Get Rich While Doing Good
Wall Street has worked hard to earn its reputation for bad behavior, from nearly bringing down the global financial system with subprime mortgages to signing up customers for fraudulent accounts.
But even as the bankers in the headlines were drawing the scorn of a generation of millennials, a large and growing group of portfolio managers have been quietly using their financial power to make the world a slightly better place. And in the process, they are making investors wealthy.
A whopping $6.6 trillion is invested “sustainably,” which means portfolio managers evaluate companies on the basis of environmental, social and governance factors, also known as ESG. It turns out that companies that aim to reduce greenhouse gas emissions, maintain high workplace standards, and have diverse boards also benefit from avoiding fines and lower employee turnover. Over the long run the companies, and their investors, thrive.
Over the 12 months ended in September, the MSCI KLD 400 Social index, a grouping of companies that put their best foot forward, returned 15.8%, edging out the Standard & Poor’s 500 index’s 15.5%.
ESG investing has an impressive history: Campaigns led by sustainable investors helped break apartheid in South Africa, and forced NKE, -1.14% (NKE) to clean up its supply chain. Nuns are rapping WFC, -0.47% (WFC) on the knuckles for its phony accounts scandal — they want a full report on what caused such behavior.
More investors are embracing this approach. From 2012 to 2014, assets invested sustainably in the U.S. ran up 76%, according to the Forum for Sustainable & Responsible investment. It wasn’t always that popular.
One reason sustainable investing has hype now is that the style of investing has evolved.
Religious investing/SRI: This old school approach screens out companies that produce or sell tobacco, alcohol, and arms. They tend to be based on religious or ethical values.
For example, socially responsible investors don’t like Big Tobacco companies such as PM, -0.33% (PM) or MO, -0.02% (MO), because their products can kill. They shun alcohol companies that practice questionable marketing tactics. In 2014, for instance, U.K. retailers got flack for pricing beer more cheaply than bottled water.
ESG investing: In recent years, sustainable investing has become more inclusive, not ruling out industries so much as looking for best-in-class companies within any given sector.
For example, MSFT, -0.35% (MSFT), DIS, -0.51% (DIS), or XOM, +0.00% (XOM) might score better on environmental factors relative to their competitors, because they voluntarily charge themselves a carbon tax. The tax incentivizes them to reduce carbon emissions, and their “taxes” go into a fund used for projects to build solar panels and wind farms. Supermarket chains such as COST, -0.97% (COST) might be favored over WFM, -1.43% (WFM), because it sells more organic foods. Even better, Costco lends money to farmers so they can buy equipment and land to produce even more.
As sustainable investing continues to gain clout, you may get more opportunities to choose mutual funds that follow this approach. For instance, such funds are more likely to appear in your 401(k) plan.
In the meantime, our sister publication Barron’s compiled a list of the Top 200 Sustainable funds, 50 of which beat the broader market. To take one example: The Parnassus fund (PARWX) has returned an average 20% per year for the past five years, handily beating the broader stock market. See our recent Barron’s cover story for a deeper dive into sustainable funds.
Keep in mind that not all sustainable funds are the same. Some managers are greener than others, and one fund may focus more on how companies treat employees, while another may be stricter about products sold. The important thing is that you can put your money where your conscience is and still retire with an (organic) nest egg.
Article and media originally published by Crystal Kim at marketwatch.com