20 KIPLINGER’S PERSONAL FINANCE^ 09/2017AHEADIt was taken over in 2010 by MSCI;
funds that track its indexes have at-
tracted $58 billion in investments. S&P
Dow Jones, Calvert, Vanguard FTSE and
many others have their own indexes.Growing complexity. The notion that in-
vestors want to put their money in com-
panies that operate in accordance with
certain social or environmental ideals is
a positive, even touching, development,
but what was once simple has become
complicated. In the past, SRI meant
merely avoiding companies deemed to
be in “evil” businesses; now, companies
that score high on often-squishy ESG
criteria dominate portfolios.
Regardless of criteria, the big ques-
tion is whether you must sacrifice
return for virtue. In theory, the answer
should be yes. Imagine you are a fund
manager whose job is to pick the best
100 stocks for your shareholders. You
compose your list, and it includes, say,
20 stocks that don’t meet ESG criteria,
so you must exclude them. By defini-
tion, the stocks that replace the 20 re-
jects will be inferior. Of course, it could
turn out that following ESG principles
actually makes companies more profit-
able. If so, the stocks of those companies
should deliver superior returns.
So let’s look at some results. The
returns of well-diversified SRI funds
trail the broad market, though not by
much. Standard & Poor’s 500-stock in-
dex, the primary benchmark for large-
capitalization U.S. stocks, returned an
annualized 14.6% for the five-year period that ended June- By comparison, Calvert Equity Portfolio A (CSIEX),
one of the largest SRI funds, with $2.1 billion in assets,
returned 12.9% annualized; the fund’s annual expense
ratio of 1.09% accounted for most of the difference. The big
winner among SRI index funds was VANGUARD FTSE SOCIAL
INDEX (VFTSX), with an expense ratio of just 0.22%. Over five
years, it returned 16.4% annualized, beating the S&P 500
by an impressive 1.8 percentage points per year, on average. LISE METZGER
JAMES K. GLASSMAN Opening ShotDon’t Outsource Your Conscience
O
nce a financial backwater,
socially responsible investing
is now a virtual tidal wave. Over
the four-year period that ended in 2016,
the amount invested in the U.S. using
professional management that considers
environmental, social and corporate-
governance issues—ESG, for short—
grew from $1.4 trillion to $8.1 trillion.
About one-fifth of all assets under man-
agement in the U.S. now include some
ESG component, according to the Forum
for Sustainable and Responsible Invest-
ment, and some 500 mutual and ex-
change-traded funds now practice some
form of socially conscious investing.
Calvert Research and Management,
which got started in SRI in 1976 with
a portfolio that avoided companies that
were doing business in apartheid-era
South Africa, now has 26 funds, includ-
ing such specialty products as Calvert
Global Water A (symbol CFWAX).
Pax World was cofounded in 1971 by
a United Methodist official to “allow
churches to invest their money in har-
mony with their message” and now has
11 funds. Among them is Pax Ellevate
Global Women’s Index (PXWEX),
which gives greater weighting in its
portfolio to companies with high
female representation on corporate
boards and in management. One of the
largest ESG-oriented ETFs is iShares
MSCI ACWI Low Carbon Target ETF
(CRBN, $108), which invests in compa-
nies all over the world with low carbon
emissions.
Even Fidelity has gotten into the act. This year, it
launched its first SRI funds: Fidelity U.S. Sustainability
Index (FENSX) and Fidelity International Sustainability
Index (FNIYX). They are designed to track two MSCI
indexes—one for domestic stocks and one for foreign
stocks—that meet ESG criteria. And there are many other
SRI indexes. The KLD 400 index, created by three SRI
pioneers—Peter Kinder, Steve Lydenberg and Amy Domini—
was the basis of much SRI investing in the early decades.The notion that
investors want to
put their money in
firms that operate
according to certain
ideals is positive.
But what was once
simple is now
complicated.