Why socially responsible investing is financially irresponsible: You can do well or do good, but rarely will you do both
Wall Street loves its fads. And if you’re looking for hot trends touted by money managers right now, it’s hard to find one more buzzworthy than “socially responsible investing.”
Bloomberg Intelligence recently posted an analysis (http://www.bloomberg.com/professional/blog/sustainable-investing-sees-hippies-give-way-suits/) of this trend, noting that various strategies labeled as “responsible” or “ethical” investing have now grown to cover 30% of global assets — or a stunning $21 trillion. So if you’re thinking that only broke hippies would want to marry Wall Street with ethics, think again.
But what does “responsible” investing look like? Volkswagen AG(VOW.XE) is a good example. The company was seen as a pioneer in clean technology, and surely that won it some points with investors and consumers alike — until we learned that it was all a lie (http://www.marketwatch.com/story/5-images-that-perfectly-depict-the-volkswagen-scandal-2015-09-22).
Then there’s the question of doing good versus doing well. A socially responsible fund that prohibits fossil fuel plays may fit your values, but, you’ll lose out on gains in that part of the market. For example, Southwestern Energy Co.(SWN) and Range Resources Corp.(RRC) are both up more than 75% so far this year and are among the best performers in the S&P 500 .
This is not to mock the idea of investing with a conscience, but simply to point out the difficulties. So before you fall in love with a “responsible” investment, you should consider precisely what that means — for your principles, and for your portfolio.
Markets and marketing
Believe me, I understand the appeal of putting your money behind companies you believe in. Particularly after all the bankers behaving badly a few years ago, it’s natural to wonder why in the world we’d want to support a corporation that cares only about its executives.
So what’s not to like about an investment that makes you richer and also makes the world a better place? It’s like a chocolate cake made with cage-free eggs, organic milk, and sustainably harvested flour — all the goodness and none of the guilt.
Of course, eating an entire cake — organic or otherwise — isn’t so good for you. In the same way, a socially responsible portfolio can be a rather irresponsible way to invest your money.
Keep in mind that Wall Street is great at tapping into what the public wants, regardless of whether it’s a wise investment. For proof, look no further than recent crazes, from marijuana penny stocks (http://www.marketwatch.com/story/why-its-still-dumb-to-invest-in-marijuana-related-penny-stocks-2015-03-24) to disastrous tech IPOs (http://techcrunch.com/2015/12/11/worst-year-for-tech-ipos-since-2009/).
So forgive me if I think the recent launch (http://www.businesswire.com/news/home/20160307005890/en/State-Street-Global-Advisors-Launches-Gender-Diversity) of a gender-diversity focused ETF with the ticker symbol SHE is just a clever marketing ploy in a year that the U.S. may elect its first female president, and where gender inequality in the workplace (http://www.marketwatch.com/story/gender-wage-gap-narrows-by-just-1-cent-2015-09-16) is still an issue.
If it makes you feel good, go for it. But the fact that the SPDR SSGA Gender Diversity Index ETF (SHE) has sucked up almost $300 million in assets in just a few weeks shows the power of this kind of marketing.
The fact that principled investing plans also happen to be big business is worth acknowledging, and investors ought to look past the marketing to see if these funds are actually delivering.
‘Responsibility’ isn’t easy to label
Identifying marketing tactics is easy, but the much harder issue to unravel is whether a company or an investment manager is ethical simply because they claim to be. Take the aforementioned Bloomberg study that says 30% of the world’s assets are in “responsible” investments. Does that mean that 70% of the world’s assets are unsustainable or irresponsible or “bad” investments?
And where does Apple Inc. (AAPL) fall? Apple seems to be run with a nod to social equality, including a black woman on its executive team as the chief of human resources, and CEO Tim Cook writing a highly personal and public essay (http://www.marketwatch.com/story/apples-tim-cook-on-being-gay-i-have-the-skin-of-a-rhinoceros-2014-10-30) in 2014 about his experiences as a gay man.
But what about Apple’s heavy reliance on supplier Foxconn, which has been embroiled in worker abuse scandals (http://blogs.wsj.com/digits/2014/12/19/bbc-says-apple-suppliers-continue-to-violate-labor-standards/) over the last several years, chronically underpays many workers, (http://www.marketwatch.com/story/it-would-take-25-years-of-foxconn-wages-to-afford-10000-apple-watch-2015-03-10) and has more recently moved to automate its process and cut out jobs altogether (http://www.marketwatch.com/story/foxconn-replaces-60000-humans-with-robots-in-china-2016-05-25)?
How about First Solar Inc. (FSLR) , which is a leader in green energy but paid its CEO $4.5 million (http://insiders.morningstar.com/trading/executive-compensation.action?t=FSLR) last year despite the company’s struggle to post consistent revenue growth and lackluster share performance? Is this a “good” company, despite the fact it is in the red versus an almost 30% gain for the S&P 500 since mid-2013 — and if so, are your principles worth that lost profit?
These are not easy questions to answer. But before you rationalize away your investment in the latest fad ETF based on a buzzword, they are worth asking.
Tough to tell the difference
It’s worth noting that there are a host of ETFs out there intended to tug at investors’ heart strings. But what’s in them, and how good or bad are they for your portfolio absent of ethical concerns?
For example, the SPDR gender diversity ETF focuses on large-cap U.S. companies that “exhibit gender diversity in their senior leadership positions,” including Home Depot Inc.(HD) , Berkshire Hathaway Inc. (BRKA) (BRKA) and Oracle Corp. (ORCL).
And iShares MSCI USA ESG Select ETF (KLD) and iShares MSCI KLD 400 Social ETF (DSI) each focus on U.S. stocks that display “positive environmental, social and governance characteristics,” with the KLD 400 ETF allowing for some smaller companies but both investing in larger firms including Microsoft Corp. (MSFT) and 3M Co.(MMM) .
Another decent-sized socially responsible fund is iShares MSCI ACWI Low Carbon Target ETF(CRBN) , which avoids energy stocks and prefers tech plays such as Apple and Microsoft, as well as mega-caps Johnson & Johnson (JNJ) and General Electric Co. (GE) .
Take a look at these funds’ holdings and I’m sure you’ll see a lot of overlap between these “responsible” ETFs and your own portfolio. The big difference, of course, is the fees. The iShares MSCI KLD 400 Social ETF charges 0.5% in annual expenses — more than three times that of plain-vanilla mid-cap funds such as iShares Core S&P Mid-Cap ETF (IJH), which charges 0.12%.
Also, the Core S&P Mid-Cap ETF doesn’t allocate more than about 0.7% of assets to a single position, while the KLD 400 ETF is overweight in large-cap technology stocks — with almost 10% of assets allocated to the trio of Apple, Microsoft and Alphabet Inc. (GOOGL) (GOOGL) .
Investing with your conscience involves some trade-offs. So it’s worth digging into these funds and similar offerings before you move your money. Chances are you may already be investing in a way that’s in line with your values — and doing so with greater diversification, lower fees, and better performance.
-Jeff Reeves; 415-439-6400; AskNewswires@dowjones.com