Socially Responsible Investing Pt. 3

Socially Responsible Investing: Do You Have to Sacrifice Performance?

There is an old adage that a person would have to sacrifice performance if they were interested in
investing in socially responsible funds. Is that the case? Do people have to make a choice between
increasing the performance of their accounts and investing in companies that support their values?

At the moment, socially responsible funds make up 11% of funds/investments in the market today and
most of these funds are relatively new. As a result, we do have to take the data with a grain of salt, and
we have to remember that past performance doesn’t guarantee future returns. Let’s take a look at what
the research is showing us.

What do the recent numbers say?

Morningstar in April of 2020, conducted a report comparing ESG funds to their traditional counter parts
based on their performance in 2019, a three year look back and a five year look back. Their report
focuses on how funds finished from a performance standpoint between their peers. In 2019,
Morningstar found that 35% of ESG funds finished in the top quartile of performance amongst their
peers and almost two thirds finished in the top two quartiles. The trend of high performance continues
when we look at three year and five year time frames. 67% of funds finished in the top half of over a
three year frame and 64% of ESG funds finished in the top half over the past five years. In English, a
higher percentage of ESG funds finished with better returns compared to traditional funds.

In 2019, 13 Large Cap ESG funds outperformed the S&P 500 Index and 12 ESG funds outperformed the
MSCI EAFE index. A common explanation for ESG fund performance in 2019 is their underweight of
energy and their overweight of technology. When you look at the average holdings of ESG funds, you
find that energy is underweight by 2%, but technology is actually underweight as well (23.9% vs 24.2%).
Overall, the average holdings do track closely to their respective benchmarks.

The International Monetary Fund (IMF) ran a report on sustainable investing’s performance compared
to traditional investment options. Their findings did not show any conclusive evidence showing under
performance or over performance of ESG funds versus traditional investments. IMF’s study looks back
farther than Morningstar’s report. IMF noted a significant shift with socially responsible funds in 2012.
IMF stated that socially responsible funds moved from a primarily a screen out approach to an ESG
investment philosophy.

What does this mean for you?

Non-conclusive findings are not usually good news. If you are evaluating whether or not socially
responsible investing is right for you, then this could be good news. In the past, you may have had to
make a choice of investing based on your values or obtaining higher investment performance. If there is
no difference between performance of ESG funds and non ESG funds, then you don’t have to choose.
You can simply choose to invest based on your values.

Sources:
1 https://www.envestnet.com/files/Campaigns/PMC-SRI-TrustedAdvisor/images/PMC-SRI-0914.pdf

2 https://www.imf.org/en/Publications/GFSR/Issues/2019/10/01/global-financial-stability-reportoctober-2019
Derek Mazzarella, CFP® is an LPL Financial Advisor with Gateway Financial Partners based in Glastonbury
Connecticut.

Disclosure: All investing involves risk including the possible loss of principal. No strategy assures success
or protects against loss.