What Are 'Socially Responsible' Funds and How Do They Stack Up?
These players aim to balance your values with your investment goals.
You don't have to check your values at the door when investing in the market. An increasing number of investors are choosing to put their money to work in companies that not only have a profitable future, but also reflect their values, like those committed to environmental sustainability or ones that give back to the community. But this isn't charity; it is Socially or Sustainable and Responsible Investing (or SRI), and investors still expect and seek a strong return on their money – just one that balances their values with their investment goals.
The Rise of the SRI Fund
The first SRI fund of its kind started in the early 1990s with very few assets. But at the end of 2010, there were over 250 SRI-focused funds for investors to choose from. Funds earmarked for SRI investments now make up around 12%, or $3 trillion, out of the $25.2 trillion invested in the market today, according to The Forum for Sustainable and Responsible Investment (US SIF), a trade group representing SRI funds.
Inside the funds, which are managed by professional money managers, are a collection of companies and investments that comply with a certain SRI cause. They usually follow some sort of environmental, social or corporate governance theme, which are collectively known as ESG issues.
Several of the large money managers offer several SRI products for their clients, ranging from simple passive index funds that track large or small SRI compliant companies, to actively managed funds that invest in companies focused on one of the three main ESG themes. Investors can also put their money in one of a number of exchange traded funds (or ETFs) that track SRI compliant companies.
What Does It Mean to Be "SRI Compliant?"
The large funds may be a bit too broad for many investors; money managers screen and add or eliminate companies that normally do not comply with the general idea of what makes up an SRI company, but the values held by people aren't usually that simple.
In general, money managers choose to avoid adding companies that deal in things that kill (defense and weapons, landmines and cluster munitions), things that are vices or sins (gambling, pornography, usury, tobacco, and alcohol), and very controversial topics (abortion, contraceptives, animal testing, genetic engineering, stem cell research, and nuclear power).
They also avoid investing in companies that do business with, or are domiciled in, "rouge" nations like Iran, North Korea, Sudan, Myanmar (Burma), Cuba, and Syria. The screening process varies by money manager so be sure to find out all the information when choosing to invest in a SRI-focused fund. One way to find out is to use this handy chart from US SIF.
How SRI Funds Stack Up
So how do these "feel-good" investments actually stack up with the broader market? Well, it's hard to say, given how variegated the funds are based on their various themes, but as a group, they tend to track the S&P 500 index pretty well. There are more than 20 studies that show SRI funds perform basically on par with non-SRI funds. One can review the studies at www.sristudies.org, which is a collection of all the major academic studies on SRI investing.
But some SRI themes have been hard hit lately, especially those focusing on alternative energy. Weak natural gas prices and the reduction of government subsidies for alternative energy companies have obliterated funds that focus on wind, solar, and geothermal energy start-ups. For example, the Calvert Global Alternative Energy Fund A (CGAEX), which invests in wind and solar companies, was down 33% last year. You can review all SRI fund performance on the US SIF website.
Editor's Note: This article by Cyrus Sanati was originally published on MintLife.
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