4 Myths About Sustainable Investing

August 12, 2014

fb-jumpintosriSustainable responsible impact investing (SRI)—previously known as socially responsible investing—has evolved over the years. What was once considered a niche market is now widespread.

“Investing with an eye toward sustainable business practices is now considered, well, just good business,” Barron’s wrote in their October 8, 2016 cover story on sustainable funds.

But there are still many myths and misconceptions about SRI funds that may prevent investors from capitalizing on the advantages of sustainable investing, such as:

Myth #1: SRI Funds Only Cover a Small Part of the Market

Fact: SRI Funds Cover Most Areas of the Market (& the World)

Some investors believe that sustainable funds only have access to a small segment of the market and that this could limit their opportunity to build wealth.

But there are now hundreds of SRI funds available (Morningstar reported that another 19 sustainable funds and ETFs just launched in 2016), and most major fund companies, like Vanguard and iShares, now offer SRI funds.

These funds cover many different areas of the market and the world. There are large-cap and small-cap SRI funds, growth and value SRI funds, and domestic and foreign SRI funds. Some SRI funds are diversified, while others are more concentrated.

Myth #2: SRI Funds Only Invest in Small Environmental Companies

Fact: SRI Funds Can Invest in Large Multinational Corporations 

Many sustainable funds invest in large companies that are household names. Pepsi, for example, is held by some SRI funds because the company is working on forestry issues, and Home Depot is focused on renewable energy.

As companies become more focused on sustainability (80% of the large U.S. companies in the S&P 500 now publish sustainability reports), SRI funds have even more names to choose from.

SRI funds have access to all kinds of companies and industries, including fossil fuel companies. One example is Domini Social Equity (DSEFX), which has invested in an oil and gas company like Apache Corporation in order to engage with the company about the environmental risks of fracking.

While some SRI fund managers avoid investing in certain kinds of companies, most SRI fund managers believe they can make a bigger impact by investing in these companies and encouraging these companies to change. Today’s SRI funds have more comprehensive approach to sustainability and they focus on investing in companies with strong environmental, social and governance (ESG) policies.

Myth #3: SRI Funds Only Do Well In Certain Markets

Fact: SRI Funds Follow Market Trends

SRI funds participate in the same market trends as other funds. When growth is in favor, growth-oriented SRI funds typically outperform value-oriented SRI funds. When U.S. markets are leading, domestic SRI funds are usually the place to be.

This year, higher quality stocks have done well, and as Barron’s pointed out “companies with sustainable practices and good governance are likely to be high quality. They’ve outpaced low-quality rivals in the past year, just as value has bested growth.”

NoLoad FundX’s Upgrading strategy helps investors capitalize on market trends. In 2013, mid-cap funds were among the best performers and we were led to buy Ariel (ARGFX), a mid-cap fund that excludes investments in tobacco and weapons companies.

But in 2014, large-cap funds had better performance, and we replaced Ariel with large-cap Domini Social Equity (DSEFX), which screens companies based on their social and environmental impact.

This year, we’ve bought into Parnassus Endeavor (PARWX), which owns higher quality companies that are great places to work.

Myth #4: SRI Underperforms

Fact: SRI Performs Just as Well as Conventional Investing

Studies repeatedly find that SRI portfolios perform just as well as conventional investing. In fact, a 2015 analysis of over 2,000 empirical studies since the 1970s—the most comprehensive review of academic research on this topic—found that the majority of studies show positive findings between environmental, social and governance (ESG) factors and corporate financial performance (CFP).

Barron’s found that in the past year, “25% of [sustainable] funds beat the S&P, compared with just 12% of all actively managed large-cap funds.”

These results are consistent with our own 20-year experience managing sustainable responsible investing (SRI) portfolios for clients.

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