Does socially conscious investing mean leaving money on the table? Not anymore, proponents say

Most people don’t like to sacrifice any more than they must. In the financial field, this often has translated into skepticism of socially conscious investing.

Social investing policies, like beauty, are somewhat in the eye of the beholder, as any two people might not attach the same importance to the same issue. © Getty Images/iStockphoto Social investing policies, like beauty, are somewhat in the eye of the beholder, as any two people might not attach the same importance to the same issue.

For decades, the approach has struggled because of the perception that investors must give up some returns if they want to do good with their money. Investors will miss opportunities, the reasoning goes, if they avoid tobacco or alcohol stocks or turn a blind eye to weapons producers, gambling companies or big polluters.

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That assumption is facing more challenges today.

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The newer viewpoint holds that bad corporate citizens are more likely to attract lawsuits, draw regulatory fines, suffer from poor employee morale or face other issues that lead to a poor public image and possibly reduced profits. Conversely, more upstanding companies often are named as good places to work, have favorable environmental reputations and are popular with customers for these and other reasons.

Corporate-governance practices also factor into the mix. Shareholder-friendly companies are more likely to have independent boards of directors and have adopted checks and balances, such as splitting the CEO and chairman positions so that the same person doesn’t occupy both.

It all adds up to more attention paid to socially responsible investing, which also goes by terms including sustainable or impact investing or, more formally, investing based on ESG or environmental, social and governance policies.

“The investor landscape is changing because of the fact that we can’t ignore environmental, social and governance considerations anymore,” said Kunal Kapoor, CEO of investment researcher Morningstar.

Morningstar is devoting more of its attention to the social consequences of how businesses operate. As an example, Kapoor cited Beyond Meat Inc., a leader in developing plant-based burgers, sausages and the like.

“The assumption is they’re probably doing great” based on various social metrics such as avoiding inhumane treatment of animals, Kapoor said during a late-September Morningstar research conference.

But Beyond Meat’s farming practices, the environmental impact of the packaging materials it uses and a lack of disclosure about carbon emissions raise concerns about the company, he added.

Somewhat differing policies

Social investing policies, like beauty, are somewhat in the eye of the beholder, as any two people might not attach the same importance to the same issue. Investors thus can screen stocks on their own, or they can buy into various mutual funds and exchange-traded funds that do the analysis and stock selection for them.

Kapoor cited two funds that he feels do a good job of generating solid returns while also paying attention to ESG metrics: Brown Advisory Sustainable Growth and Parnassus Core Equity.

The Parnassus fund, for example, doesn’t invest in companies that generate more than 10% of their profits from alcohol, fossil fuels, gambling, nuclear power, tobacco or weapons. It also seeks out companies with good environmental practices and that treat their employees well, pursue diversity and practice other enlightened corporate-governance policies.

Proponents of social investing “actively use these investments to reinforce good practices and good corporate practices, and maybe in some cases promote positive change,” said Kristina Van Liew, managing director at Graystone Consulting and another speaker at the Morningstar conference. 

The policies also are catching on among endowment funds, nonprofit groups, foundations and other investment entities. “We’re seeing growing demand broadly for these types of strategies,” she said.

More buzz on impact investing

Internet conversations among investors and media articles are more focused on this topic than ever before, especially among women and younger adults, Kapoor said. But he also reported widespread public confusion about what ESG practices are all about.

In addition to a lack of consensus on what social, sustainable or ESG investing means, government regulators haven’t given much direction, and there’s no single, clear-cut strategy. You can be a growth or a value stock investor, for example, and hold tight to ESG principles. Even bond issuers are receiving more scrutiny for the types of projects they finance — whether a new mining operation, a solar-electric farm or whatever.

“As a result, investors have been left largely on their own to figure out the many facets of sustainable investing,” said Jon Hale, who oversees much research on the topic at Morningstar.

But at the core, the ESG, responsible or sustainable approach seeks to deliver competitive financial results while also paying attention to these and other broader societal issues, he added.

Competitive returns last year

While some forms of social or sustainable investing have been around for decades — such as efforts to divest South African mining stocks during the apartheid era — interest has swelled over the past five or so years.

Recent investment results are encouraging. In 2020, for example, 75% of ESG funds tracked by Morningstar finished in the top half of their respective investment categories, while just 6% fell into the bottom quartile. More index funds also are investing with social or sustainable objectives in mind, including those offered by groups including Vanguard, iShares, Fidelity and Calvert.

In short, the evolving thinking on socially-responsible or ESG funds isn’t that they are just about avoiding certain companies and sacrificing returns but also about pursuing attractive opportunities with upstanding businesses that follow favorable policies.

“It’s not (seen) as a zero-sum game anymore,” Kapoor said.

Reach the reporter at russ.wiles@arizonarepublic.com.

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This article originally appeared on Arizona Republic: Does socially conscious investing mean leaving money on the table? Not anymore, proponents say

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