Wednesday, August 6, 2008

The Costs of Socially Responsible Investing

One of the leading advocates of socially responsible investing in recent years has been the California Public Employees' Retirement System (CalPERS). Socially responsible investors avoid investing in countries, industries, and companies that engage in business that the investors find objectionable ("socially irresponsible"?).

A recent report indicates that this investment stance comes with some serious costs. For example, CalPERS had rejected investing in China, India and Russia. Avoiding these countries resulted in the fund underperforming an index without such a screen by just over 2.5 percent per year and reduced returns by $400 million according to a CalPERS report (note: last year the fund changed its policy on investing in these countries). Avoiding tobacco stocks has reportedly cost the fund over $1 billion in returns over the last seven years.


  1. Scott Malpass, the Chief Investment Office at the University of Notre Dame, is prohibited from buying stocks in some 350 companies that Roman Catholic bishops have thrown a flag on for non-compliance with Catholic teachings, yet ND's endowment is consistently ranked among the top 5 in returns for American universities.

  2. Just like 'conventional' investing, socially responsible investing provides returns all-over the map. However, serious, unbiased studies do show that in general, returns on socially responsible investment portfolios as as good, and sometimes better, than with most regular portfolios. See Ethical Investing Studies

    Best wishes, Ron Robins
    PS I've been following socially responsible investing for about forty years and the link above is to a page on my website. My website focuses on global news, research and services related to the subject.

  3. Yes, there are studies that show both outperformance and underperformance. However, socially responsible investing is almost guaranteed to continue growing as more people realize that they CAN choose SRI. I run a company that connects individuals to investment advisors ( Find a Financial Advisor ) and I see a growing trend toward people searching for socially responsible investing as part of the criteria for choosing a financial advisor. In fact, it is easy to make the case that at times, part of the outperformance of SRI companies is due simply to cash flow into those companies. Then there is also the green or alternative energy companies which are likely to continue to do well unless oil drops by more than half.

  4. Mel and Stacey - thanks for your thoughts. I want to comment on your point about SRI stocks rising because of cash flow going into them. I presume you are inferring that more people are investing in them. I partly agree with your point, however, many SRI companies are also 'best-of-sector' whereby they often make more money than their peers. So they do indeed warrant higher price-earnings ratios, etc.

    I visited your 'Finding an Advisor' site. Looks very interesting. I often get asked to refer people to advisors, can you send me more detailed info, such as how many advisors you have, do they pay to be listed, etc.

    Thanks indeed. Ron