TDF Analysis | Published in February 2017

Socially Conscious Investing

The DCIIA suggests that, while investors utilize ESG and SRI to receive the emotional benefits, they do not necessarily sacrifice returns

By Matt Cirillo | February 2017

The concept of investing in a socially conscious manner has seen greater adoption in recent years as investors seek to put their assets to work in alignment with their beliefs. Two popular terms for this strategy are environmental, social and governance (ESG) investing and socially responsible investing (SRI).
Typically, socially conscious strategies aim to reflect investors’ moral and ethical values through investments that are screened for a variety of issues including those related to the environment, alcohol, gaming, tobacco, and civil rights, among others.
Research presented recently at the 2016 Defined Contribution Institutional Investment Association (DCIIA) Academic Forum suggests that, while investors utilize ESG and SRI to receive the emotional benefits, they do not necessarily sacrifice the utilitarian benefits—i.e., returns—of traditional investment strategies. At the same time, they do not experience significant performance-related advantages either. Research conducted by professor Meir Statman of Santa Clara University concludes that when comparing socially conscious and traditional indexes, historically, returns of the two strategies are effectively equivalent. Statman explains this similarity in returns as the result of the negating impact of including/excluding stocks of “good” and “bad” companies, respectively.
Even with the general popularity of the concept, the presence of socially conscious investments in retirement plans has been fairly limited, occupying less than a 1% share of the defined contribution (DC) mutual fund market, according to BrightScope 2014 defined contribution plan data (both BrightScope and PLANSPONSOR are owned by Strategic Insight). This is not surprising, considering the lack of innovation due to the pervasive fear of litigation and the longer sales cycles associated with this market. In terms of product development that caters to DC plans, very few target-date fund (TDF) series have embraced this theme of incorporating values-based selection.
Until Natixis declared its intent to launch, in Q1 2017, what it describes as the industry’s first broad-based ESG-focused TDF series, this niche had been relatively vacant. In a TDF market dominated by several key players and where true differentiation is difficult to achieve, Natixis will have positioned itself well to take advantage of investor demand for socially conscious options.

Why Returns of ESG/SRI Indexes Equal Returns of Conventional Indexes

 Stocks of “good” companiesStocks of “bad” companies
PerformancePerform well Perform well
ImpactIncrease returns of ESG
funds that include them
Decrease returns of ESG
funds that exclude them
ResultThe two factors cancel out, leaving similar returns
Sources: BNY Mellon Fiduciary Solutions; St. Louis Federal Reserve

ESG/SRI in Target-Date Funds

TDF ManagerESG/SRI StrategyTotal TDF Assets
American CenturyOver 75% of series assets
invested in the firm’s
“no tobacco” funds
$17.0 billion
American FundsUtilize the firm’s Washington
Mutual fund (excludes alcohol,
tobacco) throughout the series
$51.0 billion
GuideStoneFaith-based$2.3 billion
NatixisBroad-basedQ1 2017 launch
Sources: BNY Mellon Fiduciary Solutions; St. Louis Federal Reserve