Good News Regarding SRI Funds

The below excerpts are from a March 2008 Worth Magazine article (http://www.worth.com/Editorial/Wealth-Management/Investment-Risk-Management/Feature-Portfolios-With-Purpose-Print.asp).

I was interested to see the conclusion that SRI funds actually tend to outperform, although the difference is statistically insignificant (as much as most active managers suck at what they do, they might as well be socially responsible while they do it). Also of interest is that nearly 10% of high net worth money under professional management is now allocated to SRI investments. As this number grows I would expect it to result in more active fund managers challenging public companies to improve their CSR initiatives and in more companies implementing CSR programs to attract new purchases of their equity because -- apologies to Milton Friedman -- job #1 for management is not actually to maximize profits but to maximize shareholder value, and if CSR helps them do that then it is better for everybody.

"Growing interest from investors is prompting deeper and more sophisticated analyses of SRI’s effect on the bottom line. This, in turn, has undermined the conventional wisdom that SRI equals poor returns. Late last fall, the United Nations Environment Program and Mercer Consulting released a report of 20 academic studies overturning that old notion, with half of the studies correlating SRI with positive performance. Of the remaining 10 studies, seven reported that the effect was neutral, and the other three showed it as negative.

Among mutual funds, the academic research reveals that SRI funds slightly outperformed conventional funds on average returns, with a difference that was so small as to be statistically insignificant, according to Meir Statman, a finance professor at Santa Clara University in California. The key factor denting returns was the cost of the funds—not the incorporation of ESG concerns—which lends credence to the indexing approach that the Jubitz family favors. Meanwhile, the Domini 400 Social Index slightly outpaced the S&P 500 in the overall span from its debut in May 1990 to June 2006.

The recent proliferation of investment vehicles with socially responsible elements reflects a huge new wave of demand. Affluent individuals poured $17.3 billion into separately managed accounts with social screens in 2005, contributing to a tenfold leap in assets in these accounts since 1995, according to the Social Investment Forum. In North America, 6 percent of wealthy individuals requested social screens in 2006, allocating 8 percent of their portfolios to this strategy, according to Merrill Lynch/Capgemini’s 2007 World Wealth Report.

With 9.4 percent of the $24.4 trillion under professional management now allocated to SRI, money managers expect social and environmental concerns to play an ever-larger role in mainstream investment management, suggests research by Mercer cited in the Social Investment Forum’s report."