Investing in Green Companies Doesn’t Have to Mean Sacrificing Returns

Angela Colley

At first glance, socially responsible investing seems like a no-brainer: companies earn an investor’s trust by acting as environmental stewards, treating their employees fairly, not bribing elected officials—ya’ know, basically by behaving like good citizens of our shared planet and not like the come-to-life version of a cartoon fat cat, twirling his handlebar mustache while dumping toxic green slime into a river. Investors are satisfied that their assets are being used to make positive social change in the world. And green companies are encouraged to keep doing good, while investors make a profit off their investment. It’s hard to knock an opportunity to build out your own portfolio while also making the world a better place.

But socially responsible investing has always had its critics, usually from one of three camps: One, SRI is a sort of fringe investment, largely for the tree hugger types. It isn’t—and won’t ever be—as mainstream as, say, your mutual funds made up of name-brand blue-chip stocks. Two, you can’t make a profit investing that way. Investors can either opt for funds that perform well, or opt for funds that do good, but not both. Third, it’s elitist, requiring large initial investments that price most average investors out.

SRI is a relatively new investing concept, hitting the scene in the early 2000s. As funds form and the benchmarks for measuring companies evolve, it has had its growing pains, but a lot of the earlier criticisms have turned out to be more myth than fact. Here’s the three biggest:

It’s for hippies

When SRI was first picking up steam, some financial experts doubted its ability to really impact the market. After all, investors had been told for years to consider profit and profit alone. You study white sheets, keep an eye on market trends, look for the next best thing. Social responsibility and environmental concerns were for nonprofits, not mutual funds. There was also the concern that carbon footprints and positive corporate policies would only be important to a small subsect of the investor population: the do-gooder, hippie types, if you will.

But SRI has been picking up steam, particularly among millennials. In 2015, Morgan Stanley’s “Sustainable Signals” report found 28 percent of millennials—compared to 19 percent of the rest of the population polled—were “very interested” in impact, or SRI, investing. By 2017, when Morgan Stanley ran the study again, 86 percent of millennials were interested in SRI, compared to 75 percent of other age groups.

Some studies have also shown that women, particularly millennial women, have a strong interest in SRI. Morgan Stanley found that 84 percent of women, compared to 67 percent of men, were focused on SRI in 2017.

You can do good or do well, not both

Analysts—and some investors—also doubted SRI’s ability to turn a profit for investors. After all, if you’re worried about how a company impacts the world, are you also really worried about how it impacts your portfolio?

But, like any other investment, SRI has always been about making a profit–just with the added benefit of investing in companies that investors can feel good about. And for a lot of investors the socially driven mission is paying off. Between 2014 and 2016, SRI investing hit a growth spurt, growing more than 33 percent, which brought the total invested funds from $6.57 trillion to $8.72 trillion, according to Morgan Stanley. By the end of 2017, those numbers had shot up even higher. According to the US SIF Foundation’s 2018 report, $1 out of every $4 professionally managed investment dollars in the United States were invested in SRI strategies—bringing the total up to $12 trillion or more.

Socially responsible investing funds have also consistently been meeting benchmarks set by the broader market, proving these funds can at least keep pace with the other traditional, everyday funds some analysts were sure they’d never even catch up to. In 2017, some SRI funds jumped ahead of the S&P 500.

Only rich West-coasters can afford it

Niche funds have always been seen as somewhat exclusionary, but SRI principles have the added downside of being seen as something that would appeal to—and could only be afforded by—wealthier, environmentalist types. The kind of thing you buy into at a gala for the endangered spotted owl while sipping mimosas in designer-made, sustainable cocktail dresses.

There is some truth to some SRI funds having higher minimum buy-ins than traditional investing options, but other investment managers have put their focus on being as inclusive as possible to all levels of investors. And that means offering lower initial costs and more affordable investments. Today, investors are just as likely to find an SRI fund at their price point as any other traditional fund. The key is shopping around or working with an investment manager than can help investors find the right kind of investments that meet both their social conscious and their financial needs.

While SRI funds have the potential to meet (or maybe even beat) market benchmarks, the investment industry as a whole is changing and investors should still do their due diligence to make sure they’re confident in what they invest in and can withstand any potential risk. For investors who’d rather not go it alone, funds can offer a chance to diversify a personal portfolio without the headache of searching individually. Whichever route an investor chooses, there’s a good peace of mind that come from investing with a conscience and that’s priceless.