Investors Put Their Money Where Their Values Are
Imagine a company whose stock provides consistently superior returns but whose values run counter to yours. Do you put your own moral code aside for the sake of portfolio performance? For investors who have embraced socially responsible investing, the answer may surprise you.
What is Socially Responsible Investing?
Socially responsible investing (SRI) is a deliberate decision to invest only in companies or organizations whose actions and policies have a positive environmental, social and corporate governance impact. Traditionally, SRI had taken a “do no harm” approach, where investors would simply avoid companies that did not meet ethical, social or environmental criteria, such as those with ties to pollution or health hazards. More recently, SRI has embraced a proactive approach to selecting investments, identifying companies whose policies align with the investor’s values. Some investors have gone a step further through their participation in “green bonds” or “social impact bonds,” which fund projects that promote such societal benefits as clean water or reduced prisoner recidivism.
The Financial Impact of Socially Responsible Investing
But couldn’t excluding investments in companies you disagree with philosophically lead to poorer investment performance? Not necessarily. A 2012 meta-analysis of more than 100 academic studies of SRI found that companies with high environmental, social and corporate governance (ESG) ratings had higher credit ratings and lower cost of capital. Eighty-nine percent of the studies found companies with high ESG ratings exhibited market-based outperformance, and 85% showed these companies exhibited greater profitability relative to the broader market.
While the demand for socially responsible investing has been concentrated among institutional investors, there is increasing interest among today’s retail investors, particularly millennials and women. According to the U.S. SIF Foundation, currently more than $1 of every $6 in investable assets under professional management is in socially responsible investment products. If the prospect of aligning your portfolio with your values interests you, your Baird Financial Advisor can discuss socially responsible investments with you in greater detail.
Article provided by Rebecca Ross, Vice President and Financial Advisor at Robert W. Baird & Co., member SIPC. She has 32 years of financial services industry experience, and can be reached at 239-541-9090 or rross@rwbaird.com.
