Socially Responsible Investing (SRI) is an approach that looks beyond just financial returns when evaluating an investment, and also considers social, environmental, or other ethical concerns. It can mean vastly different things to different investors.
If you are Catholic it might mean avoiding Johnson & Jonson (ticker: JNJ) because they manufacture various forms of birth control like Ortho Evra, or Church & Dwight (ticker: CHD) because in addition to Arm & Hammer baking soda they also make Trojan condoms.
If you are a pacifist you probably don’t want to invest in Smith & Wesson (ticker: SWHC) or in Raytheon (ticker: RTN), maker of the kick-ass Tomahawk missile.
Greenpeace advocates might steer clear of oil companies like Exxon Mobil (ticker: XOM), coal mining stocks like Peabody Energy (ticker: BTU), and nuclear power plant operators like Exelon (ticker: EXC).
Squares and hospital endowments often exclude alcohol and tobacco stocks like Guinness brewer and Johnnie Walker distiller Diageo (ticker: DEO) or Marlboro roller Altria (ticker: MO).
Prudes will certainly want to avoid strip-club operator RCI Hospitality Holdings (ticker: RICK) and casino stocks like Las Vegas Sands (ticker: LVS).
Some SRI strategies go beyond these basic screens to look for companies with good governance and ethical labor practices. Apple (ticker: AAPL) was kicked out of many SRI funds in the aftermath of a number of media reports that drew attention to the poor labor conditions of workers at Foxconn factories in China where Apple products were made. These included 14 suicides by workers in 2010 and the May 13th, 2011 explosion at a Chengdu plant.
Others like to invest in companies with strong philanthropic records. Target (ticker: TGT), or the Tau Gamma Tau sorority as I affectionately began calling their corporate headquarters when I lived of Minneapolis (seriously, they mostly hire attractive women), donates around 5% of its pre-tax operating profit to charity. That amounted to $223,593,122 in cash and products in 2013. Looked at in a criticizing way, that was about $0.35 per share that could’ve been paid out to shareholders instead.
Honestly, though, Target does a lot of great things including some stuff you might never think of. For example, they run two forensic crime labs and 30% of their caseload is pro bono work on violent felony crimes for law enforcement agencies. They also have what they call their Corporate Command Center (C3) in Minneapolis, which looks something like the CTU headquarters on the TV series 24 and monitors severe weather and other events around the world so they can route critical supplies ahead of a disaster and be prepared with a relief response.
Sometimes one screen will eliminate an otherwise great company. Starbucks (ticker: SBUX) has long been a darling of the SRI community. It is the poster-child for socially and environmentally conscious companies with ethical governance and labor practices. However, in 2005 when the company launched a Starbucks-branded liqueur with Jim Beam, they were promptly removed from the PAX World family of Christian-values-based funds.
Some SRI screens are good, particularly those involving ethical corporate governance and labor practices, but whenever you add too many restrictions to your investment portfolio you are inevitably going to to be screening out some high performing stocks. SRI portfolios tend to be light on energy and heavy on tech, and they also tend to have a smaller market cap than comparable non-SRI benchmarks.
Additionally screening for ethical, social, and environmental criteria is not always easy. It requires a lot of digging around and the additional research is going to be either more time consuming if you do it yourself, or more expensive if you invest through a mutual fund or ETF.
The performance hasn’t been all bad for SRI funds, but it hasn’t been good either. The $2.9 billion Calvert Equity Fund (ticker: CSIEX) is one of the oldest existing SRI funds having been around since 1987. They’ve done well over the past ten and 15-year periods, but they’ve underperformed the S&P 500 by 1.55% per year over the past five-year period ending April 30, 2015. Things look much worse over the full life of the fund, having had their asses handed to them in the mid-to-late 90’s and never being able to claw back.
The Domini Social Equity Fund’s (ticker: DSEFX) 1.20% expense ratio has been hard to overcome and that fund has underperformed the S&P 500 over the past one, three, five, and ten-year periods, and by an average of 1.25% per year over the 15-year period.
The less expensive iShares MSCI USA ESG Select (ticker: KLD) is a socially responsible ETF that has been around since January 24, 2005. It only costs 0.50% to invest in but has underperformed the S&P 500 seven out of its first nine full calendar years.
SRI investing might make you feel all warm and fuzzy inside, but your decision to invest or not invest in a stock doesn’t actually impact the financial performance of the company. Oil will continue to be drilled for, guns and bombs will be manufactured, women will have access to birth control, the beer will flow like wine, the dice will be rolled, and people will smoke ‘em if they’ve got ‘em.
SRI is more expensive to execute and significantly limits your investable universe. Wouldn’t you rather have broader potential for better returns? If it makes you feel better you can always donate your increased wealth to charity.
