Four years ago, I wrote about Socially Responsible Investing (SRI) in this blog. SRI is investing in companies based on an assessment of their Environmental, Social, and Governance policies, or ESG. In 2014, SRI funds had just passed $100 Billion in assets and have since grown twenty-fold to over $2 Trillion globally.
At that time, I had reservations that SRI funds carried a number of pitfalls, including weak diversification, high expense ratios, and poor performance. I discussed one of the original SRI exchange traded funds, KLD, which in 2014 had an expense ratio of 0.50%.
Things have changed for the better. Today we have new SRI funds which are better diversified and have reduced tracking error versus a core Index-based ETF like we normally suggest. Expense ratios have fallen dramatically, with some SRI funds as low as 0.15% to 0.20%, which is much more competitive with traditional ETFs.
With these newer funds, I think we can now say that investing using SRI principles should have similar performance to our traditional portfolios. I don’t know that the performance will be any better, but I no longer am concerned that SRI will automatically condemn you to under-performing a non-SRI approach today.
For the first time, we have the tools to create a globally diversified portfolio of SRI funds which are low cost, transparent, and rules-based. What is lacking, however, is a long track record: of the 38 or so SRI ETFs available to US investors today, about half are less than two years old. This requires extra research and due diligence to understand what you are actually buying and how the fund might perform in different market environments.
For a lot of investors, we want to invest in companies which do good, and not the ones who pollute the environment, support dictators, sell tobacco, or treat their employees, customers, or shareholders with callous disregard. That’s the appeal of SRI; it aligns our money with our values.
When you invest in an index fund, you own all the stocks in a benchmark, including some which maybe you’d rather not own. With the proliferation of index investing, the largest shareholders of many companies are often Vanguard and Blackrock, the two largest index fund providers.
Although index funds vote on behalf of shareholders, they have largely voted in favor of management proposals. Indexers cannot sell their shares if a company is doing bad things. If it’s in the index, the fund has to own it. This weakens the role of shareholders as owners and beneficiaries of corporate decisions and the accountability of executives to shareholders.
I see a beneficial role for SRI investors within capitalism because they tell company executives and boards that they have to do better on ESG criteria or we will not invest in their company. To that extent, I believe we are already seeing improved corporate behavior thanks to SRI investors including ETFs, activist funds, and large pension plans such as CalPERS.
Are you interested in Socially Responsible Investing? Would you like to see what your portfolio might look like if we used SRI funds instead of traditional Index ETFs? We do not want to sacrifice performance, which is why we have been cautious about adopting SRI funds. But with better diversification and lower expense ratios, today’s SRI funds are significantly improved. Let’s talk about how we might implement SRI for you.