Do Responsible Investors Need Sacrifice Returns?

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Ask most financial advisors about Socially Responsible Investments (SRI) and they will likely defer to a standard response about sacrificing returns. I know, because that’s what I used to tell clients in my first 10 years in this industry working at larger firms. It’s the message we were given even though the numbers show a different story.It’s time for advisors to help their clients desiring to align their values with their portfolios to put the ‘returns dilemma’ behind them.

The S&P Dow Jones Indices (S&P DJI) is one of the world’s leading providers of financial market indices. In June they launched an SRI index “designed to offer investors enhanced exposure to securities meeting sustainability investing criteria while maintaining a risk and performance profile similar to the S&P 500”.Not only is this significant for confirmingincreased SRI demand, but the index returns for the 3+ years that it has been tracked, outperformed the S&P 500!

But guess what, this is not actually new news. The MSCI KLD 400 Social Index “provides exposure to companies with outstanding Environmental, Social and Governance (ESG) ratings and excludes companies whose products have negative social or environmental impacts”.A recent report by Morgan Stanley’s Institute for Sustainable Investing shows that since its inception in July of 1990 the Social Index has outperformed the S&P 500 on an annualized basis achieving a return of 10.14 percent compared to 9.69 percent for the S&P 500.

This report also examined 13,102 mutual funds & separately managed accounts and found, “investing in sustainability has usually met, and often exceeded, the performance of comparable traditional investments. This is on both an absolute and risk-adjusted basis, across asset classes and over time.

So, why does this misconception persist regarding SRI returns trailing the returns of the broader markets? It could be caused by the methods in the early years of Socially “Conscious” Investments where only negative screening was applied toward companies or industries that an investor might not want to support like gambling, tobacco, alcohol and others.There were also far fewer players during that period which translated into higher costs. Now SRI strategies don’t only incorporate negative screening, the new SRI directs dollars towards forward thinking companies with sound governance, environmental, and social corporate policies. Increased demand means competition which has allowed costs to come down as well.

Supply and demand has always shaped costs and investment returns. In 2014 $1 out of every $6 of US assets under professional management was invested in some form of sustainable investment, primarily in public equities – nearly 6.7 trillion (according to the Morgan Stanley report.).The US Sustainable and Responsible Investment Forum (US SIF) 2014 annual report on investment trends showed SRI assets in the US growing by 76 percent between 2012 and 2014! Popular demand, not only to care for people and the environment, but demand for investment choices is increasing investoroptions, reducing costs and allowing investors to take advantage of this strong momentum.

Hopefully the increase of information like this will help put the misconception over returns out of the picture.Investors and their advisors now clearly have more freedom to pursue aligning values with investment portfolios. This is very good for the causes we care about and for pursuing long-term investment goals.

Jack Schniepp is the owner of Cascade Financial Strategies and with his business partner, Ryan Andrews, he co-authors the blog SRI Bend which addresses issues related to Socially Responsible Investing (www.SriBend.com).

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Jack Schniepp

Jack Schniepp ChFC CERTIFIED FINANCIAL PLANNER™ jack@cascadefs.com CASCADE FINANCIAL STRATEGIES, LLC 243 Scalehouse Loop, Suite 3B Bend, OR 97702 www.cascadefs.com p (541) 678-5475 c (541) 728-7500

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