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Big Impact: Clients Turn to Socially Responsible Investing

In post-recession America, greed is out. Clients are more open to thinking about values along with profits. So it’s not a surprise that so-called “socially responsible investing (SRI)” funds have grown at a faster rate than assets in the broader market, according to the latest study by the Social Investment Forum. Professionally managed assets following SRI strategies rose 380 per cent from 1995 to 2010, from $639 billion to $3.07 trillion, compared to a 260 per cent increase of assets in the broader market.

For the uninitiated, socially responsible investment funds are funds that screen potential investment targets for things like environmental impact, corporate governance or employment policies. Advocates claim that firms that seek to tread lightly on the environment, engage in transparent corporate governance or work for the good of society make better investment choices for investors who support these values, and could make an investment return at least matching the broader market in the process.

The popularity of these funds can be seen in the Total Return III Fund, PIMCO’s SRI offering. It grew seven percent last year, to $3.5 billion, while the PIMCO Total Return Fund, the country’s largest with $244 billion in assets, rose by two per cent.

The Pimco offering is considered an SRI fund in that it refuses to invest in any business that claims more than 10% of its revenues from casinos, tobacco, alcohol, pornography or military equipment. It also won’t invest in companies that are engaged in business activities with Sudan. If a client has expressed a concern over these practices, this fund may be a suitable match.

“To be honest, it caught us by surprise,” said Peter Essele, senior investment research analyst for Commonwealth Financial Network. “We’ve seen a big change in the last two and a half years. I think interest in socially responsible investing has gone from a fringe movement to something that’s much more mainstream. Advisors started asking us for more information and they said the requests were coming from their clients.”

In September 2010, Commonwealth started its own ESG fund, the PPS Select SRI Portfolio, which now has $15 million in assets. In San Francisco, Veris Wealth Partners has allocated all of its $600 million in assets under management to impact investing.

“It’s a concept that has really resonated with people,” said Veris chief executive Patricia Farrar-Rivas. “They see that they can use their personal wealth and the capital markets to have a positive impact on the world, and also still make money. So why not?”

Benefits and Caveats

Offering these types of funds can give your firm a unique edge, at least in terms of client relations. Investors with an interest in making the world a better place tend to be passionate and more willing to talk up an investment advisor that helps them with those goals. “Clients doing socially responsible investing tend to spend time with like-minded people, and advisors are seeing new clients come through those referrals,” Essele said.

“More clients are seeking out ways to do good with their money. If your firm doesn’t offer SRI opportunities, they may consider taking a portion of their assets and moving them to somebody who does,” Farrar-Rivas said. “We’ve found that having an SRI platform creates a new bond with the client because this is an area that is so important to them. The assets become very sticky.”

But wealth managers considering impact investing also need to proceed with caution. While there have been some studies suggesting a financial edge to SRI investments (see “Why Sustainability Is Now the Key Driver of Innovation” in the Sept. 2009 Harvard Business Review) selling these funds as a financial strategy only isn’t advisable.

“We view these investments as both philanthropy and an investment,” said Michael Tiedemann, chief executive and chief investment officer for New York-based Tiedemann Wealth Management. “Many will fail, although will hopefully provide some social benefit, and those that succeed will likely bring high rewards. As an investment advisor and fiduciary, Tiedemann must view these investments as part of a family’s overall portfolio and typically recommends impact allocations represent a modest percentage within the high risk allocation.”

Greg Peterson, director of investment research for Waltham, Mass.-based Ballentine Partners LLC also emphasizes the risks of impact investing to his clients. “We’ve been doing it for about five years and we tell our clients they may get market returns and they may not get market returns,” said Peterson, who helps manage the firm’s $3.5 billion in assets under management. “They have to ask themselves how much they are willing to give up in performance. Doing an SRI screen can limit your universe of companies which can lead to lower performance. You may also be taking a sector-specific risk. For example, clean energy is a sector that has gotten pummeled in the past couple of years.”

Advocates point to the Dow Jones Sustainability World Index, which includes companies scoring in the top 10 per cent for SRI criteria. The annualized 10-year return through 2011 for the DJSWI was 3.3 per cent, compared to 3.4 per cent for the same period for the broader MSCI World Index.

And the PIMCO SRI fund only lagged the mutual fund giant’s powerhouse Total Return fund slightly, registering a -0.10 per cent return last year , compared to a 0.18 return for its huge counterpart.

Some impact investors are being offered potentially lucrative private equity deals, Peterson said, including early stage alternative energy, biotech and medical device companies. Heavy duty vetting is essential no matter what options impact investors choose.

“We believe most people interested in this type of investing should seek out third-party groups that’ll perform the needed due diligence,” said Tiedemann. Firms like KLD Research and Analytics specialize in evaluating SRI criteria and large mainstream data providers like Bloomberg also now offer screening services for investors and advisors.

Companies offering SRI products ranging from funds to indexes to separately managed accounts are multiplying rapidly, but wealth managers should seek out providers with a long history in the field, said Farrar-Rivas. “You want to see their track record, just like you would with any fund manager,” she said. “It’s not just about someone who says they’re green – you want to look at what they’ve actually done.”

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