Socially responsible investing grows up

There also can be areas where innovative leadership is scarce such as energy and oil. Energy companies are huge drivers of returns in conventional portfolios, but oil companies engage in opaque business practices and can cause devastating environmental disasters such as the Deepwater Horizon oil spill in 2010. That's a conundrum for concerned investors who just want to be able to retire someday. But there are options for SRI funds and individuals.

"You definitely have to be more discerning. They're in a very dangerous business. There are physical risks and geopolitical risks and explosive risks. Can we find companies to invest in there? Absolutely, yes," Gorte says.

The dollars and sense of SRI

The intangible rewards of being a do-gooder are a priority for SRI-oriented managers, but returns are equally so. Recent research has found that investing in companies with solid ratings in environmental, social and governance areas actually can be as good as or better for your bottom line than conventional investing.

"The vast majority of literature shows one of two things: one, that those funds perform comparably to non-ESG funds. The other is that they outperform. There are a tiny number of studies that show underperformance," Gorte says.

Jon Quigley, a managing partner and investment manager at Advanced Investment Partners in Safety Harbor, Fla., conducted a study into the extent to which ESG criteria limit portfolio diversity and returns.

First, they eliminated 6 percent to 8 percent of the Standard & Poor's 500 index from their investment portfolio by restricting companies that derived more than 5 percent of their revenue from alcohol and gaming, and from military and defense, or companies that did business with Sudan, a country known for acts of genocide.

Next, they used a data provider that ranks companies on environmental, social and governance criteria to further refine their portfolio.

"We restricted investments in companies that scored in the bottom 20 percent by their ESG rating, and we found that eliminated 6 percent to 8 percent of the S&P 500. If you combine the two, you'd eliminate about 10 percent to 12 percent because there are some overlaps in those restrictions," Quigley says.

The end result left 450 stocks.

It turned out that simply by applying the ESG criteria, the investment portfolio saw a little bit of outperformance.

That's not always the case. For example, investors interested in avoiding tobacco stocks can miss out on some unique circumstances in which those particular stocks do well.

"If you look at the fall or late summer of 2011, investors became very risk-averse, and a group of stocks, like tobacco stocks, that pay a very high dividend yield outperformed the market. If you had restricted investments in those companies, you would have underperformed the S&P 500," Quigley says.

Impactful on the bottom line

For many investors, making the world a better place is not on the agenda when searching for investments. But maybe it should be.

Companies governed in a more socially responsible manner than competitors tend to be more profitable.

"Typically, you would see 20 percent to 30 percent less volatility for companies that rate strongly along the environment, social and governance lines versus those that score poorly," Quigley says.

Less volatility means fewer lawsuits and fewer front-page scandals or disasters. That can only be good for investors.


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