Investing to make a social impact

An increasing number of people these days want to align their investments with their personal and social values. They worry, though, about whether the financial returns will be as good as other investments.

In reality, the returns on socially responsible investments can be better than other options.

Socially responsible investing (SRI) refers to investing with the goal of achieving both social and financial returns, giving investors an opportunity to make money and to make a difference in the world or support a cause at the same time. Investment firm MSCI ESG Research defines it more specifically as the consideration of environmental, social and governance (ESG) factors alongside financial factors in the investment decision-making process.

Admittedly, the definition of "socially responsible" can be different for each person. Some individuals want to focus on investing in companies with excellent environmental practices and others focus on social policies such as worker protection or community involvement.

Still others just want to exclude companies in industries such as weapons, tobacco, casinos or coal.

Each investor needs to decide then, what they mean by SRI and what personal values or preferences they will use in selecting their investments.

And while consumers may think that most investors don't consider ESG factors, SRI is actually growing quickly.

American funds that use ESG criteria to evaluate grew by 58 per cent to US$98 billion (S$130 billion) last year, investment research firm Morningstar reported.

Data from the Global Sustainable Investment Alliance, a collaboration of sustainable investment organisations around the world, showed that more than US$22 trillion is managed using responsible investment strategies.

RETURNS AND RISKS

Many people still feel that they have to choose between investment returns and their values. However, research has shown that socially responsible companies produce higher returns and have lower risks.

A study of more than 2,000 research projects by Deutsche Bank, for instance, found that the business case for ESG investing is empirically well-founded. The positive ESG impact appears stable over time regardless of region or asset class, such as emerging markets, corporate bonds, and green real estate.

Investment manager Pimco similarly said that sustainable investing makes good business sense because it can help mitigate risks and potentially improve the return profile of an investment portfolio.

And investment firm Pax found growing evidence that integrating ESG factors into investment analysis and portfolio construction offers investors potential long-term performance advantages.

Looking more specifically at mutual funds, financial services giant Morgan Stanley found that nearly two-thirds of sustainable equity mutual funds had higher returns and lower volatility compared to other funds. Moreover, it said numerous studies have found lower risk and outperformance for portfolios that integrated ESG factors alongside rigorous financial analysis.

MSCI emerging market (EM) ESG equity indices that take ESG into account, for example, outperformed the MSCI EM Index by 16 per cent over the past five years.

Making the difference even more concrete, a dated yet widely quoted Harvard study found that a US$1 investment in 1993 in a high sustainability portfolio would have grown to US$22.60 by 2010, while a low sustainability portfolio would have only reached US$15.40.

The reasons for that superior performance are straightforward. Companies that treat employees and customers well, reduce waste and follow other socially responsible practices can produce more attractive products, lower costs, benefit from more productive employees, and more — all of which is good for the bottom line and for investors.

WHERE TO PUT YOUR INVESTMENT

Making socially responsible investments has become easier for individual investors, whether you are picking stocks on your own or investing in ETFs (exchange-traded funds) and unit trusts.

The Singapore Exchange (SGX) recently mandated sustainability reporting from listed companies, requiring them to provide performance indicators and a board statement for a sustainability report, which you can use in your analysis.

By investing in companies that incorporate sound environmental and social practices, SGX stated, you are proactively endorsing companies that are investing in their future.

If you want to select companies individually, SGX suggests reading the chairman's and chief executive officer's statements, looking specifically in the report for information on sustainability governance, and checking whether the company applies Global Reporting Initiative (GRI) or industry-specific sustainability reporting guidelines.

You can use the same practices for shares in Singapore or other markets.

While it may be easier to identify companies that manufacture weapons or tobacco products, or that lend to coal companies, reading annual reports carefully to find out how the company operates and whether they apply ESG factors can enable you to make socially responsible investments.

If you want to invest in SRI ETFs or index funds, there are few if any options on the SGX.

An easy alternative, though, is to use a broker in Singapore to invest in socially responsible ETFs in the United States or another country.

For the US, you can use the ETF.com screener by selecting the "principles" tab on the website.

ETF.com writer Sumit Roy said that although socially responsible ETFs represent less than 1 per cent of the total value of ETFs, the number grew from 22 in 2016 to nearly 40 by 2017.

If you want your investment portfolio to reflect your personal values, then, SRI lets you choose companies with better social and environmental practices, and it can also produce better returns than other types of investments.