There are people, some of them financial advisors, who believe that you cannot make money through sustainability, social justice and ESG investing. (ESG stands for environmental, social and governance investing.) To be accurate, people don’t say you can’t make any money on these investments, just not as much money as you would if you didn’t factor in those considerations when picking your investments. Let’s put this to rest right out of the gate. John Hale of the renown MorningStar investment research firm has said that’s not true. And Morgan Stanley’s Sustainable Reality: Analyzing Risk and Returns of Sustainable Funds survey came to the same conclusion. It determined that the returns of sustainable funds were in line with comparable traditional funds by looking at the performance of nearly 11,000 mutual funds from 2004 to 2018. In fact, the report concluded that there were no statistically significant differences in total returns. An interesting kicker was that the sustainable funds may offer lower market risk. These funds experienced a 20% smaller downside deviation than traditional funds. If you’re like most investors, the downside is what you find scary, not the upside.
For this first article on socially responsible investing, we’ll look at two topics related to getting started: advisor selection and investment screening. We’ll also cover one benefit of ESG investing: risk mitigation.
If you’d like to pursue (or even explore) socially responsible investing with an advisor, you’ll need a particular type of advisor. Margaret Towle’s “Environmental, Social and Governance Investing: Myths versus Reality” discusses the problem with advisor selection. Many advisors simply don’t believe good returns are possible from these types of investments. Therefore, they have not researched them. Some of them are with companies that don’t have agreements with a diverse number of mutual fund managers, resulting in