Is socially responsible investing profitable? An increasing number of investors are choosing to put their money into stocks and hedge funds that align with their own socially-conscious values. This trend of sustainable and responsible investing is being driven in large part by changing demographics, with Millennials especially keen on seeing their capital outlay benefit both financial and social goals.
But can this kind of ethics-based style of investing really stack up against the more traditional forms of risk management, and does this sound the death knell for those who prefer to choose their investment vehicles solely on the basis of fundamental and technical analysis?
If this new trend of investing does indeed appear to be leading the way to the future, which socially responsible stocks are the best to invest in at the present time?
What Does Socially Responsible Investing Mean?
There’s little doubt that the political and cultural environment in the West has changed significantly over the last few decades, with contemporary and modern-day challenges such as climate change and “social justice” issues being at the forefront of many people’s minds. It’s therefore no surprise then that these shifting areas of concern should seep into the financial realm too, expressing themselves in how investors choose to allocate their capital funds.
One immediate consequence of this change is the rise of what has come to be known as environmental, social, and corporate governance – or ESG, for short. Certainly, ESG isn’t an entirely new concept; the trades unions of the post-war era directed money from their workers’ pension funds into ventures that were oriented toward their own political and social aims. Later on, companies such as General Motors would protest the apartheid regime in South Africa by divesting funds away from that country.
But it wasn’t until the turn of the millennium, when the United Nations championed the cause of ESG, that the movement took on the momentum it has today.
Seen as a particular subset of ESG, socially responsible investing (SRI) is a form of wealth management that prioritizes the personal, vested interest of the investor – who decides to exclude or include assets in their portfolio based on a set of ethical criteria – over a purely profit-oriented motive.
SRI is becoming much more popular today, with one Morgan Stanley survey in 2019 finding that 85% of respondents expressed an interest in socially responsible investing.
Is Socially Responsible Investing Profitable?
Despite the fact that socially responsible investing might present itself as an additional constraint on money managers’ ability to choose profitable stock opportunities, it turns out that it can in fact be profitable – or at least match the performance of other non-SRI investment vehicles.
For instance, Arabesque Asset Management, an asset management firm that blends both SRI principles and more traditional forms of analysis, has managed to outperform certain benchmarks with its unique quant- and sustainable-informed approach.
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SRI vs ESG Investing: What’s The Difference?
Environmental, social and corporate governance investing is often taken to be a positive approach to evaluate which companies are making active steps to improve conditions relating to ESG standards, such as social concerns like promoting diversity within an organization, or encouraging environmental sustainability by utilizing renewable forms of energy.
Conversely, socially responsible investing tends to be seen as a screening tool used to decide which stocks or funds to avoid.
For example, some vegan activists might want to divest from firms that undertake animal testing, while anti-gun or pacifist investors may wish to avoid businesses that trade in international arms sales, or which undertake and support military-adjacent research.
Does Socially Responsible Investing Make Sense?
A major factor in the adoption of socially responsible investing can be found in the idea of reputational risk.
Reputational risk is an ever present danger to businesses and organizations, and by its nature can be difficult to foresee and prepare for.
Despite this, firms have been able to learn from the mistakes and errors of others, and have begun to associate themselves with RSI as a way of signaling their green, ethical and sustainable credentials to potential investors.
However, when investing just used to be about making a profit, there was a certain clarity to its operation. The problem with socially responsible investing is that values are infinitely mutable, and what might be the flavor of the month right now, might not be so further down the line.
This puts a number of strains on the idea of investing as a form of activism. The first is that if people’s political views change over time, hedge funds and companies that are successful now could very easily become unpopular later on. And when public sentiment decides you’re not on the “right side of history”, there’s not much you, or anyone else, can do to help.
Secondly, for the buy-side and sell-side of the corporate world alike, making a big deal of one’s sustainable and responsible investing endeavors could open you up to accusations of hypocrisy.
Yes, everybody might be wholly in opposition to the practice of child labor and human trafficking, but how these concepts are defined in practice isn’t always as clear as we’d want it to be.
Questions of virtue and morality, when they migrate from the classroom or lecture hall into real life, are often fuzzy and difficult to pin down. And to flaunt your own virtue in the public square might make you feel good for a time, but if you fall short – even if your intentions are good – the justice of the Twitter cognoscenti is swift and unrelenting – with little room for appeal.
Is Amazon A Socially Responsible Investment?
Amazon (AMZN) is a good example of a high-profile business that ensures it adheres to a model of corporate social responsibility while also delivering returns for its stakeholders.
Amongst other things, the company has taken a climate pledge to reduce carbon emissions to zero, and has vowed to uphold the human rights of the communities that support its value chain globally.
Best SRI Stocks To Buy
Vanguard ESG ETF (ESGV)
A good choice for those who want to build a portfolio of off solid RSI principles would do well to consider the Vanguard ESG ETF.
This passively-managed exchange-traded fund seeks to track the FTSE US All Cap Choice Index with a full replication approach, specifically excluding securities that are associated with gambling, tobacco and the fossil fuel industries.
The fund also screens for companies that have a history of human and labor rights violations, as well as those businesses that do not satisfy certain diversity and inclusion quotas.
ESGV has done well this last year, growing over 20% in price and beating the S&P 500 return since its launch in September 2018.
The fund’s stock balance is slightly more weighted towards high-performing tech enterprises, while underplaying less profitable firms in the energy sector. Investors appear to like this offering from Vanguard, and it looks likely to remain popular for some time to come.
Fidelity International Sustainability Index Fund (FNIDX)
With a special focus on environmental sustainability, the Fidelity International Sustainability Index Fund is a mutual fund that invests in companies with a particularly high performance on ESG criteria relative to their sector rivals.
The fund offers low operating fees at just 0.20%, and has a good mix of both growth and value plays across a diverse range of market capitalizations.
The return on investment hasn’t been stellar for the fund so far, increasing just 3% since this time last year. However, the ETF has delivered more than 70% since the start of the pandemic, and, with its top portfolio sector being represented by the financial industry, FNIDX could have a pretty good 2022 if the global economy just happens to recover.
Shelton Green Alpha Fund (NEXTX)
If investing in the green economy is your thing, then the Shelton Green Alpha Fund (NEXTX) should be right up your street.
The mutual fund is dedicated to identifying green economy businesses that have a higher-than-average potential for growth, and is interesting in that it also seeks to mitigate systemic economic risks in addition to its SRI goals.
NEXTX expands its pool of investment opportunities by identifying stocks in a wide range of industries. While the fund’s 14% loss of value during 2021 is fairly underwhelming, it still looks to benchmark itself against the MSCI ACWI IMI Index.
Unfortunately, during its recent third quarter reporting, Shelton was down 4.60% compared to MSCI’s loss of 1.11%. Nevertheless, the Green Alpha Fund has outperformed both the MSCI and S&P 500 Composite indexes since its inception, garnering a return of 20.38% versus their respective 10.35% and 14.90%.
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