In the United States, the roots of socially responsible investing can be traced to the 18th century when religious groups began forbidding investments in companies with negative societal impacts, according to Investopedia. At the time, this meant avoiding investments in the slave trade, alcohol, gambling, and tobacco. However, in the 1970s and '80s, activists adopted the same practice to shun companies profiting from the Vietnam War and to protest South Africa's Apartheid. Today, the practice of removing a single industry or group of industries from a portfolio is known as "exclusionary screening".
However, SRI has come to mean more than simply removing certain types of businesses from a portfolio based on political or religious values. Today, Schwab's opinion is that "sustainable investing" assesses portfolio companies' environmental, social, and governance risks and opportunities, and determines how well each company is addressing risks relevant to its business.
From a risk and return perspective, SRI is generally neutral for investors, neither helping nor harming returns significantly (though certainly some SRI funds will outperform and others will underperform their non-SRI counterparts in any given time period). However, an SRI approach that narrowly focuses on a subset of industries (by excluding others) may have higher volatility than a more broadly diversified approach.
Schwab conducted tests based on data from Morningstar and found that as of 3/31/2020, SRI approaches, when compared to non-SRI approaches, had on average:
- More exposure to small companies
- More exposure to growth stocks (as opposed to value stocks)
- Similar average volatility
Note, however, that these are broad averages, and it is possible for any particular SRI fund to have different exposures than those reflected here. In addition, the differences found by The Schwab Center for Financial Research (SCFR) tended to be small. Overall, SRI approaches tend to have similar characteristics to non-SRI approaches.
Yes, the approaches to SRI vary widely. Morningstar groups these funds into four general types:
- ESG Consideration - Funds that are otherwise conventional that incorporate environmental, social, and governance (ESG) factors without orienting their entire investment process and outcomes around it.
- ESG Focus - Funds that broadly integrate SRI criteria throughout their investment processes.
- Impact/Thematic – Funds that invest with the intention of generating social and environmental impact alongside a financial return.
- Sustainable Sector – Funds that focus on "green economy" industries like renewable energy, energy efficiency, environmental services, water infrastructure, and green real estate.
Source: Morningstar Sustainable Funds U.S. Landscape Report: Record flows and strong fund performance in 2019.
The top five reasons why companies are excluded from SRI portfolios, based on data from US|SIF and data from Morningstar, are as follows.
US|SIF:
- Climate change / carbon
- Tobacco
- Conflict risk
- Human rights
- Transparency
Morningstar:
- Tobacco
- Alcohol
- Gambling
- Controversial weapons
- Small arms
Source: US|SIF Foundation, Report on US Sustainable, Responsible, and Impact Investment Trends 2018; Morningstar Direct data on mutual funds and ETFs by assets as of 9/30/2019.
US|SIF and Morningstar have very different categorization approaches for exclusionary factors, which leads to the different lists seen above.
Investors have several options when it comes to constructing SRI portfolios:
- Choosing a collection of SRI mutual funds, ETFs, or separately managed accounts (SMAs) that align with the investor's aims
- Buying individual stocks and bonds based on the investor’s own research into those securities that best represent the investor’s SRI goals
- Working with a financial advisor or consultant to construct a custom portfolio based on the investor’s SRI goals, or who can recommend funds or SMAs aligned with those goals.
There’s no one "right" approach to SRI investing. Talk to your Schwab representative or your Financial Consultant if you want to learn more about what approach fits your needs.
Schwab is committed to social responsibility through sustainable real estate practices, responsible workflows, and investment stewardship. Schwab discloses key corporate sustainability metrics around carbon emissions, energy and water use, and volume of environmentally favorable purchases.
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