The SRI Concern

There is an unspoken concern that many investors have about Socially Responsible Investing (SRI).  In short, the concern is that if you invest in socially responsible companies, your investments will not do very well, or at least not as well as they would have otherwise.  I was reminded of this recently while reading an article by Stephen Mauzy, CFA of The Motley Fool.  While I recognize that the article was meant to be humorous, (not that I find the idea of mixing firearms and alcohol to be funny) it still perpetuates the concern that there will be a performance penalty with SRI.

When we put together an SRI account, we took a different approach.  We knew that our core systematic relative strength strategy had historically outperformed.  The challege was to adapt that same process in an SRI account. 

We engaged KLD Research & Analytics to screen our universe of domestic mid- and large-cap stocks for environmental, social, and corporate governance factors.  KLD goes about their screening in an interesting way.  Rather than taking the typical approach of throwing out certain companies on an absolute basis because of their involvement with some perceived negative, KLD groups companies by industry and then boots the companies that score the worst on their environmental, social, and corporate governance scales.  It allows the investment universe to have broad industry representation, which is not necessarily typical of other SRI screening processes.  The advantage for the manager is that we can get exposure to every industry, so that we can potentially benefit when that industry is in favor.

Our next step was to apply the exact same core systematic relative strength process to the screened SRI universe as we do to our standard mid- and large-cap universe.  Lo and behold, the long-term performance is virtually identical between the two universes!  Same process, same results, even though one universe has low-scoring SRI companies removed.  It turns out that there is no functional difference between our regular core account and our SRI core account.  As a result, clients need not have any trepidation about a performance penalty in SRI.  You can do well even when doing good.

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