Today there is something on the order of $100 billion invested in socially responsible mutual funds and ETFs, according to the Wall Street Journal. The Social Investment Forum estimates that, including all individual and institutional investing, there could be as much as $3 trillion in socially-focused investing today.
But the very definition of socially responsible investing (SRI) is in flux. Has it become easier for someone to build an investment portfolio that balances both their financial goals and social good?
To shed some light on that question, we caught up with David Neubert, co-founder of Kapitall.com, and an active investor himself, and R. Paul Herman, founder of HIP Investor, an investment advisor based in San Francisco and author of “The HIP Investor: Make Bigger Profits By Building a Better World”. (Videos of the interview are below.)
Next-Generation Socially Responsible Investing
Traditionally called “socially responsible investing,” this type of investing has broadened in recent years. Today investing terms like “sustainable investing” and “impact investing” connote an approach that is less about excluding certain classes of companies (tobacco, gambling, big oil) and instead, takes a deeper look at individual firms. In socially responsible investing version 2.0, investors are exercising a broader range of options. They may choose to invest in companies which are doing the right thing in some areas, even while continuing to fall down in others. “Impact” investors will often take that as a starting point to agitate for change in the areas still lagging.
As a result, companies like Wal-Mart (which has taken a lead on reducing waste, but lags on labor policies) or PepsiCo (which is pushing for healthier snacks while still selling mainly soda and chips) have begun to find their way into some sustainable portfolios.
More Diversification and a Shot at Better Returns
One important advantage to this approach to SRI is that it allows an investor to build a more diverse portfolio. That in turn often leads to better performance. After x-ing out the sin stocks, many responsible funds found themselves heavily exposed to sectors like technology and finance and when those stocks got hit hard (as technology did in 2000 and finance did in 2008) they stumbled.
“You can have a diversified portfolio with an eye to impact,” says Patrick Gleeson, CEO of Meyer Family Enterprises, which invests on behalf of the Meyer family. Three years ago the Meyer Family and Gleeson began to move from traditional investing toward a method focused on impact. Today he calculates that 64% of the portfolio, which includes stocks, bonds and private equity investments, is invested based on impact. The goal is to reach 100% by 2020.
It wouldn’t be practical to do that just by investing in names readily recognized as socially responsible. For one thing, many of the pioneering SRI companies are now part of large corporations. (A recent piece on the New York Times Opinionator blog digs into this trend in detail, including a long list of once-independent companies that are now divisions of massive conglomerates. Ben and Jerry’s Ice Cream, now owned by Unilever, is just one example.)
In the long run, sustainable practices that benefit the community, the environment and employees (as well as the bottom line) will lead to better businesses, argues Herman. His HIP 100 Index, a ranking of the S&P 100 companies by their responsibility records, has beaten its benchmark since launch in July 2009. The leading companies in sustainability will be the leading companies period, argues Herman of HIP Investor. “Today it’s socially responsible investing, but ultimately it will just be investing,” he says.
Neubert argues that today individual investors are enjoying a good hearing on governance and other concerns that they bring up to the management of the companies they invest in. Part of that is due to technological change (including easy access to information) and part of that is due to the appeal of retail investors to corporations. Individuals tend to be more loyal shareholders to the companies they invest in (versus the bigger, insitutional investors). That can add something of a buffer in volatile markets.
Most responsible investing is done through financial advisors, Herman notes, but there are more retail options opening up. There are now a good number of easy-to-own SRI Exchange Traded Funds as well.
Not all SRI ETFs are created equal, of course. Expenses on some can run quite high, and over the past year performance for this group has been mixed with DSI, TAN and PBW trailing the S&P 500 and KLD and NASI doing far better than the benchmark.
The goal is to find a way to get responsible investing to a broader audience. Even at $100 billion plus, it can still feel like “we’re talking to ourselves,” says Patrick Gleeson.
In the following videos Herman and Neubert cover a number of topics including:
- SRI’s shift to a positive focus
- Influencing policies at corporations
- Social Media’s Impact
- Avoiding the Next BP
- Future of energy investing for the SRI-minded
- Challenges of Index Investing
- Can sustainability drive profits?
For the pair’s thoughts on hose topics and others, please click here:
(photo: Sarah Reido)