A few months ago a client asked me, “Do you ever use SRI funds or social screens in selecting investments?”
My answer was that we generally don’t seek out SRI funds. Instead we advise clients to seek out the investments that best meet their financial needs and then approach charitable giving separately. But I realized that this question deserved more explanation.
If a particular fund, socially responsible or not, is also the best investment choice in some limited set of choices (such as funds available in a 401k), we will recommend it in that context. However, if that same set of choices includes a fund with better long-term performance expectations, or a fund which better matches the portfolio’s financial requirements, we’ll select the fund which is a better investment without regard to social responsibility screens.
At first glance, it may appear that Socially Responsible Investing could be a great way to align one’s beliefs with one’s investments, but the fact is that SRI funds don’t actually have as much of a social impact as one might hope. When we buy stock in a company in the secondary market it has no appreciable impact on the behavior of those companies. Even owning shares and actively voting on shareholder measures at the annual meetings, where shareholders may have their strongest direct voice in management, seems to have little or no appreciable impact.
Rather than hobble one’s investments by limiting the investing universe through such social screens, we prefer to have our investments do as well as they can. And when we are interested in having a social impact, we recommend using some of the proceeds of those investments to contribute directly to causes that you care about.
In fact, regardless of any such screens, if you have highly appreciated stock or other assets in a taxable account, it may be possible to leverage one’s charitable giving by taking advantage of how the tax code treats donations of such assets to charities. Through the use of donor-advised funds, one may even make the tax-deductible contributions in high-earning/high-tax years while directing the distributions — the gifts to the charities themselves — later on, at your own pace, and potentially in years in which your marginal tax rate is lower.
Additionally, what constitutes a “socially responsible investment” is highly personal . No two SRI funds’ screens are the same and often fund holdings may be surprising to investors. For example, funds are described as “green,” “religious,” and avoiding “sin” stocks. What these terms mean is not always clear.
But what about the idea that certain SRI screens may actually help choose better investments?
There’ve been a couple of interesting studies over the years showing that certain screens have in fact correlated (a little bit) with performance, and one great example of that being put into practice is the Parnassus Workplace fund, which was created in order to take advantage of the fact that workplaces rated highly as “best places to work” tended to be great companies with great performance. Whether this continues to hold true, or whether the outperformance is good enough to overcome >1% management fees over time, remains to be seen. Domini Social Investments, for example, used to talk about how SRI criteria led to better portfolios, but the funds built on those screens didn’t do very well, and had high expenses.
All that said, there are a couple of funds which happen to use SRI screens which have done quite well. TIAA-CREF, for example, has a very good “Social Choice” equity fund. Not surprisingly, it’s not really an actively managed fund and it has very low expenses. It generally tries to replicate an index minus the parts of that index the screens eliminate, and the resulting portfolio is dominated by some of the same blue chip stocks one finds in other high-quality index funds. And, of course, for fund performance, expenses matter a lot.