Socially Responsible Investing

The strategy of socially responsible investing has a long history and is prevalent in the investing world. The exact definition or methodology of socially responsible is not crystal clear but what is not in question is the rapid growth in the space.

The strategy of socially responsible investing can be traced back to the 1960s1 but in last few decades the amount of money invested in the strategy has been significant. According to Bloomberg, total global assets invested in ESG in 2021 were $35 trillion2, Europe accounting for half of ESG assets. Bloomberg is also projecting a possible $50 trillion by 20253, with a 15% annualized growth rate which is only half the pace of the last five years.

Most socially responsible investing assets follow an Environmental, Social, and Corporate Governance (ESG) focus.  ESG is a filtering strategy that screens on environment, social and governance issues. If a security doesn’t pass the screening process of the ESG filter it will be excluded from the investable universe. Some factors that allow inclusion or exclude potential investments can be seen in the chart below. The diagram below of an ESG wheel are topics that investors can use in evaluating whether a security is socially responsible or not. Some examples of environmental issues are clean technology and water usage. On the corporate governance filter, board diversity and executive compensation are examples. Labor relations and workplace safety are topics that screen with a social filter.

As ESG initiatives have evolved, it has transitioned from not only restricting investment in certain groups that don’t fit the criteria but also actively increasing investment toward companies that promote specific or broadly defined ESG agendas.  

Socially responsible investing brings the added benefit of not only making an investment but investing alongside a person’s values. There is no strategy that perfectly aligns with every investor’s specific criteria but ESG screening methods can promote ethical and socially conscious investing.

Some investors worry investing with their values will compromise their investment return potential, but historically investing in socially responsible ways doesn’t necessarily mean sacrificing performance. A report from Charles Schwab4 points out that ESG portfolios have consistently ranked around the middle of their overall peer groups (ESG and non-ESG focused investments). In the chart below, ESG portfolios (black line) for the last decade have performed slightly better and slightly worse in different periods but doesn’t show significant long-term performance erosion by investing in a socially responsible manner.

At Gradient Investments, the Socially Responsible Portfolio aligns investments with values. The Portfolio Management team actively manages the socially responsible portfolio by selecting exchange-traded funds (ETFs) that utilize ESG criteria for investment selection.  Gradient Investments has 3 different portfolios for socially responsible investors ranging from Conservative to Growth.  While there is no one size fits all for socially responsible investing, the Socially Responsible Portfolio provides a process of investing in a socially responsible manner that fit your return objectives and risk tolerance without sacrificing the performance needed to meet your investment goals.   

  1. https://www.msci.com/esg-101-what-is-esg/evolution-of-esg-investing
  2. https://www.bloomberg.com/news/articles/2022-02-03/esg-by-the-numbers-sustainable-investing-set-records-in-2021
  3. https://www.bloomberg.com/professional/blog/esg-assets-may-hit-53-trillion-by-2025-a-third-of-global-aum/
  4. https://www.schwab.com/learn/story/how-well-has-environmental-social-and-governance-investing-performed