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On world markets there are more funds investing exclusively in socially responsible companies. Invested in them, the investor will indirectly help the society or even the planet. But can he earn?
Socially responsible investing (social responsible investments, or SRI) or, in other words, the strategy of investing with an eye to the principles of social and environmental responsibility, and corporate governance standards — is now definitely a hot topic in many developed countries. For example, in USA the volume of investments in this kind of “responsible investment strategy” has reached about us $8.1 trillion, showing an increase of 30% in 2014. In just 10 years, the funds with the mandate to “responsible investments” has increased more than 10 times, from $202 billion to $2.6 trillion. This is mainly mutual funds and hedge funds, but recently began to appear and the corresponding ETF. Thus, the strategy of “high moral” investment seized up to a quarter of industry assets management in the United States.
What are socially responsible investments? This term is sufficiently broad interpretation: here, the strategy associated with the exception of the portfolios of the so-called “merchants of death” (arms manufacturers, alcohol and tobacco), and assign greater weight in the portfolio companies with the image conscious who care about the environment or spending big money on charity. Some portfolio managers even include indicators of socially responsible investing (ESG-indicators, Environmental-Social-Governance) in the financial model.
The company related to ESG, as a rule, can boast that they are trying to minimize carbon dioxide emissions and environmental pollution, pay more attention to food safety and take care not only of employees but also on minority shareholders. Individual empirical studies (from Oxford University to the Morningstar Agency) show that “moral” issuers can more easily raise capital and demonstrate greater efficiency — this should lead to an increase in the share price at the least risk. Everything seemed to be optimistic money flow to responsible companies, which over time will make people’s lives better. However, all is not so simple.
First, this is a modern stream would not prevent the increase of transparency: according to profile non-profit organization US SIF, the criteria for inclusion or exclusion of companies in ESG indices remain extremely vague. Secondly, and this is the main problem — ESG-investing does not work. Paradoxically, the fact. For 10 years, ESG index, developed markets lagged behind the “standard” MSCI World four times, showing a yield of only 11.5% vs 45,23%. Behind the underlying index MSCI USA ESG and its version (by 57.5 per cent over eight years). As it is in the industry proponents of socially responsible investments? “The effect will be noticeable in the future. Possible.”
This is hardly surprising. The selection of tools according to the criteria of the ESG is initially based on discrimination. Before you choose from 2000 of the securities, after application euphonious filter based on fuzzy criteria, the selection shrank to 1,000 papers, and with it the possibility of diversification. This increases the risks taken by the investor, and leads to a decrease in yield of its portfolio.
However, there is a silver lining: if socially concerned investors EN masse shun any securities, it becomes undervalued relative to other companies of the same sector or industry. By purchasing this share, the investor essentially not involved in the discrimination, can expect higher expected profitability of their investments. So relentless and immoral laws of Economics reward “sin” and not “virtue”.
Why is the number of financial managers, the rising under the banner of ESG/SRI that is constantly growing? Perhaps the reason for the tendency of market participants to engage in herd behaviour and “career risk.” Want to stay on the market — you do what you are asking institutional investors and family offices keen on the liberal agenda. To stand in the way of progress (in specific understanding of media and NGOs) is to put your career at risk, so managers tend not to debunk fashion ideas, and make money on them.
Unlike Western markets, in Russia, the prospects for socially responsible investments is very vague. This can be illustrated by the experience of UK “URALSIB” whose mutual Fund “URALSIB Socially responsible business”, having existed for less than three years and not to arouse investors ‘ interest, was quietly attached to the PIF of “Global innovation.” The fact that in our country the majority of market participants do not attach any importance to ESG factors, may ultimately lead to more successful investments.
A Russian investor, who is still eyeing the socially responsible funds, it is necessary to wish not to get involved neither “fashionable” nor “noble” investment, and to follow a more effective strategy asset allocation using broad indexes of stocks, bonds and commodities. Leave a healthy selfishness — it will help to increase the profitability of your investment portfolio while minimizing risk.