Socially Responsible Investing

The Forum for Sustainable and Responsible Investment (US SIF) estimates that over 18% of professionally managed assets are invested with socially responsible goals in mind, and that number is growing.

What does socially responsible investing mean, and how can you meet your fiduciary duty of choosing the best investment while also considering non-financial goals?

The first step is to identify what criteria are important to your client.  SRI comprises environmental goals, social goals (like diversity, human rights, and community investing), corporate governance issues (including executive pay), and product related criteria (such as avoiding alcohol or weapons).

Morningstar calls this ESG (Environmental, Social, Governance) and this year released a new sustainability rating system similar to their 5 star rating system.  The new rating system is applied to any fund with adequate data for them to rate, and includes quantitative and qualitative evaluations.  They have published a description of the methodology which can be found on the Morningstar website.  Currently, of 106,311 open end funds listed on Morningstar, 40,575 have received sustainability ratings.  5,479 of 14,361 listed ETFs have recieved ratings.  The rating is based on data from Susatinalytics, which evaluates over 10,000 individual companies.

There are over 200 mutual funds that are advertised as having SRI/ESG goals.  US SIF maintains a spreadsheet of these mutual funds that includes detailed information on the goals and methods used by the mutual funds, and also the performance information, which is supplied by Bloomberg ESG Data Service, which evaluates over 10,500 companies for this criteria. includes a filter for “principles-based” investing.  As of this writing, there are 23 ETFs that self identify in this way.

Obviously, this leads to many questions into the ESG ratings data and accuracy.  Global Initiative for Sustainability Ratings is an organization attempting to improve the information that is available.  Their website includes a kind of “rating-the-raters” information hub, .  This includes data on 215 ratings, rankings, and indexes.

Additionally, performance still matters.  According to Deutsche Bank (, socially responsible investing may actually improve returns.   From CNBC:

David Kathman, a mutual fund analyst with Morningstar, said that based on numerous academic studies, the general consensus is that “there will be good times when a social screening will hurt you and times when it will help you, but over time it doesn’t make a difference.  It’s neutral,” he said. “Basically, a free good.”

Larry Swedroe has found studies reaching the opposite conclusion; SRI in fact imposes opportunity costs, depending on how it is implemented.

These results all indicate that there is a financial price to pay for choosing the SRI route, and it comes in the form of reduced risk-adjusted returns and less efficient diversification. However, it’s worthwhile to recognize that, for some investors, such financial consequences are not very important, or might not play a role at all. For them, their values have greater importance than maximizing risk-adjusted returns. It’s a very personal decision as to whether values or returns should drive investment.

Socially responsible investing cannot be a single checklist item, and it is currently not a simple task to identify investments that meet specific requirements.  Investor principles and monetary goals as well as the ratings themselves must all be considered



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