Socially Responsible Investing
Joel Dresang: Kyle, I want to talk about socially responsible investing. The Forum for Sustainable and Responsible Investment estimates that there are trillions of dollars invested into socially responsible companies. What does that mean, and where does that trend come from?
Kyle Tetting: Ultimately, socially responsible investing, or socially conscious investing, is at its core about not just running financial screens on the companies you’re investing in but taking some non-financial screen and applying it to those companies.
So what we’ve seen is that dating back as far back as the apartheid in South Africa, investors were looking for a way to make an impact on what was going on there. Moving on now, it’s no longer just exclusionary in nature. Now there are companies out there or fund families out there that are looking for opportunities to invest in companies that are doing things they want them to do, not just things that they don’t want them to do.
Joel: So what sorts of screens, what kind of criteria are there?
Kyle: It’s really a very wide opportunity set. And it can be very specific to an individual investor’s needs.
Probably the most common is the ESG or the environmental, social and governance screens. So what we’re really looking at is avoiding tobacco, alcohol and nuclear weapon and nuclear energy, looking for companies that have good social relationships with the world around them, good employee relationships. And then companies that have some kind of governance in place that allows them to be a good corporate citizen.
Joel: So, if I’m an investor, and I want to be more socially conscious in my investing, what should I expect to have to compromise as far as performance?
Kyle: You know, one of the things that we see quite a bit with the socially conscious funds is that they tend to exclude a very specific area of the market.
So where we see things like utilities do quite well, these kinds of companies might be screened out of a socially conscious fund whether because it has an environmental screen that doesn’t allow for, say, coal-powered plants or nuclear-powered plants or for another company perhaps that doesn’t meet their social or governance screens.
That’s fairly common in certain specific industries and certainly something that can help you miss out on a chunk of market performance.
Joel: So this socially responsible investing allows investors to do well by doing good?
Kyle: I think early on, it was very difficult to get an inexpensive socially screened even just plain vanilla stock fund. What we’ve seen is as the industry has grown, there are a lot more low-cost options now, there’s a lot more competition, which has really added value.
And what a number of researchers in the area have found is that over time, because you’re investing in companies that have built good relationships with the world around them, they tend to be a little bit more stable investments. Overall, you do have the ability to invest broadly enough that you can capture market performance.
And I think it has made a pretty big impact for companies as well, who are now much more concerned about how they appear on these social screens. Long-term, that should be a good thing for investors.
Kyle Tetting is research director at Landaas & Company.
Joel Dresang is vice president-communications at Landaas & Company.
Money Talk Video by Peter May
The Forum for Sustainable and Responsible Investment
(initially posted Nov. 20, 2014)