Investors may decide to pay more, and not only because they think they’ve found the rare portfolio manager who can outperform the indexes. For example, they may want a manager who takes the time to sponsor shareholder resolutions that push companies to behave more ethically or responsibly, by one definition or another. That kind of activism might not always pay off financially, but that’s not necessarily the point.
Still, investors shouldn’t have to sacrifice their returns altogether for their values. “Companies are going to charge what they can get away with,” said Sonia Kowal, president of Zevin Asset Management. In general, an actively managed SRI or ESG fund shouldn’t cost more than a typical non-ESG actively managed fund, she said. According to the Investment Company Institute, the average investor pays an annual expense ratio of 0.86 percent for actively managed stock funds. And the more you have to invest, the less you should pay.
Don’t Expect Huge Returns
A common pitch is that sustainable investments perform better than other assets. The idea is that ethical and responsible companies are less risky and better long-term investments.
It might even be true. In a March 2015 analysis by the University of Oxford and Arabesque Asset Management, 80 percent of academic studies found that the stocks of companies with “good sustainability practices” do better than other stocks.
But it can cost money to find these companies, in the form of fees that detract from returns. And even the best-paid, most-experienced analysts can make mistakes. Until Oct. 6, Volkswagen was included in the Dow Jones Sustainability Indices.
Sustainable strategies’ real-world track record is mixed. Morningstar estimates that social impact funds returned about 5 percent a year over the past 10 years, lagging behind large-cap funds by 1.1 percentage points a year. When you look at index funds, it’s hard to distinguish the performance of socially responsible funds from that of their non-SRI peers. The Vanguard FTSE Social Index Fund has beaten Vanguard’s S&P 500 fund over the past five years but lagged over the past decade.
Don’t Let The Jargon Throw You
Terms such as sustainable, impact, ESG, and SRI can all mean different things to different people. “We’ve got a terminology problem,” said Leonard of UBS.
Take the “ESG integration.” More and more fund managers are pledging to integrate ESG factors into their investment process. For many of those managers, however, ESG remains just one factor of many. They might still end up owning the tobacco, fossil fuel, or defense stocks you thought you were avoiding.
Even based on the same values, there's a ton of ways to invest. Some investors will want to exclude companies with questionable practices; others end up owning those companies and pushing executives to do better. Some just try to buy the best- behaving companies in each industry, so they are fully diversified; others double down on industries they want to encourage—for example, by buying solar stock funds.