Why Socially Responsible Companies Make Profitable Investments |
Written by SRIStocks.com
The overall SRI investment performance warrants a socially responsible investor to study into the fundamentals powering SRI mutual funds, socially responsible funds, and socially responsible investment funds, which are based upon values investing, corporate social responsibility, socially responsible stocks, and social investing.
With socially responsible investment funds, such as Parnassus Equity Income and Pax World Balanced Fund , outperforming more than 90% of its market counterparts and the S&P 500, the numbers are clear - you do not have to sacrifice socially responsible investment returns to engage in social investing.
Conceptually, socially responsible investment performance is supported by strong theoretical underpinnings that explain its potential to outperform the market.
Theory #1: Socially responsible companies are less prone to certain risks.
Whereas socially responsible stocks do not have the opportunity to capitalize upon exploitative profits, they develop sustainable, long-term business practices - which will still demonstrate efficiency long after the world's natural resources and labor have been subjugated.
In addition, companies and socially responsible stocks that practice corporate social responsibility are shielded from the risks stemming from legal battles and labor conflicts. The probability that socially responsible companies will be sued for bad corporate governance practices is significantly lower than its non-responsible counterparts. Therefore, the financial risks of bad business practices are mitigated, increasing the profitability of the socially responsible stock.
Lowered risk in social investing extends to other sectors
Researchers at the University of Wisconsin and MIT concluded that firms with stronger corporate governance reduce the agency risk, and thus, decreasing the cost of equity capital to shareholders. Subsequently, credit and debt organizations have begun to review corporate governance when developing their own risk strategies.
Theory #2: Corporate social responsibility bodes well for all areas of management.
A socially responsible stock that practices corporate social responsibility is likely to have an effective management approach, especially in terms of building strong human relations - leading to a satisfied, more productive workforce. In addition, these socially responsible stocks are more likely to anticipate and innovate in their industry, maintain positive community relations, and develop strong rapport with financing organizations.
There is tangible evidence that corporate social responsibility contributes to the bottom line. According to research conducted by the Governance Metrics International (GMI) , companies within the top 10% of GMI rankings for corporate social responsibility standards earned higher ROA, ROC, and ROE than the average of all other GMI rated companies. By the same token, all of the companies in the lowest 10% percentile of GMI rankings had lower ROA, ROC, and ROE than the overall average. Thus, there is a definitive relationship between corporate social responsibility and SRI investment performance – boding well for the socially responsible investor.nd SRI investment performance - boding well for the socially responsible investor.
Strong corporate sustainability practices beget improved financial performance, which then allows for even more funding for greater levels of sustainability - creating a positive cycle both for social and economic profits for the socially responsible investment portfolio.
Theory #3: Rigorous social investing research results in greater returns.
Due to the inherent nature of socially responsible investment funds and values investing, an extensive amount of research must be conducted in order for socially responsible stocks to pass through the negative, positive, and industry best filters. Therefore, the socially responsible investment fund managers know the companies intimately - on a much deeper level than the traditional strictly quantitative analysis. In fact, socially conscious investing portfolio managers often speak directly with the potential socially responsible stock's management to gauge their ability to pass social screens, which is a much more powerful dynamic than reviewing papers and numbers alone.
SRI asks, "What car are you driving?"
Some social investing portfolio managers may even analyze the type of cars the executives drive, as this may be indicative of the spending values and executive compensation styles. According to Jane Siebels, founder of Green Cays Asset Management, "Things like that can tell you a lot about the company that you won't get from just an interview with the CEO."
Theory #4: Socially responsible stocks have inherent built-in value.
With the growing awareness surrounding sustainable investing , it is more evident that socially responsible stocks have tangible, built-in value. According to research conducted by Oekom , an independent sustainability ratings agency, socially responsible stocks with top sustainability ratings experience an average growth higher than their market counterparts.
In addition, more American CEOs are beginning to see the financial value of sustainability. According to research conducted by the Center for Corporate Citizenship at Boston College , more than 80% of surveyed CEOs believed that corporate social responsibility boosts the value of the bottom line.
Socially responsible stocks or socially responsible mutual funds?
For the average investor, researching socially responsible stocks can be a time-consuming process. For socially responsible investors who are not rigorously active in trading their portfolios, SRI mutual funds may be a good option. With over 100 socially responsible funds, many with focus specialties, they conveniently produce SRI investment returns. For example:
With the tangible socially responsible investment performance numbers, combined with the strong theoretical underpinnings, socially responsible investing is good for both financial and social rewards for the socially responsible investor.
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