Portfolios That Make a Difference
Impact investing has finally “moved from the fringes” of the financial world, said Paul Sullivan in The New York Times. Investors looking to align their portfolios with good causes are pouring money into funds championing issues ranging from fighting climate change and improving education to funding the arts and putting more women and minorities on corporate boards. Last year, 1 out of every 6 professionally managed dollars was invested using socially responsible investment criteria, which considers not only financial returns but also environmental and social impact. “And impact investing may now open up further.” In October, the Department of Labor cleared the way for managers of pensions and 401(k)s to add these socially targeted funds to their offerings.
Socially responsible investing has deep roots in American history, said Angelo Young in IBTimes.com. Colonial-era Quakers refused to do business with companies linked to the slave trade. In the early 20th century, the first mutual funds screened out companies linked to gambling, tobacco, and alcohol. Today, there are more options for conscientious investors than ever. The number of socially responsible investment funds ballooned from 200 in 2013 to more than 900 last year, according to the Forum for Sustainable and Responsible Investment.
“The question is, Will you make money?” said Ben Steverman in Bloomberg.com. It’s never been easier to find an investment that promises to do good, but it’s never been harder to pick the right one. “No matter how well-intended an investment strategy may be, it can’t avoid mathematical reality.” So be wary of do-gooder funds laden with fees, which eat into your returns. You’ll often hear that socially responsible investments perform better than other assets, because ethical companies are less risky. The truth is more complicated. Some funds beat the market, others don’t. The Vanguard FTSE Social Index Fund, for instance, has beaten Vanguard’s S&P 500 fund over the past five years but lagged over the past decade. Virtue is also a tricky thing to define. A gayfriendly company may be a polluter; a solar company may treat its employees terribly.
Shunning “unethical” companies can also backfire, said William MacAskill in NewYorker.com. Divestment campaigns, which encourage investors to pull their investments from certain companies, are a popular form of socially responsible investing. But if you want to discourage the use of fossil fuels by selling your shares in, say, ExxonMobil, chances are “someone who doesn’t have ethical concerns will snap up the bargain.” One study found that “sin” stocks outperform other stocks by 2.5 percent per year; some mutual funds even exclusively invest in companies involved in alcohol, tobacco, gambling, or defense, and regularly beat the market. “By divesting from unethical companies, ‘ethical’ investors may effectively transfer money to opportunists.”
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