from $6.57 trillion in 2014. In 2018 that number swelled to $12 trillion, with Forbes reporting that that amount accounts for 1 in every 4 dollars of total assets under management in the United States. In addition to the total invested assets, the total number of those managing the assets is increasing. Money managers and community investing institutions are increasingly using SRI criteria, like environmental, social and governance factors (“ESG”). It’s estimated that 90% of institutional investors find that investment plans that incorporate ESG factors will perform as well as traditional ones.
In case you need a refresher, SRI portfolios aim to improve social conditions while also generating positive, competitive returns for the investors involved. Some of those SRI portfolios use the ESG factors to compare funds. Since the portfolios began to rise in 2014 as potentially competitive the rate of growth as been notable. The gain just from 2016 to 2018 was more than 13% - a significant rate of growth. Morningstar also reports that SRI mutual funds slightly outperform traditional funds: the difference at three years is the most significant at an almost full percentage point of annualized rate of return (5.5% for SRIs to the 4.7% for traditional funds). The difference between the two types of funds levels out towards a 10 year time period (with 8.9% for SRIs compared to 8.5% for traditional funds).
The trend of making analytics (like those underlying Robo-Investing) available to clients has lately been used to allow clients to identify and analyze funds. Schwab has introduced screeners that allow clients filter funds for different SRI metrics. This new filter allows clients to be slightly more involved in what areas they choose to focus on in SRIs. For example, environmental stewardship may be more prominent for one client versus another’s focus on gun manufacturing. Similarly, iShares also provides additional filters on its indexes for clients to use in searching funds.
In addition to new tools, there are also new investment considerations at play. In 2018, the Securities Exchange Commission recommended that investors examine five items prior to investing in an ESG fund. Those five items are: 1) the difference in performance of the ESG fund to other, more traditional funds, 2) the shorter history of performance of the fund, which could limit analysis of the fund; 3) the diversification of the fund and its strengths and weaknesses; 4) the logic of the investments and techniques used to achieve performance and whether the complexity of the techniques fit within an investor’s risk preference; and 5) the cost or expense of the ESG fund as compared to traditional funds.
In addition to ESG mutual funds, other SRI instruments have been cropping up. Some include government bonds, such as the Blue Bond from the Seychelles that will benefit marine life. In the U.S. the municipal bond market is responding to environmental impact events, like a municipal water bond issued by Washington, D.C. That bond creates a green infrastructure for processing storm water run off.
Finally, in 2017 much of the discussion about the ESG funds focus on the E (Environmental) more organizations, with some discussion of arms and gun manufactures. Since then social movements have found their footing with this investment technique. For example the NAACP has created its own empowerment EFT that assesses diversity in the workplace (among other criteria).
The continued performance growth of SRIs may lead to even more innovation in all areas of investment growth. The effect could be a benefit to investors and the invested alike.
Before leaping into the unknown, we recommend a thorough examination of your plan. Because we are experts in the field, we know the marketplace and know what your existing vendor is capable of offering. Through this examination, we can help you optimize the service you receive.
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