Positive Social Impact

Why socially responsible index investing is good for your portfolio as well as the world.

Positive Social Impact

A growing number of investors care about doing good in the world – or so it seems when you consider the explosive growth of socially responsible investing (SRI).

According to a recent study, SRI investments in the US rose more than 75% between 2012 and 2014, and now account for over 6.5 trillion US dollars in assets under management. This is impressive for an investment approach that seems more concerned with social or environmental causes than portfolio returns. 

Beyond the numbers

In SRI, investors look beyond financials to evaluate companies based on a set of standards addressing environmental, social and corporate governance issues. These are known as the ESG criteria.

Until recently, SRI has been considered a type of niche investing. While doing good, the feeling was that ESG screening would lead to inferior returns – for instance by avoiding investments in profitable businesses which do not meet the standards.

This is changing. Noble in themselves, ESG criteria are increasingly being recognized as blueprints for sound, sustainable business practice. Those companies which score high on ESG due diligence should, the thinking goes, be well run, sustainable companies in their own right, and hence solid investments. 

A strong case

As we look at in detail in a later article, there is growing evidence that this is indeed the case. That said, SRI is not necessarily easy to do. Screening requires time, effort and expertise. 

For this reason, many SRI investors turn to funds, relying on the fund manager, supported by ESG experts, to assume this role. The situation is similar in the world of index investing, where the index methodology prescribes strict rules for selecting companies in view of their ESG rankings. 

ETFs based on SRI indices provide investors a straightforward way to reflect SRI principles in their investment portfolios. Along with the other advantages of ETFs, such as flexibility, transparency and low cost, this adds the benefit of supporting responsible companies – and so making a positive social impact.