Do socially responsible investments earn less?

June 7, 2008 2:53 PM

Do socially-responsible mutual funds perform better or worse than similar non-screened funds?

I haven't been able to find a recent objective report on the relative performance of socially-responsible mutual funds compared to mutual funds in similar sectors without social screens. Could anyone point me to such a report?

I understand that the term "socially responsible" is loaded. For my purposes, I'm just interested in the relative performance of funds that use this term, not whether they are really socially responsible.

posted by espertus to work & money (12 comments total)

I've seen reports that go both ways, and I can't find a single "objective" source to lead you to. The other component to consider, and it's one issue that most reports agree on, is that SRI funds, because of the research and management necessary, typically have higher fees than non-SRI funds. It can add up substantially over time, lowering the return investors get, if not the actual performance of the fund.
posted by NotMyselfRightNow at 3:06 PM on June 7

I have Social Choice fund from CREF as one of the alternatives offered by the University for which I work and, compared to the regular stock, it always underperform.

I get a little bit cranky every quarter, but it is the way of life I have chosen.
posted by francesca too at 3:09 PM on June 7

According to my IA, 'socially responsible' (she lumps in 'green' and 'no defence industry' there) funds underperform compared to other funds. Anecdotal, she didn't provide research to back it up.
posted by dirtynumbangelboy at 3:52 PM on June 7

My wife, lovable little hippie that she is, chose to use Calvert Funds for her retirement savings. With the fees they charge (3%? - can't remember exactly) she's losing out no matter what the market does. She knows this.
posted by letitrain at 4:06 PM on June 7

If they performed better, they wouldn't have to market them as "socially responsible funds", they'd market them as "funds with excellent performance". The idea is that you're willing to sacrifice some returns in exchange for social responsibility.
posted by mendel at 4:12 PM on June 7

According to Investopedia, they do slightly better, but have higher fees.
posted by procrastination at 4:13 PM on June 7 [1 favorite]

If you've got specific funds in mind, MorningStar will provide comparative data to help you decide.

Otherwise the question is rather broad, and specific answers difficult to provide. A few things to keep in mind when comparing fund / investment performance: "ethical investment" as a business has only been around for about twenty years. This makes longer term comparisons difficult.

Also, what constitutes an "ethical" investment is problematic, as different fund managers will have different lists of acceptable businesses / enterprises to invest in. Regardless, there seem to be two key selection criteria for what constitutes an "ethical" fund or investment:

• Negative - companies involved in the (very, very lucrative) sin trade; alcohol, tobacco, firearms, porno, environmentally unfriendly activities (e.g., Brazilian deforestation) or perhaps animal testing.


• Positive - seeking out enterprises that actively work to improve the environment, recycle, education or produce energy in a sustainable manner.

To get some good background on this area, "The Asset Management Working Group of the United Nations Environment Programme Finance Initiative" have assembled a collection of academic and industry research on the topic of ethical investment [.pdf].

Havemann & Webster (1999) wrote an interesting paper addressing the question "Does Ethical Investment Pay?", with their key findings:

1. "On average, ethical funds have lower total risk than funds without ethical criteria."
2. "On average, ethical funds have lower returns, although there are a number of examples of out-performance, in some cases sustained over long periods."

But in general, you're not only going to suffer from increased screening costs - as noted by NotMyselfRightNow above, but also most ethical investment funds will take a pass on emerging markets, due to concerns about human rights and environmental issues. Finally, mendel makes a great point about marketing - keep that in mind.

Other resources of interest:

• The European Centre for Corporate Engagement


• The Sustainable Investment Research Platform

If you'd like to see ethical investment put into action - I did an FPP on Islamic Investment recently; a part of the global financial system that has seen rapid growth recently.

Hope this helps - happy returns!!
posted by Mutant at 4:23 PM on June 7 [3 favorites]

what constitutes an "ethical" fund or investment... Negative - companies involved in the (very, very lucrative) sin trade;

FWIW, Altria (aka Philip Morris aka big tobacco) was included in a lot of the ethical (specifically, sustainable) packages as of a couple years ago. Despite the fact they kill their customers in due time, they do have some pretty progressive policies vis a vis training farmers in, for example, intercropping. So, even the "obvious" things to exclude aren't so obvious.
posted by whatzit at 4:39 PM on June 7

I do remember this Slate article about the subject of Virtue Funds and Vice Funds. I think it is a bit outdated, though.
posted by Weebot at 12:19 AM on June 8

Also keep in mind that ethical funds will likely be higher risk due to the fact that they may hold more smaller companies (as larger companies may not meet all the criteria) and they will have less diversification as they will not be able to hold some of the largest sectors such as oil, tobacco, mining, livestock and commodities - as well as emerging markets as Mutant mentioned. Many of these (e.g. commodities, emerging markets) have been the real outperformers recently, so ethical funds which don't invest in them will be missing out.

Also, as whazit pointed out, it is very difficult construct a fund which meets all ethical criterion. A lot of ethical funds also include banks, whose social responsibility is open to interpretation, so make sure you are aware of how the fund chooses companies and that it is a policy you can agree with.
posted by triggerfinger at 3:14 AM on June 8

Bear in mind that there are crappy socially responsible funds the same way there are crappy conventional funds. I don't know that you can make a blanket statement about any of them- it's all fund by fund.
posted by small_ruminant at 8:46 AM on June 8

Addressing triggerfinger's comments: there are quite a few large cap SRI funds, and a handful of new emerging markets funds, but you're absolutely correct about there being major gaps by sector. (Oil, defense, mining, commodities in general, and prisons spring to mind, certainly. I have no idea about livestock.)

Also, depending on which direction you lean, there is religious SRI, too, which these days is more often called "values investing." Some of those funds are single issue funds- they might only screen out abortion, for instance- but some are pretty similar to the lefty version of SRI, with a few extra screens. Environment screening in that context is called creation care, though- NOT "green".
posted by small_ruminant at 8:56 AM on June 8