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How Well Has Socially Responsible Investing Performed?

Socially responsible investing (SRI) holds some emotional appeal for many investors. Having alignment between your investments and your personal values sounds good, but it is natural to ask if there’s a downside to SRI. Do you have to accept poor returns from your investments if you want them to be socially responsible? Is SRI riskier than non-SRI approaches? Our research has found otherwise: SRI has tended to perform very similarly and with very similar levels of risk to non-SRI approaches.

What counts as SRI?

As you may know, there is no single definition of SRI. For research purposes, we looked at mutual funds that Morningstar flags as “Sustainable Investment – Overall” as our SRI universe. This was a group of 358 unique funds across a range of categories, with most of the funds in U.S. Equity and International Equity asset classes. 

In this group, Morningstar includes funds with a variety of approaches, but excludes funds it sees as “ESG Consideration” only. This means that it aims to include only those funds for which SRI principles are an important part of the investment process, not funds that mention SRI issues in their paperwork but that don’t meaningfully rely on SRI.

SRI funds have ranked near the middle of their peer groups

One way to measure the performance of SRI funds is to see how their performance ranks relative to funds in the same Morningstar category. A fund that ranks in the 1st percentile for a three-year period has done better than all of the other funds like it over that time, while a fund that ranks in the 100th percentile has done the worst of all of its peers. If SRI funds were systematically at a disadvantage thanks to sticking to SRI principles, they would rank between the 50th and 100th percentiles time after time.

SRI funds have consistently ranked around the middle of their peer groups

Source: Charles Schwab Investment Advisory, Morningstar Direct as of 4/30/2020. Past performance is no guarantee of future results.

Instead, what you can see from the chart above is that on an overall basis and across the three largest asset classes, SRI funds have consistently ranked around the middle of their peer groups – sometimes a bit below the middle, often a bit above, but never dramatically worse. If SRI funds were at a natural disadvantage, these lines would be toward the bottom of the chart. If anything, SRI funds have done a bit better than average overall (though this isn’t a strong effect).

SRI funds have had about the same amount of risk as their peers

When it comes to the risk of an investment portfolio like a mutual fund, one common measure is the standard deviation of returns. The higher the standard deviation, the bigger the swings the fund has experienced, both up and down. Stocks, for instance, tend to have much higher standard deviations than bonds.

The table below shows standard deviations for SRI funds compared to their Morningstar category peers for the 10 categories that have the most SRI assets.

Standard deviation of SRI funds relative to Morningstar category averages

Note: Differences less than -0.5% are colored green. Differences greater than 0.5% are colored red.
Charles Schwab Investment Advisory, Morningstar Direct as of 3/31/2020. Past performance is no guarantee of future results. The example is provided for illustrative purposes only.

While there are a lot of numbers in the table above, the important numbers are the “Difference” rows in each section. If the difference is negative, it means the SRI funds in the category had a lower standard deviation—that is, less risk—than the peer group. A positive difference means that SRI funds were riskier than peers. If the difference is larger than half a percent, it is colored green (when SRI funds had lower risk) or red (when SRI funds had higher risk). There’s very little red on the table, which means that over the past one-, three-, five- and 10-year periods, there wasn’t any strong evidence for SRI funds being riskier than other funds.

SRI funds have performed fine during market drops

Many investors care first and foremost about how a fund will do when times get hard and the market drops in value. So, how have SRI funds held up when stock markets have dropped in value?

The table below shows the performance of SRI funds compared to their Morningstar category averages during the last six corrections (a drop of 10% in the stock market) and two bear markets (a drop of more than 20%). The most important rows here again are the differences, with green numbers showing times and categories where SRI funds held up better than their peers by at least half a percent, and red numbers showing where SRI funds held up worse by at least half a percent.

Note: Differences greater than 0.5% are colored green. Differences less than -0.5% are colored red.
Charles Schwab Investment Advisory, Morningstar Direct as of 3/31/2020. Past performance is no guarantee of future results. The example is provided for illustrative purposes only. The example does not assume that dividends and interest have been reinvested, and does not reflect the effects of taxes or fees.

As with the risk table, you can once again see more green than red, indicating that SRI funds dropped less than their peers more frequently than they dropped farther. The two actual bear markets in the table—the first column, showing the 2020 coronavirus pandemic, and the last column, showing the 2008 great financial crisis—have no red numbers at all. This doesn’t mean that SRI protected investors from losses during market declines; in fact, SRI funds still fell substantially in value during those times. But they didn’t have any pattern of falling any more than other funds, and they often fell less.

Expect SRI funds as a whole to be similar to other funds

While the results from these time periods have been generally encouraging for SRI funds as a whole, we don’t see convincing evidence that SRI funds are reliably better than non-SRI funds. The differences have tended to be small, and even when the differences have been good for SRI funds, there were always some individual funds that did worse. The important lesson here is that there is no evidence that choosing SRI funds puts investors at any kind of disadvantage when it comes to risk or returns.

Bottom line: If the concept of socially responsible investing appeals to you, our research has found that you should not have to reduce your expectations when it comes to risk and return. SRI funds have done as well as other funds over time.

What You Can Do Next

Important Disclosures:

Investors should consider carefully information contained in the prospectus or, if available, the summary prospectus, including investment objectives, risks, charges, and expenses. You can request a prospectus by calling Schwab at 1-800-435-4000. Please read it carefully before investing.

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. 

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed. 

Past performance is no guarantee of future results and the opinions presented cannot be viewed as an indicator of future performance.

Standard deviation is a statistical measure that calculates the degree to which returns have fluctuated over a given time period. A higher standard deviation indicates a higher level of variability in returns.

Investing involves risk, including loss of principal. 

Fixed income securities are subject to increased loss of principal during periods of rising interest rates. Fixed income investments are subject to various other risks including changes in credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications and other factors. Lower rated securities are subject to greater credit risk, default risk, and liquidity risk.

International investments involve additional risks, which include differences in financial accounting standards, currency fluctuations, geopolitical risk, foreign taxes and regulations, and the potential for illiquid markets. Investing in emerging markets may accentuate these risks.

Small cap funds are subject to greater volatility than those in other asset categories.

Charles Schwab Investment Advisory, Inc. is an affiliate of Charles Schwab & Co., Inc.


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