The Conundrum of Socially Responsible Investing

Target Readers:

  1. Investors confused by socially responsible investing.
  2. Advisors considering additional emphasis on socially responsible investing.
  3. Advisors struggling to gain traction with socially responsible investing.

Talking Points:

  1. Is socially responsible investing as popular as the media promotes?
  2. Will millennials finally bring socially responsible investing mainstream?
  3. Should investors consider adding socially responsible investing into their portfolios?

Here’s the Skinny,

Socially responsible investing is great in theory, but lacks in real life traction.

Sad but true.

People talk a good game, but as I’ve always said, “If you really want to know what people think or believe, study their actions, not just their words.”

Nuveen just released a detailed study titled, “Investor interest in responsible investing soars.”  The study/survey includes great detail within its 9-pages of results, but one graphic including the core questions really caught my attention…

I do not question the validity of the verbal responses from those surveyed.  However, in answering questions number 2, 4, 6, 7, and 9…  I can’t help but wonder, do their “actions” really support their “words” in real life?

For example:

  • In questions 2 and 4, would the respondent actually be willing to take a pay cut to work for such an employer, or do they mean they would expect the same pay, but prefer such an employer?
  • In question 6, would the respondent be willing to pay more for a similar quality product, or do they mean given the same price and quality they would prefer such a product?
  • In question 7, I would propose a similar scenario, but then question 9 seems to cut straight to the point, unless they interpreted it as meaning given equal returns, which would you feel better about?

Human nature is tricky.

In real life, our asset management firm, USA Financial Portformulas, offers 30+ investment model strategies, and one of our least popular models (according to assets invested) is our socially responsible model based upon the S&P 500 universe.  Interestingly, investors seem to love knowing that we have such a model even though they may not invest in it themselves.  I find that predictable, but still intriguing.

Similarly, cigarette smoking is the leading cause of preventable disease and death in the United States, yet over 13% of adults age 18-24 still smoke and almost 18% of adults age 25-44 continue to smoke.  In the United States, over 70% of adults age 18+ drank alcohol in the past year (and that’s including ages 18-20, when age 21+ is drinking age).  With a growing trend toward marijuana legalization, 22% of adults admit to current usage (even more than cigarettes).  I believe it’s safe to say, most adults know these things are not good for their health and most would steer their children away from such things…  Yet these industries are all thriving.

Does investing work similarly?

I think, all things being equal, investors prefer the idea of socially responsible portfolios.  But if the socially responsible portfolio does not live up to its “less socially responsible peers” and/or it costs more to return the same or less, then investors generally tend to revert back toward traditional portfolio allocations.  And financial advisors know this, so many do not broach the subject unless the investor makes such a request.

Do I sound cynical or am I just a realist?

I love the idea of socially responsible investing.  And speaking as asset manager, it’s not that difficult to add socially responsible screening mechanisms in order to de-select the socially irresponsible stocks.  But until market demand supports the effort, the effort isn’t worth the price of mass deployment (at least not yet).  Like I said, we promote a socially responsible investment model, yet it is one of the least utilized models we provide.

Additionally, socially responsible investing can become a bit murky.  When does an investment cross the line?  If you wish to invest with social responsibility, but you enjoy craft beer or a nice glass of wine, do you re-include the alcohol industry even though it would normally be excluded?  Or what about a tech firm that has poor data security and/or outright sells data you would deem private – include or exclude?

I’ve read that the socially responsible investing category under professional management is currently as high as 22%, but again, that math is a bit murky as it does not include passive management (only active or professional management).

In the end, many lay claim to millennials being the force behind the ultimate push toward socially responsible investing.  And in many ways that argument makes perfect sense, yet millennials are also credited with the push toward marijuana legalization…  And it may be difficult for those two things to coexist.  Not all that different from previous generations wrestling with ways for socially responsible investing to coexist with the popularity of alcohol.

It’s an emotional subject and a trend to watch closely.  But I contend the trend is probably further off in “action” than it is in “words.”

That’s the Skinny, 

 

 

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