Socially Responsible Investing (SRI) sounds so right, what could possibly be wrong with it? SRI is a strategy that strives to generate ethical change and also financial returns for an investor. There are numerous proponents to this strategy and even professional designation programs incorporating it. Many investors are interested in investments that make an impact and want a company’s environmental, social, and governance (ESG) factors to be considered when investing.
Many investors feel strongly that they want these strategies used, but regulators have justified concerns about ESG choices. The SEC Asset Management Advisory Committee’s ESG sub-committee wants to improve the data and disclosure used for ESG investments to create more transparency for investors and better verifiability of investment products’ ESG strategies and practices. The Department of Labor finalized a rule requiring plan fiduciaries to focus solely on the plan’s financial risks and returns and keep the interests of plan participants and beneficiaries paramount when making decisions on investments and investment courses of action. That means that the financial professional may not recommend ESG funds at this point in time in retirement plans.
Financial professionals must keep in mind emotions versus returns when considering socially responsible investments. Is the client willing to sacrifice value for values? What screening factors should be used? Consider positive versus negative factors, such as sustainable products or diverse management and board of directors, versus no investments in tobacco or non-renewable energy companies. Thematic investing would include companies that use all recyclable packaging or other social issues. If a client requests such investments, sufficient disclosure must be given so clients understand that they may sacrifice returns or increase expenses by using these investment strategies.
Asset managers like BlackRock, Fidelity and Vanguard say ESG funds perform better over the long term, but the evidence is spotty. A Pacific Research Institute study last year found that the S&P 500 outperformed a broad basket of ESG funds over a decade by nearly 44%.1
There are a number of ways to take an ESG-style investing approach, including ETFs that track indices, as well as specialty funds that do not include stocks related to polarizing areas of the market such as tobacco and fossil fuels.
The Leaders Group does not take one side or another, as it should be an investor’s choice if it is important to them. In the near future, The Leaders Group will have disclosure requirements that outline the potential financial risks and the transparency issues of Socially Responsible Investment strategies. In the interim, resources are available in the LEADERSlink libraries under the tag #ESG.
 Labor vs. the ESG Racket – https://www.wsj.com/articles/labor-vs-the-esg-racket-11605482618
Jane Riley, Chief Compliance Officer