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Investing According To Your Values Can Also Make You Money
"Such a definition allows for a lot of wiggle room, in particular the vague 'factors in' part. What portfolio manager would say that he doesn’t factor corporate governance into his thinking, for instance?"
ESG, SRI, sustainable investing or whatever you want to call. The term is way too ambiguous for me.
Ya, I like the idea, too. It used to be that the SRI funds just did not offer attractive enough profit for shareholders. I note that state of affairs is changing for the better. OK, but my own Soc. Resp. filters are a lot more stringent than any of them I've seen. So I'm not in them not because I don't support the concept. I just don't think they go far enough. Guns, alcohol, gambling and nuclear stuff is not enough. Seems they are willing to invest in the criminal scum Big Banks. No thanks, from where I sit. That's just one example.
If investments were truly socially responsible, then they wouldn't invest in anything related to capitalism. Therefore the only thing left to invest in is government. But no profits, dividends or capital gains there.
I believe Treasury bonds, savings bonds and municipal bonds are all investments in the government and have managed to generate returns for investors for many years.
@Maurice Yes, except reductive binary arguments--sustainable/unsustainable--are false childish ones. We live in a world of scales and spectrum and there are many shades of grey between sustainable and unsustainable. Last I heard muni bonds weren't used to support wars and revolutions. But by saying everything's unsustainable it rationalizes investing in everything (or nothing if you're on the other side of this childish argument) when some companies and governments are much worse or better than others.
Here's how the federal government spent the 2016 Federal Budget according to Investopedia: investopedia.com/updates/usa-national-debt/ What Goes into the Current National Debt?
As indicated above, debt is the net accumulation of budget deficits. It is important to look at the top expenses, as they constitute the major factors of national debt. The top expenses in the U.S. are identified as follows (based on the Federal Budget 2016 Total Outlay Figures):
Healthcare Programs (includes Medicare & Medicaid): A total of $1.1 trillion (USD) is allocated to healthcare benefit programs, which includes Medicare and Medicaid. Social Security Program/Pensions: Aimed at providing financial security to the retired, the total Social Security and other expenditures are $1 trillion. Defense Budget Expenses: The portion of national budget which is allocated for military related expenditures. Currently, $1.1 trillion is earmarked for the U.S. Defense Budget. Others: Transportation, veteran benefits, international affairs, education and training, etc. are also expenses the government has to take care of. Interestingly, the common public belief is that spending on international affairs consumes a lot of resources and expenses, but in truth, such expenditures lie within the lower rung in the list.
So even on the federal level it's not just wars. But you already knew that.
The funds tend to have higher ERs too..... It's a gimmick if you ask me.
I do not agree that the attempt is a gimmick. I think the holes is the net are way too big, that's all. It's a good thing, I think, to consider ethical criteria. In fact, I dunno how to invest and at the same time ignore ethical considerations. I dunno how to wall-off ethics from ANY decision that MATTERS for anything, including investing. Except that capitalism is the only game in town. Markets don't have a conscience. That's to be expected. When people don't have a conscience, don't we call that sociopathic? (And as we all know, what's legally permitted and what is ethical are sadly, very often two different things.) Trouble is, @LewisBraham is correct. Nothing is pure and 100% perfect. It's a messy world. At the same time, it is clear that there are investments which are patently and obviously much more evil, destructive and harmful--- to people and to the environment and whatever else.
It's all because of the outperformance of PRBLX. (NOT higher ER, btw, really.) But these kinds of things have been around for decades. A former neighbor / fellow coach of mine was head at Calvert, back when, IIRC. Not a performer, it turned out. At all.
>> @Maurice >> If investments were truly socially responsible, then they wouldn't invest in anything related to capitalism.
Oh, please. Let us always have extremes and wack overstatements carry the argument here. No matter what. It makes the forum so sophisticated and worldly.
What's interesting and not many people understand is there are two important kinds of socially responsible investing. In one version, many call the old model, certain sectors are completely excluded from the portfolio--oil, weapons, tobacco, etc. These are so-called exclusionary screens. In another kind every sector is included, but the fund ranks the stocks in each sector on ESG criteria and chooses only those that rank the highest while excluding the lowest. So for instance oil companies will still be in the portfolio but only those that rank the highest in ESG.
The former older exclusionary model studies have shown can match the market or slightly lags it. The latter model which ranks on ESG actually has outperformed the market over time. Companies that do good do well performance-wise. However, there is another step that I think can take an ESG oriented fund to the the next level. If a socially responsible fund is going to for instance own oil companies, it should I believe also engage with corporate management to improve its ESG record, voting for shareholder proposals that would force oil companies to disclose more of their climate risks. It should even file proposals itself. This would be in accord with the values of most of the shareholders who buy socially responsible funds. I think divestment as many universities do actually is less of an socially responsible approach than shareholder engagement. Challenge CEOs to do better. The market actually rewards them for doing so.
There is no strong evidence that supports ESG outperforming. There are research pieces out there that support both traditional investing and ESG investing in terms of performance.
There is no strong evidence that supports ESG outperforming.
There absolutely has been strong evidence for many years: https://db.com/cr/en/docs/Sustainable_Investing_2012.pdf This is specifically for the model I'm describing of ranking by ESG factors not exclusionary screens of entire sectors. There is a ton of supporting evidence for ranking by ESG factors.
What's interesting and not many people understand is there are two important kinds of socially responsible investing. In one version, many call the old model, certain sectors are completely excluded from the portfolio--oil, weapons, tobacco, etc. These are so-called exclusionary screens. In another kind every sector is included, but the fund ranks the stocks in each sector on ESG criteria and chooses only those that rank the highest while excluding the lowest. So for instance oil companies will still be in the portfolio but only those that rank the highest in ESG.
The former older exclusionary model studies have shown can match the market or slightly lags it. The latter model which ranks on ESG actually has outperformed the market over time. Companies that do good do well performance-wise. However, there is another step that I think can take an ESG oriented fund to the the next level. If a socially responsible fund is going to for instance own oil companies, it should I believe also engage with corporate management to improve its ESG record, voting for shareholder proposals that would force oil companies to disclose more of their climate risks. It should even file proposals itself. This would be in accord with the values of most of the shareholders who buy socially responsible funds. I think divestment as many universities do actually is less of an socially responsible approach than shareholder engagement. Challenge CEOs to do better. The market actually rewards them for doing so.
@LewisBraham: This is not always so, though I see the case you're making. Over the years, I've come across shareholder petitions from Orders of nuns to promote one thing or another, and Management ignores them. (...Because...? No one else gives a shit?) Interaction by shareholders with Management in order to lobby for more socially responsible policies on the part of the company might work, sometimes. Yet several denominations have finally chosen to divest from companies making money in connection with the continued Israeli occupation of Palestine. HP, Caterpillar, Motorola, just to name a few. Because Management simply ignored the questions and petitions, offered from within the company structure. Boycotts and divestment are always a last resort. But they have been resorted to. Everyone knows about the Montgomery, Alabama bus boycott...
There absolutely has been strong evidence for many years: https://db.com/cr/en/docs/Sustainable_Investing_2012.pdf This is specifically for the model I'm describing of ranking by ESG factors not exclusionary screens of entire sectors. There is a ton of supporting evidence for ranking by ESG factors.
Anybody can data mine evidence to support their camp. And back tests don't tell me anything or give me any confidence that this will be effective moving forward.
RBC has a piece that supports ESG/SRI, but at least they still point to the lack of evidence it outperforms.
"This has also been illustrated in an updated study by di Bartolomeo and Kurtz (2011). Performing a holdings-based attribution analysis using the North eld U.S. Fundamental Equity Risk Model, they examined the risk and return characteristics of the S&P 500 Index and the KLD 400 Index for an 18-year period between January 1992 and June 2010. Within the total 18-year period, 2 sub-periods were also analyzed: January 1992-November 1999, and December 1999-June 2010. The KLD 400 outperformed the S&P 500 during January 1992-November 1999, but underperformed during the latter period. Di Bartolomeo and Kurtz concluded that the strong performance in the 1990s was entirely factor driven, during which time the KLD 400 Index had a higher market beta, bets on higher valuation, and an overweight position in the Information Technology sector (i.e., growth stocks). The underperformance following the 1999 peak was said to be due to an over reliance on the same factors."
@Crash I think boycotts can be highly effective from a consumer level of company products, but less so from a shareholder one. If the nuns don't own Exxon's shares, someone else will. I would rather my socially responsible funds have a seat at the table as a stakeholder and agitate from within for change than have no seat at all. If you're not an owner, you have no voice. The interesting thing is those proposals from nuns and such--and I've seen them too--have gradually gathered momentum. They file them every year and every year they get more support so that there have been some victories recently.
@JoJo26 I hate to say this but the data mining is largely on the other side at this point. The single study you point to looks at one index. In DB's case in the original report I linked to DB looked at over 100 studies and found a consistent pattern of ESG outperforming. More recently they've updated their research to include over 2000 studies: https://db.com/newsroom_news/ESG_study_Jan16.pdf Here's an article nicely summarizing the original 2012 study which was focused more on the distinction between the ESG ranking I described and more traditional exclusionary socially responsible investing: institutionalinvestor.com/blogarticle/3107313/blog/yes-esg-boosts-returns-sri-not-so-much.html
The RBC study you referenced looks at the KLD 400 Index. According to MSCI, the index's owner: "The MSCI KLD 400 Social Index is maintained in two stages. First, securities of companies involved in Nuclear Power, Tobacco, Alcohol, Gambling, Military Weapons, Civilian Firearms, GMOs and Adult Entertainment are excluded." https://msci.com/documents/10199/904492e6-527e-4d64-9904-c710bf1533c6 It is precisely such exclusionary screens for SRI funds I stated the research was neutral about, revealing that such exclusionary indexes/funds either match the market or lag it slightly. It is ESG rankings in which every sector is included but the worst ranked ESG companies are minimized or eliminated that there is strong corroborative evidence for. Since you didn't read the links I provided to the DB report, here is an important excerpt:
The evidence is compelling: Sustainable Investing can be a clear win for investors and for companies. However, many SRI fund managers, who have tended to use exclusionary screens, have historically struggled to capture this. We believe that ESG analysis should be built into the investment processes of every serious investor, and into the corporate strategy of every company that cares about shareholder value. ESG best-in-class focused funds should be able to capture superior risk-adjusted returns if well executed.
This is the key finding of our report in which we looked at more than 100 academic studies of sustainable investing around the world, and then closely examined and categorized 56 research papers, as well as 2 literature reviews and 4 meta studies – we believe this is one of the most comprehensive reviews of the literature ever undertaken.
Frequently, Sustainable Investing is stated to yield ‘mixed results”. However, by breaking down our analysis into different categories (SRI, CSR, and ESG) we have identified exactly where in the sprawling, diverse universe of so-called Sustainable Investment, value has been found.
By applying what we believe to be a unique methodology, we show that “Corporate Social Responsibility” (CSR) and most importantly, “Environmental, Social and Governance” (ESG) factors are correlated with superior risk-adjusted returns at a securities level. In conducting this analysis, it became evident that CSR has essentially evolved into ESG. At the same time, we are able to show that studies of fund performance – which have been classified “Socially Responsible Investing” (SRI) in the academic literature and have tended to rely on exclusionary screens – show SRI adds little upside, although it does not underperform either. Exclusion, in many senses, is essentially a values-based or ethical consideration for investors.
We were surprised by the clarity of the results we uncovered:
100% of the academic studies agree that companies with high ratings for CSR and ESG factors have a lower cost of capital in terms of debt (loans and bonds) and equity. In effect, the market recognizes that these companies are lower risk than other companies and rewards them accordingly. This finding alone should put the issue of Sustainability squarely into the office of the Chief Financial Officer, if not the board, of every company.
89% of the studies we examined show that companies with high ratings for ESG factors exhibit market-based outperformance, while 85% of the studies show these types of company’s exhibit accounting-based outperformance. Here a gain, the market is showing correlation between financial performance of companies and what it perceives as advantageous ESG strategies, at least over the medium (3-5 years) to long term (5-10 years).
The single most important of these factors, and the most looked at by academics to date, is Governance (G), with 20 studies focusing in on this component of ESG (relative to 10 studies focusing on E and 8 studies on S). In other words, any company that thinks it does not need to bother with improving its systems of corporate governance is, in effect, thumbing its nose at the market and hurting its own performance all at the same time. In the hierarchy of factors that count with investors and the markets in general, Environment is the next most important, followed closely by Social factors.
Most importantly, when we turn to fund returns, it is notable that these are all clustered into the SRI category. Here, 88% of studies of actual SRI fund returns show neutral or mixed results. Looking at the compositions of the fund universes included in the academic studies we see a lot of exclusionary screens being used. However, that is not to say that SRI funds have generally underperformed. In other words, we have found that SRI fund managers have struggled to capture outperformance in the broad SRI category but they have, at least, not lost money in the attempt.
These conclusions go a long way towards explaining why the concept of sustainable investing has taken so long to gain acceptance and even now inspires indifference and even cynicism among many investors. It has been too closely associated for too long with the SRI fund manager results which are not only an extremely broad category (i.e. in terms of investment mandate), but historically were based more on exclusionary – as opposed to positive or best-in-class – screening. ESG investing, by contrast, takes the best-in-class approach. By analyzing the various categories within the universe of sustainable investing, we can now say confidently that the ESG approach, at an analytical level, works for investors and for companies both in terms of cost of capital and corporate financial performance (on a market and accounting basis). It is now a question of ESG best-in-class funds capturing the available returns.
Well of course. The RBC study reveals its bias toward exclusionary rather than inclusionary screens: "after all, the raison d’être of SRI is to exclude 'irresponsible' companies from consideration".
It even cites evidence supporting outperformance by inclusionary funds:
"Moreover, Cortez, Silva, and Areal (2009) found that SRI mutual funds have shown superior performance in Europe as opposed to the United States. This may be attributed, according to the authors, to differences in SRI investment style. The European SRI approach generally used positive criteria (security selections based on the most socially responsible companies), whereas the American approach was more oriented towards negative screening (security selection based on excluding the least socially responsible companies)."
Right. First it excludes all companies that are involved (generally 5% or more of their business) in alcohol, gambling, tobacco, military weapons, civilian firearms, nuclear power, adult entertainment, or GMOs. Then on what's left it applies inclusionary screens.
If anything, based on this enumerated list and the curvilinear (roughly speaking, parabolic) relationship between the number of screens and performance cited by RBC, the index uses nearly the absolute worst number of screens.
One would expect an index with either more screens or fewer screens to do better. Selective choice by RBC of index or just bad luck? Doesn't matter, the effect's the same.
I owe it to myself to maximize the value of my investments, and I don't believe this is a way to do it. Not saying making an impact is a bad thing or not worth considering, I just haven't seen enough proof that these investments truly add value. I don't want to see a back test of pools of companies that have initiated ESG policies and how they've performed over time. I need to see live track records (not just Parnassus) as proof that this can be done more broadly before jumping in. The universe of investment products with sufficient history is way too small at this point. It is growing though and only time will tell. I'd tread carefully, though... From the July newsletter on smart beta, "Most investors are trend chasers! Most academics are trend chasers! Most product providers are trend chasers! Trend chasing is costly!”
I'm thinking that most folks that post on the board are students of the markets and as such we are a cut above the average retail investor that does not watch the markets or monitor their accounts (except look through their statements). I'll bet many of them comment and ask themselves ... What the hell happen here? With this, we each have our own investment concepts. These different concepts, ideas, strategies and thought processes all factor into how we view the market and govern our investments. I have found, through the years, that is better to be on the front end of a trend than the back end of one (don't chase the market). For me, I enjoy a dance with my wife before the dance floor gets crowded. And, in investing, I enjoy being on the front end of a developing investment theme over jumping in after the crowd has arrived. And, yes I have left some money on the table by not riding the train (investment theme) to it's final station. Don't want to be the last one left that has to turn off the lights and close the place up. And, then wonder ... Where did everyone go?
And, folks ... If you really enjoy following the markets and it brings true enjoyment to you why not? And, when profit is made that makes it even better. Currently, if I was going to put new money in play and I was short on small caps I'd be moving some money there and the same with value too as they both have been recent laggards. But, since I am currently fully allocated in these two areas it is back to watching and continue with my current theme and that is to increase my footprint in hybrid funds. After all, many hybrid funds hold some small caps, value stocks, along with foreign positions and other asset classes as well.
Those that want to invest in ESG policy stocks and funds are welcome to do so by my thinking because if you are truly diverisified you probally own some of them too.
Comments
http://www.morningstar.com/funds/XNAS/SFGIX/quote.html
ESG, SRI, sustainable investing or whatever you want to call. The term is way too ambiguous for me.
Seafarer’s Policy on Corporate Governance (or, “ESG Policy”)
http://www.seafarerfunds.com/letters-to-shareholders/2017/04/annual
Here's how the federal government spent the 2016 Federal Budget according to Investopedia:
investopedia.com/updates/usa-national-debt/
What Goes into the Current National Debt?
As indicated above, debt is the net accumulation of budget deficits. It is important to look at the top expenses, as they constitute the major factors of national debt. The top expenses in the U.S. are identified as follows (based on the Federal Budget 2016 Total Outlay Figures):
Healthcare Programs (includes Medicare & Medicaid): A total of $1.1 trillion (USD) is allocated to healthcare benefit programs, which includes Medicare and Medicaid.
Social Security Program/Pensions: Aimed at providing financial security to the retired, the total Social Security and other expenditures are $1 trillion.
Defense Budget Expenses: The portion of national budget which is allocated for military related expenditures. Currently, $1.1 trillion is earmarked for the U.S. Defense Budget.
Others: Transportation, veteran benefits, international affairs, education and training, etc. are also expenses the government has to take care of. Interestingly, the common public belief is that spending on international affairs consumes a lot of resources and expenses, but in truth, such expenditures lie within the lower rung in the list.
So even on the federal level it's not just wars. But you already knew that.
But these kinds of things have been around for decades. A former neighbor / fellow coach of mine was head at Calvert, back when, IIRC. Not a performer, it turned out. At all.
>> @Maurice
>> If investments were truly socially responsible, then they wouldn't invest in anything related to capitalism.
https://giphy.com/search/bitch-please
Oh, please. Let us always have extremes and wack overstatements carry the argument here. No matter what. It makes the forum so sophisticated and worldly.
The former older exclusionary model studies have shown can match the market or slightly lags it. The latter model which ranks on ESG actually has outperformed the market over time. Companies that do good do well performance-wise. However, there is another step that I think can take an ESG oriented fund to the the next level. If a socially responsible fund is going to for instance own oil companies, it should I believe also engage with corporate management to improve its ESG record, voting for shareholder proposals that would force oil companies to disclose more of their climate risks. It should even file proposals itself. This would be in accord with the values of most of the shareholders who buy socially responsible funds. I think divestment as many universities do actually is less of an socially responsible approach than shareholder engagement. Challenge CEOs to do better. The market actually rewards them for doing so.
https://db.com/cr/en/docs/Sustainable_Investing_2012.pdf
This is specifically for the model I'm describing of ranking by ESG factors not exclusionary screens of entire sectors. There is a ton of supporting evidence for ranking by ESG factors.
https://db.com/cr/en/docs/Sustainable_Investing_2012.pdf
This is specifically for the model I'm describing of ranking by ESG factors not exclusionary screens of entire sectors. There is a ton of supporting evidence for ranking by ESG factors.
Anybody can data mine evidence to support their camp. And back tests don't tell me anything or give me any confidence that this will be effective moving forward.
RBC has a piece that supports ESG/SRI, but at least they still point to the lack of evidence it outperforms.
"This has also been illustrated in an updated study by di Bartolomeo and Kurtz (2011). Performing a holdings-based attribution analysis using the North eld U.S. Fundamental Equity Risk Model, they examined the risk and return characteristics of the S&P 500 Index and the KLD 400 Index for an 18-year period between January 1992 and June 2010. Within the total 18-year period, 2 sub-periods were also analyzed: January 1992-November 1999, and December 1999-June 2010. The KLD 400 outperformed the S&P 500 during January 1992-November 1999, but underperformed during the latter period. Di Bartolomeo and Kurtz concluded that the strong performance in the 1990s was entirely factor driven, during which time the KLD 400 Index had a higher market beta, bets on higher valuation, and an overweight position in the Information Technology sector (i.e., growth stocks). The underperformance following the 1999 peak
was said to be due to an over reliance on the same factors."
Here's an article nicely summarizing the original 2012 study which was focused more on the distinction between the ESG ranking I described and more traditional exclusionary socially responsible investing:
institutionalinvestor.com/blogarticle/3107313/blog/yes-esg-boosts-returns-sri-not-so-much.html
The RBC study you referenced looks at the KLD 400 Index. According to MSCI, the index's owner: "The MSCI KLD 400 Social Index is maintained in two stages. First, securities of companies involved in Nuclear Power, Tobacco, Alcohol, Gambling, Military Weapons, Civilian Firearms, GMOs and Adult Entertainment are excluded." https://msci.com/documents/10199/904492e6-527e-4d64-9904-c710bf1533c6
It is precisely such exclusionary screens for SRI funds I stated the research was neutral about, revealing that such exclusionary indexes/funds either match the market or lag it slightly. It is ESG rankings in which every sector is included but the worst ranked ESG companies are minimized or eliminated that there is strong corroborative evidence for. Since you didn't read the links I provided to the DB report, here is an important excerpt:
It even cites evidence supporting outperformance by inclusionary funds:
"Moreover, Cortez, Silva, and Areal (2009) found that SRI mutual funds have shown superior performance in Europe as opposed to the United States. This may be attributed, according to the authors, to differences in SRI investment style. The European SRI approach generally used positive criteria (security selections based on the most socially responsible companies), whereas the American approach was more oriented towards negative screening (security selection based on excluding the least socially responsible companies)."
https://www.msci.com/eqb/methodology/meth_docs/MSCI_KLD_400_Social_Index_Methodology_February2015.pdf
If anything, based on this enumerated list and the curvilinear (roughly speaking, parabolic) relationship between the number of screens and performance cited by RBC, the index uses nearly the absolute worst number of screens.
One would expect an index with either more screens or fewer screens to do better. Selective choice by RBC of index or just bad luck? Doesn't matter, the effect's the same.
And, folks ... If you really enjoy following the markets and it brings true enjoyment to you why not? And, when profit is made that makes it even better. Currently, if I was going to put new money in play and I was short on small caps I'd be moving some money there and the same with value too as they both have been recent laggards. But, since I am currently fully allocated in these two areas it is back to watching and continue with my current theme and that is to increase my footprint in hybrid funds. After all, many hybrid funds hold some small caps, value stocks, along with foreign positions and other asset classes as well.
Those that want to invest in ESG policy stocks and funds are welcome to do so by my thinking because if you are truly diverisified you probally own some of them too.
And, so it goes ...
Peace,
Skeet