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Does Socially Responsible Investing Mean Sacrificing Returns?
7 / 10 / 2017
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Interested in learning about Socially Responsible Investing returns? Great! We’re here to clear up some myths.  There’s a common misconception that socially responsible investing (investing to both maximize returns and exclude the corporations that go against your ethics) means sacrificing returns, but the data shows that’s actually a pretty obsolete notion. In the past, socially responsible investing returns were potentially lower because socially responsible investing was based on unsophisticated strategies (for example, taking a scalpel approach and only cutting out “bad” industries) may have resulted in poor returns. In recent years technology has allowed for automated, algorithmic investing options like OpenInvest to greatly improve the effectiveness of socially and environmentally oriented investments. In short, we have become much more thoughtful and exact, becoming more popular in the process, especially as values-driven Millennials get older and wealthier.

Nowadays, it is possible to invest with your heart and invest smart at the same time.

 

socially responsible investing

OpenInvest users get real time updates about not only their portfolio performance, but also their direct impact on their causes as well.

What does that mean?

You can invest in the causes you care about with the same long-term potential for risk and reward as standard investments. As more data and research around responsible investing has become available – along with a rise in the popularity of value investing – studies indicate that ESG (environmental, social, and governance, a common acronym for responsible investing variables) investing isn’t just investing with your values, it can actually be smarter investing.

For example, in 2015, Deutsche Asset & Wealth Management conducted an analysis that aggregated evidence from more than 2000 empirical studies on ESG variables and financial performance. They found a positive correlation between ESG performance and overall company financial performance in the vast majority of cases.1

And an analysis by Arabesque Partners found that ESG practices have historically resulted in better long-term operational performance and positive stock price performance.2 And this makes sense. A company that invests in its employees, considers long-term opportunities and doesn’t risk lawsuits, boycotts or public outcry is a sensible long term investment.

Josh Levin, CSO of OpenInvest says, “Many people commonly assume that you need to sacrifice returns to invest with your values. Any advisor that believes this either is unaware of historical and current trends or lacks the sophisticated modern tools to achieve this level of customization.”

Historical Performance

Historically, research indicates that socially responsible investing returns track market performance and in many cases can potentially perform even better than the market.

The oldest US stock index using ESG metrics – the Domini Social Index (DSI)/MSCI KLD Social 400 Index- has actually outperformed both the S&P 500 and the Russell 3000 for 25 years.*

And robo advisors, like OpenInvest, work with you to make sure your asset allocation is optimal, based on your risk level and financial goals.

What does this mean for you? Long term historical data and benchmark comparisons suggest that there is no significant performance penalty by investing responsibly.**

What About Diversification Constraints?

Some critics argue that ESG investing limits your ability to spread risk and create a fully diversified portfolio.

At OpenInvest that simply is not true. Our average investor is spread across 60 individual companies and a myriad of industries, none of which go against their values.

While the process of diversification means investing in a large bundle of companies to minimize risk, ESG investing does mean your investment universe is constrained to the point of harming your portfolio. Your investment universe really depends on your investment strategy.

Our investment approach still gives you exposure to most industries and sectors, while ensuring that the quality of the investment universe is up to par.

Unlike other robo advisors, we can create fully customized portfolios for every customer, ensuring that financial and social goals are at the heart of your investment decisions.

To sum it all up: with modern investment strategies and new investment tools that can provide greater customization, there’s no reason why you shouldn’t be investing in the companies you believe in. Get started today with OpenInvest!

Need more info? We’d love to chat with you about any questions or concern you have about SRI or investing in general. Let’s chat. You can email us 24/7 at support@openinvest.co or call us during normal business hours via 1-855-466-6545

Why aren't you investing with your values? Sign Up

Sources:

1. http://www.tandfonline.com/doi/full/10.1080/20430795.2015.1118917
2. “From the Stockholder to the Stakeholder: How Sustainably Can Drive Financial Outperformance”, Arabesque Partners

*Direct comparisons between indices are not without limitations. Indices may track different market segments and include a number of different securities, including options, derivative instruments, and fixed income investments.  Additionally, different market conditions may have material impacts on index performance where indices track different market segments.  Indices may be unmanaged and unweighted and may not include the deduction of advisory fees or expenses.
**Historical performance is no guarantee of future returns. Any investment strategy carries with it a risk of partial or total loss of the capital deployed.

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