By Dave DeWitte
Socially responsible investing has become a bigger part of the product and marketing mix in the Corridor’s investment community.
Formally known as sustainable, responsible and impact (SRI) investing, it is a discipline that weighs environmental, social and corporate governance (ESG) criteria in investment choices to generate competitive long-term returns and positive social impact.
SRI investments increased 76 percent from the start of 2012 to the start of 2014, and now account for more than $6.57 trillion in assets under management, according to the 2014 biennial survey of the U.S. SIF Foundation.
Investment adviser Suresh Basnet of Voya Financial in Cedar Rapids has placed SRI investing front and center in his client relationships.
“We go through a process before we recommend anything,” Mr. Basnet said. “We ask about their individual values through a questionnaire and also have a deep conversation to understand what is important to them. Then we have developed a rigorous process over the years of how we invest in the things they believe in, and we facilitate that.”
When socially responsible investing funds were first hitting the market more than 30 years ago, they had a reputation for producing returns that underperformed the market. Some investment advisers joked that SRI funds were the surest way to feel good about getting a below-average return on an investment.
That’s not true any more. Mr. Basnet says. He has researched the performance of SRI investments using the Russell 1000 stock index as a benchmark, and found the risk-weighted returns are equivalent to their peers that do not screen for socially responsible factors.
“If the return was equally good on a risk-adjusted basis, why would you not invest in socially responsible investment that is good for your conscience and good for your portfolio?” he asked.
Socially responsible investing has long been a part of the client discussion for Jeremy James, a certified financial planner and co-branch manager of James Investment Group Inc. in Iowa City.
“Iowa City is a very socially responsible community, so we tend to feel it [SRI investing] is geared more toward the community,” Mr. James said. The high level of education, and to some extent, the financial security of investors in the community, make them more inclined to exercise their social values through investing, he said.
Investment advisers use a variety of screening tools to filter out funds investing in companies that do things that conflict with their clients’ values. Tools are also available to help clients filter individual stocks for SRI factors, and align them with clients’ risk tolerance and performance expectations, Mr. James said.
The screens have grown so detailed that it’s now possible to screen for everything from so-called “Bible Belt” values, such as opposition to alcohol, gambling and tobacco, to companies that provide equally for same-sex couples in their benefit packages.
Jeffrey Johnston, president of Premiere Investments of Iowa in Cedar Rapids, is not a dyed-in-the-wool SRI investment advocate, although he always asks clients if there are any investment sectors they object to when he helps them plan an investment strategy. Most of them have none, he said.
Mr. Johnston has seen a noticeable increase in the emphasis on social responsibility in the marketing of investment products. He says there are plusses and minuses to the trend from an investor perspective.
“It makes it hard to make a decision,” Mr. Johnston said, adding that investors already face a baffling array of choices. “I’m not sure having more choices is making people better investors.”
It is possible for investors to both make a good return and follow their principles, Mr. Johnston added, but “you’re limiting your investment options.”
Mr. Basnet believes there are plenty of choices available, and that screening technology helps identify them.
“Whether it’s pork or liquor or tobacco, you can screen for any of it,” he said. Screening tools even can filter out companies that profit from contraception, Mr. Basnet noted, for individuals whose religious beliefs oppose it.
SRI investing has helped fill a gap in the investor feedback loop that developed when individual investing shifted from individual stocks to managed funds. When investors still picked their own stocks, they typically made calculated decisions that included what kind of activities the companies pursued for profit and corporate governance. If investors didn’t dislike a practice enough to sell the stock, they could sometimes use annual shareholder proxy votes to express their views.
When mutual funds became the preferred way for individuals to invest, investors’ values didn’t translate into the market as well. Fund managers had a strong motivation to generate the highest returns possible with limited concern for investors’ social attitudes on things like sustainability, treatment of employees or socially damaging consequences of their products. Many investors had little awareness of the kinds of companies in which their mutual funds invested.
Mr. Basnet said most SRI funds and screening tools do not entirely cross off publicly traded companies as investments if 90 percent or more of their activities meet the screening factor. Instead, he said SRI fund managers urge boards and senior leadership to wean the company away from the practice that is screened.
If the public company doesn’t respond to an SRI fund’s pressure to change, Mr. Basnet said the fund typically sells its investment within a few years.
The number and types of factors screened for continues to increase and change. Climate change, investment in Sudan and corporate disclosure of political campaign contributions were recent areas of growing social investing interest, according to the U.S. SIF Foundation’s survey.
Expense ratios, along with returns, influence the long-term financial performance of any mutual fund. Although some SRI funds have higher-than-average expense ratios, Mr. James and Mr. Basnet agreed that as a group, their expense ratios are no higher than other funds.
Investment advisers play a key role in the transformation to SRI investing, Mr. Basnet said, because many investors don’t know about the available SRI options until they are told.
“In the long run, it will be cheaper for companies to raise money in the markets through socially responsible investors,” Mr. Basnet said. He believes socially responsible companies will also generate better long-term returns by having fewer ethical lapses that produce negative consequences, and higher employee morale.