I’ve been at least peripherally conscious of the Socially Responsible Investing (SRI) segment of the investment management business for a very long time. The criteria for a company or security being “socially responsible” have primarily been negative–typically no “sin” stocks, namely, tobacco, alcohol, gambling or weapons. Maybe no heavily polluting industries, as well.
It’s also been a niche business, with high costs and poor performance results. I don’t get the results part. I don’t understand why any portfolio manager would hold tobacco stocks, thereby lowering the cost of capital for a terrible business and enabling in the harm it causes. Polluters, who will inevitably be caught, fined and disgraced, are a poor bet, too. In my experience few PMs in the US hold these sorts of stocks (how the ones who do justify this remains a mystery to me), although lots in Europe do. I have less trouble with the other three industry groups, but all are relatively small parts of the index. Holding Faceboook, Google or Netflix would more than offset any loss of performance avoiding the sin stocks would cause. So I’ve never understood why SRI investing results haven’t been better. Could SRI investors want underpeformance to validate their virtue?
According to the Institutional Investor, however, the SRI backwater is undergoing a transformation. That’s because Millennials are showing themselves to be genuinely socially aware investors. Yes, there are industries where they don’t want to put their money. But they also appear to be much more knowledgeable about publicly traded companies than older investors (the Internet? PSI?). And they have a much greater desire to own companies that aim to solve social or environmental problems, rather than simply avoiding doing harm.
As I mentioned above, most thinking PMs are socially aware in their stock selection anyway. It’s the right thing to do …and it makes good business sense. Just don’t tell a potential client, or he’ll conjure up the image of a performance-indifferent hippie, despite your conservative suit and tie.
My guess is the the first evidence of SRI-aware Millennials will not be in a flowering of SRI funds and ETFs. Rather, we’ll see it in incrementally better performance of companies with highly ethical managements and in industries that target social good. If SRI funds could post competitive investment performance, they may participate, too.
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