NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Thursday, February 2, 2017

Socially responsible investing (SRI). Environmental, Social, and Governance investing (ESG). Impact investing…and so on…

These socially responsible investing concepts can be roughly described as portfolio strategies that allocate investment dollars based on ethical, social, sustainability, or other factors. This form of investment has become increasingly popular over the last decade (e.g., see the recent move by the Ritholtz gang into the space). Assets pursuing various flavors of these strategies are now measured in the trillions of dollars and index providers have been busy manufacturing products for this cause.

I respect the intention of those who pursue SRI and related approaches. If an investment approach makes one feel more comfortable with their portfolio and can improve their ability to maintain investment discipline, by all means — go for it. This post won’t debate the psychological benefits of the concept and won’t debate the performance characteristics of these approaches. Indeed, a significant amount of research has already been devoted to determining how these practices impact investment performance. Does investing with a conscience impose a cost on investors via dampened performance or does this form of investing reward investors with better returns? Thus far, the findings on potential cost/benefits appear mixed (see here and here examples of the debate). Notwithstanding, we believe there is a more important concern to be addressed: