We’ve addressed socially responsible investing (SRI) on environmental, social, and governance (ESG) criteria before. In May 2018, we wrote an article about what socially responsible investing is and how it functions on a technical level. Then, in the Spring 2020 issue of Confero, focusing on Human Capital, #30 my colleague Chuck Privitera wrote an article about the history and recent innovations (impact investing, triple bottom line) in the space and how it employers can be used to engage new talent.
Now, in 2020, the conversation around socially responsible investing has changed for a few reasons. First, there have been a number of hardships – including fires across the Pacific Northwest and a growing call for equal standards across race and class – which have come to the forefront of public attention in 2020. Second, there has been a real opportunity for performance distinction as the correlations between different investment classes broke down throughout the year. For example, socially responsible investment funds tend to have higher allocations in newer, modern, technology driven companies which have dominated the stock market rally of the past 6 months. Moreover, SRI funds tend to avoid fossil-fuel companies – which were hammered in the COVID crash as energy requirements for transportation fell due to sustained diminished public mobility. The practical upshot of which is that SRI funds have often soundly beaten their counterparts.
We’re glad SRI funds are having a moment in the sun. Socially responsible investment funds are often an appropriate choice in retirement plan lineups and charitable organization’s asset allocation. Institutional clients may use SRI products in a fair and suitable way. However, we just want to give our readers one warning going forward: the fiduciary rule towards investments still applies. Investment managers must be evaluated on a level playing field, whether their products utilize SRI methodologies or not. SRI funds are not exempt from the primary duty a fiduciary has to the beneficiaries of a retirement plan or charitable organization’s goals. In other words, it doesn’t matter how “nice” a fund is trying to be, it still has to work for the benefit of the investors.