Sustainable, Responsible & Profitable Investing

April 24, 2014

LookingUpTreeThis post by FundX President Janet Brown originally appeared on Forbes.

Sustainable investing has changed over the last two decades. The SRI acronym has changed: what was once called socially responsible investing is now most commonly considered sustainable, responsible investing. But the bigger change is that SRI investors no longer have to sacrifice potential returns in order to align their investments with their values.

When I first began managing SRI portfolios 20 years ago, they often lagged conventional portfolios. While many investors liked the idea of SRI investing, this trade-off limited its appeal. But some of my clients accepted this trade-off: they were committed to investing their portfolios in a sustainable way even if their SRI portfolios didn’t earn as much as other portfolios.

In the last few years, however, their SRI portfolios have performed right in line with the other portfolios I manage–a sign that investors can generate long-term competitive financial returns and make a positive societal impact at the same time.

What’s Changed?

1. More SRI funds to choose from

Today, there are far more opportunities available to SRI investors. There are hundreds of SRI mutual and exchange-traded funds that offer investors exposure to many different areas of the market. There are SRI funds that invest in growth stocks and those that invest in value stocks. There are large-, small- and mid-cap SRI funds, as well as domestic, foreign and global SRI funds. There are SRI funds that track indexes and funds that are actively managed, and there are funds that invest in a single sector or industry and those that are more broadly diversified.

2. More SRI investment approaches 

SRI investment approaches have also become more diverse over time. For many years, most SRI funds were focused on avoidance (now often referred to as ‘divestment’). These funds avoided investing in companies like weapons manufacturers or gambling companies.

But many SRI managers now believe that avoiding companies may not be the best way to effect change. These managers realized that as investors in these companies, they have power: they can vote proxies at a company’s annual meeting, and they can file or support shareholder resolutions, such as resolutions asking companies to disclose or reduce their carbon emissions.

Advocacy is having an effect: a shareholder resolution prompted Exxon Mobil to release its first carbon risk report in March. The Wall Street Journal reported that in 2014 “environmental and social issues have accounted for 56% of shareholder proposals, representing a majority for the first time.”

New SRI funds and new approaches to SRI investing offer investors many new opportunities and many new choices. Today, investors have to determine whether they should invest in domestic or foreign SRI funds, and if they should seek out funds that have a policy of avoidance or those that are focused on advocacy. And, like all fund investors, SRI investors also have to determine which funds to own now, how much to allocate to each fund, and whether they can stick with these allocations when markets inevitably change.

A Proven Fund Strategy

A time-tested investment strategy can help SRI investors make these decisions. I’ve used my Upgrading strategy to select leading funds for more than 35 years now, and I use this same strategy to select SRI funds and manage SRI portfolios.

Upgrading is designed to adapt to changing markets and to capitalize on major market trends, and SRI funds participate in the same market leadership trends as other funds. When growth is in favor, growth-oriented SRI funds will outperform value-oriented SRI funds. When U.S. markets are leading, domestic SRI funds will be the place to be.

Upgrading leads me to invest in the funds that have the best performance compared to other funds with similar risk. Because U.S. markets have been in favor in 2014, my SRI portfolios are invested in domestic SRI mutual funds and ETFs. But if markets change and foreign SRI funds come back into favor, I’ll be led to shift my portfolios into foreign or global SRI funds.

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