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Busting the myths about Socially Responsible Investing


So, you’ve decided that you want your investments to fit better with your own personal values of living a better life and want to play your part, however small in building a better and more sustainable world. You are of course aware that this can be achieved through Socially Responsible Investing (SRI) and want to investigate how you can utilise this approach with your pension fund and other investment assets.

But, you’ve a nagging doubt in the back of your mind… are you going to have to pay too high a price for this more idealistic investment approach? The good news is, the short answer is NO. We’re going to explain this answer and bust some of the myths around SRI. However should you want to take a deeper dive into the whole are of SRI, it’s worth taking a look at our whitepaper “Our Guide to Socially Responsible and Sustainable Investing”. 

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Myth 1: Socially Responsible Investing results in lower returns 

This simply doesn’t stand up to scrutiny. The returns from SRI investing will naturally deviate from a broad market index as there will be a different stock composition, however research has shown that, over time, this doesn't typically not result in significant underperformance. In fact, in the recent past, excluding certain stocks such as Oil Companies in favour of Technology Companies has actually had a beneficial impact on investors portfolios!

Opponents of SRI have drawn attention in the past to the outperformance of tobacco stocks in the 1990s and early 2000s, and have pointed out that by excluding this sector, SRI funds could only underperform. A fair point. But they then fail to remind you that tobacco stocks subsequently underperformed (significantly so in the last 5 years).

We can explain these differences in performance through the underperformance of "Value" relative to "Growth" over the last 10 years. See this Bloomberg article  for a good summary of this subject.

 

Myth 2: Mixing your values with investing is a recipe for losses

Again, this is a myth… After all, every investor and indeed fund manager is bringing values or style to every investment decision. They may want to take big bets only – they’ll have winners and losers. They may be searching for access to the lowest cost funds – again within these there will be winners and losers.

It’s the same with Socially Responsible Investing. An investor will have winners and losers in their portfolio and its sometimes said that;

"diversification is the only free lunch in investing"

Again, time is an important factor. An SRI investor will experience different returns to other more traditional index funds or managed funds, but over time these will balance out.

Mixing investor preferences with investing is nothing new and is entirely rational and happens anyway in every managed fund scenario.


Myth 3: Socially Responsible Investing is narrowly focused on excluding “bad” stocks

This is simply not the case anymore. While SRI definitely excludes companies that earn a certain percentage of their total business revenue through the production or sale of harmful products, it has evolved into a far more sophisticated approach than simply that.

Companies that take their Environmental, Social and Governance (ESG) responsibilities very seriously and who perform strongly in these areas tend to also perform strongly in a financial context too. This is good news for SRI investors, who typically have a bias towards these types of stocks within their portfolios.

The bottom line is that SRI offers investors the opportunity to build a portfolio that is aligned with their values, while not ceding investment returns as a consequence of doing so. We are fortunate at Global Wealth, along with our sister company Ethical Financial to have deep experience and specialist expertise in helping people to invest in line with their own preferences and convictions.

Would you like to find out more about how Global Wealth and Ethical Financial assist and guide individuals to investing on their terms?

 

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