Sustainable Investing is profitable

Sustainable Investing is profitable

Have you ever wondered whether your possible returns in SRI are going to be lower just because they are SRI related? Some of us can have such doubts, but the answer to the question is “no”. And now let us try to explain why.

To begin with, here are some facts: investments in SRI (sustainable, responsible and impact) assets are 33% higher than in 2014 (according to US SIF). In other words, $1 of every $4,6 under professional management is invested in SRI. The companies which are better at implementing ESG (environmental, social and governance) approach benefit from high-quality management and good stock performance. The quality, structure and compensation of management, and relations between employees are the main factors deciding about the company’s success.

A crucial ESG factor – corporate governance, tests them. What is more, an active ESG participation shows management teams’ ability to think forward and this helps companies to make use of some long-term opportunities. Consequently, lower costs of capital, higher operational and stock price performance become the reward for the companies which aim at constantly improving ESG actions.

Academic research reviewed 190 high quality academic studies on sustainability and business performance and proved the truth of the theory. According to a research paper by Oxford University from 2014, 90% of the studies showed that sound sustainability standards helped companies lower the cost of capital, and 80% of the studies proved that good sustainability practices have a positive impact on stock performance. 88% of the studies demonstrated that operational performance of companies was positively influenced by implementing ESG practices.

Pepsi can be a good example which proves the theory. What led Pepsi to the stock prices increase? It was the company’s action aimed at water conservation, which brought positive results for both the firm and society. Thanks to the involvement in one of the social issues, Pepsi saved more than $80 million in years 2001-2015.

How about investable SRI funds?

Morgan Stanley conducted a study in 2015 which showed that most of the kinds of sustainable equity mutual funds are overrepresented in the highest quartiles of returns and in the lowest quartiles of volatility. When it comes to the question about some short-term variance between SRI indices and non SRI indices performance, it finds the explanation in the fact that sector allocation of some SRI indices is different when compared to the parent index. It is mostly seen in the cases of those which exclude whole sectors and industries. As it is with KLD 400 Social Index, it is overweight information technology by 6 percent and by 4,6 percent it is underweight financials.

In consequence, discrepancies come out when the two sectors show some performance differentials. Many ESG portfolios experienced huge outperformance in 2015 and then, in 2016 they were systematically going down. What can be the reason of such a scenario? It can be the fact that plenty of ESG portfolios turn out to be underweight energy. On the other hand, since generally ESG practices have a positive impact on businesses, in the long run, ESG criteria bring higher and higher returns.

You can be a Socially Responsible Investor!

Nowadays, people are more and more aware of the current world’s problems and they appreciate the initiatives which work to solve them and have a good impact on the society. The world’s wellbeing has become our common interest. In such circumstances, also investing turns out to be a good way to show what we care about and what we want to improve. Now, not only the return in the shape of money is the investing motivator, but also the positive impact the investment can have on the world.

Socially Responsible Investing: what is it?

Socially Responsible Investing (SRI) – also known as “sustainable”, “ethical”, “green”, “socially conscious” or “mission” – is the kind of investing which is led by an investor’s belief that something has a good influence on the things he or she cares about. This type of investment can be done in 3 ways:

  1. By ESG investing. It means choosing those companies and governments to invest in, which have environmental, social or governance concerns similar to those of the investor.
  2. By shareholder advocacy. In this case socially responsible investor’s aim is to put pressure on a corporation so that it becomes more socially responsible in its activities. It can be done by dialogues, educating the public, engaging media or filling resolutions for shareholders’ vote.
  3. By community investing. This type of SRI is intensively growing in popularity. Here the capital goes to the communities (both in the U.S. and abroad) which are poorer and cannot usually count on the cooperation with the traditional lending institutions. This kind of investing helps not only in the area of income and investment capital, but also provides community services
    like healthcare or education.

SRI means investing in stocks or bonds of those companies which perform, support or disapprove of certain actions. In order to check whether a company can be considered in the socially responsible investing there are three screening methods:

  1. The negative screen – this could be a fact that company consciously does not invest in a certain sector (for example tobacco).
  2. The positive screen – companies which are engaged in “green” actions (solar/wind power usage).
  3. The restricted screen – since corporations are often diversified, SRI fund managers utilize the restricted screen in filtration.

Investors have proved to be sensitive to the social problems as the popularity of the Socially Responsible Investing has grown by 22% in the last 2 years. If you decide to invest in SRI you have a few options to choose between. The most common are mutual funds. Parnassus, GuideStone Funds, and Calvert are the biggest fund companies. Also Exchange Traded Funds have recently appeared in SRI format and apart from this, you can check Powershares or iShares too. The important thing is to have some theoretical knowledge before investing. One of the sources of some information is surely the internet, there are also a few useful books in the topic, for example “The Complete Idiot’s Guide to Socially Responsible Investing” or “Socially Responsible Investing for Dummies”. But if you definitely do not feel confident enough to do it on your own, you can ask an advisor for a necessary help.