Rick Welch: Dollars and Sense

              Socially Responsible Investing

The theme of using one’s money for the good of society dates back to the early days of life here in America.  As a young investor in the 1970’s, I learned that socially responsible investing involved the avoidance of the sin stocks, which were a grouping of companies in the alcohol, tobacco, gambling and defense industries. The implied social benefit then was to support only socially responsible companies at the expense of those in sinful industries.  The concept then and now is sound and leaves us with just one question to answer. As investors, will we have to sacrifice performance in order to invest with our conscience?

Today, investors can choose from over 500 mutual and exchange traded funds (with total assets over $1.0 trillion) if they would like to add a social responsibility component to their portfolios.  The focus now is not only on the exclusion of sin stocks, but, also on including companies that promote and adhere to high standards in environmental, social and governance (ESG) functions as a means of doing business. Accordingly, the MSCI KLD 400 Social Index (KLD) “is a capitalization weighted index of 400 US securities that provides exposure to companies with outstanding ESG ratings and excludes companies whose products have negative social or environmental impacts. Companies are chosen for inclusion in the index based on ESG performance, sector alignment and size representation.” Environmental categories often include climate change, natural resource use, water sustainability, reduced carbon emissions, global renewable energy solutions and waste management. Social categories include human rights, labor relations, product safety, community impact and workplace health, safety and diversification.  Governance categories include ethics, shareholder rights, executive compensation and public policy.

On the matter of investment returns, when viewed over 1-year, 3-year and 5-year periods, the performance of KLD is generally in line with that of the S&P 500. Is it really possible that an investment in an index comprised of socially responsible companies could provide the same type of investment return as the broader market?  Of course it is. May be the answer lies in the fact that companies with the highest ESG criteria score might also be the best run and most profitable companies. As author Alex Bryan wrote earlier this year for Morningstar.com, it is quite possible that “an expansive view of corporate social responsibility may also be consistent with long-term profit maximization.  Because a firm’s impact on the environment and social welfare can affect its brand, risks, and ability to attract and retain talent, pursuing social and environmental goals can promote sustainable and attractive profits over the long term. Companies that take a more holistic view toward corporate social responsibility may be less likely to take shortcuts to boost short-term results at the expense of long-term opportunities than their less socially conscious counterparts.”

The connection of investment returns and social impact is open to much debate.  Is it reasonable to expect that their future relationship can be mutually inclusive? It depends on who you ask. None other than famed investor and Berkshire Hathaway CEO Warren Buffett recently questioned the wisdom of chasing both profit and social good together when he stated “I think you should make the most money you can and then use that for whatever social or philanthropic goals that you may have.” 

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