Why Socially Responsible Investing is Gaining Ground

Abe Borenstein, Senior Managing Director and Portfolio Manager, First Republic Investment Management

August 26, 2015

More investors these days are gravitating toward socially responsible investing, the practice of selecting investments based on one’s ethics or values—whatever those happen to be.

According to the Forum for Sustainable and Responsible Investment, 18% of all professionally managed assets in the U.S. were socially responsible investments in 2014, up from 9% in 2005.1 This trend is being driven in part by millennial investors who care about ensuring their investments adhere to strong environmental, social and governance (ESG) practices.

Fund companies have helped further this trend by introducing new funds specifically geared toward investors who want to build a “responsible” portfolio. Traditionally, socially responsible investing simply meant avoiding “sin stocks”—the securities of companies that profit from alcohol, tobacco, gambling and other deemed vices. Today, SRIs encompass everything from companies that prioritize water conservation or have a high number of females in their executive ranks to those that adhere to ethical labor or certain corporate governance practices. “Impact investing,” a subset of this trend, involves investing in companies that proactively seek to make a positive difference in the world.

Getting started

Investors who want to follow an ethically based investment strategy have more options than ever before. A good place to start is to outline some guiding principles: What kind of values or standards do you want to uphold in your investing? What kind of companies do you—or don’t you—want to invest in? Defining your goals can help you narrow down the options and create your strategy.

Some investors may want to design their own portfolio of companies that meet their ESG criteria. This, of course, can require intense research and screening. Especially when evaluating large corporations, it can be difficult to determine whether they meet all the standards because they likely have operations all over the world.

Others may want to choose SRI mutual funds or exchange-traded funds, relying on the expertise of professional fund managers. There are currently more than 400 SRI funds, according to Morningstar.

Another option is separately managed accounts in which professional asset managers help investors select stocks based on their ESG criteria. First Republic, for example, offers an ESG portfolio overseen by asset managers with deep experience and expertise selecting socially and environmentally responsible investments that also meet specific performance metrics.

Comparing performance

Investing with values-driven goals does not mean an investor necessarily sacrifices portfolio performance. The MSCI KLD 400 Social Index, which is composed of companies with high ESG ratings, outpaced the Standard & Poor’s 500 index by an average 0.5% annually between 1990 and 2014, according to Morningstar.2

The growth of ESG investing is having a positive influence on how companies around the world are managed and governed. But as with any investment goal, investors who want to follow a responsible investing strategy are wise to first discuss it with their portfolio manager, who can help design an ESG strategy that fits their specific goals and identify those ESG investments that also make financial sense.

1 – USSIF.org

2 – Morningstar.com, “The Benefits and Costs of Socially Responsible Investing,” Jan. 7, 2015

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All analyses and projections depicted herein are for illustration only, and are not intended to be representations of performance or expected results. The results achieved by individual clients will vary and will depend on a number of factors including prevailing dividend yields, market liquidity, interest rate levels, market volatilities, and the client's expressed return and risk parameters at the time the service is initiated and during the term. Past performance is not a guarantee of future results.

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©First Republic Investment Management, 2015