Better Returns with SRI Investing

If you’ve stayed up on our posts over the past 5 years, you’ve likely noticed that one of the main themes is debunking the idea that you must sacrifice returns to invest sustainably and responsibly (SRI). We’ve presented numerous in-depth reports and research to our readers showing that this concept is unsupported, though it remains prevalent among most financial advisors. The recent selloff in March provides a unique snapshot of how SRI might actually help improve your investment returns, not just match the standard indexes.

Act Analytics is a platform that can be used to evaluate companies and mutual funds to determine how well they meet SRI criteria. One of the categories they use to determine a company’s ESG rating is a factor they call Health Opportunity. “A company with a high Health Opportunity score would have, for example: a detailed employee health-and-safety policy, an eye on health-and-safety issues throughout its supply chain, skills training, a career-development policy and/or a dedicated workplace health-and-safety team.” When they tested this score during the recent market downturn, specifically February 20 to March 18, they found that choosing stocks based on this factor would have outperformed by approximately 3% during the market downturn.

This is actually not too surprising when we compare the returns year-to-date of the S&P 500 ESG Index (Environmental/Social/Governance) to the standard S&P 500 Index. As of 9/4/2020 the ESG index has outperformed by nearly 2.5%. Of course this outperformance by the ESG index was helped significantly by the decline in oil prices -- which was influenced by more factors than just the pandemic.

Treatment of employees is another example of how ESG related company policies may have helped outperformance. Businesses offering flexible schedules and remote work options were once labeled as catering to Millennials. These same companies were able to make a smoother transition to the post-Covid world which may have allowed them to keep their doors open without any major disruptions.

ESG related investment inflows over the past 12 months may have helped performance as well, doubling total assets to more than 80 billion. Maybe investments are pouring in not only because investors are hoping to match their values with their portfolios, but also to boost their nest eggs!

Jack Schniepp is a CERTIFIED FINANCIAL PLANNER™ (CFP®, ChFC®) , financial advisor and the owner of Cascade Financial Strategies. CFS is a registered investment advisor licensed in Oregon, California, Washington, Arizona and Idaho. They specialize in socially responsible investing which integrates environmental, social, and corporate governance (ESG) criteria into portfolio construction.