There’s a powerful trend emerging in the world of crafting portfolios. Investors are now building portfolios based on their morals and values. Dubbed “social responsible investing” or SRI, these investors essentially add several screens to shift through various stocks in order to comply with various environmental, social and governance (ESG) requirements.
The hope is that the underlying SRI portfolio will produce a strong financial return as well as a good social one. And those returns have been getting much much better.
Socially responsible investing used to be considered the whipping boy in terms of total returns, often falling behind broad indexes and “sin” related industries like tobacco, booze and gambling. However, with major pensions and sovereign wealth funds now using their immense size to influence management on ESG policies, SRI returns have improved.
According to Goldman Sachs (GS), firms that are considered to be leaders in socially responsible investing have also been leaders in terms of stock performance as well — averaging an extra 25% over the longer term. This echoes similar research conducted by Allianz. Between 2006 and 2010, the German insurance group found that investors could have added an additional 1.6% a year to their investment returns by allocating to portfolios that invest in companies with above-average ESG ratings.
The bottom line is that investors no longer have to sacrifice their morals when looking for investment returns. Here are five of the easiest ways to a dash of ESG and socially responsible investing to your portfolio.