Have “green” or “socially responsible” investments performed better or worse

Have “green” or “socially responsible” investments performed better or worse than the rest of the stock market in recent years?

—Ruby Romano, San Francisco, CA

It might be helpful to first define “socially responsible.” KLD Research & Analytics, a leading research firm that helps investors and investment professionals integrate environmental and social factors into their investment decisions, established the Domini 400 Social Index in 1990. The Index is a roster of public companies deemed by KLD to have positive records on numerous counts: the environment, human rights, product performance and safety, community and employee relations, diversity and corporate governance.

Contrary to popular belief, socially responsible investment and mutual funds, known collectively in the industry as “SRI” funds, have historically generated similar if not slightly higher returns than traditional funds. This fact is borne out by the performance of the Domini Index, which has generated a 12.17 percent return since inception. By comparison, the Standard and Poor”s S&P 500, a roster of 500 large companies representing the market as a whole, generated an 11.49 percent return over the same period.

In fact, the investment research firm Morningstar awarded one in five SRI funds—twice as many as the overall fund universe—its coveted five-star rating for high returns over a three-year period during the late 1990s. However, from 2004 to 2006 the average SRI fund has lagged slightly behind the broader market, returning only 8.5 percent versus the S&P 500″s 10.4 percent.

But to say that SRI funds perform better or worse than others would be misleading, as they tend to perform about the same as the rest of the market. “Most serious academic studies I’ve seen show that socially responsible investing has been, broadly speaking and over the long term, at worst a neutral factor for portfolio performance,” says Progressive Asset Management”s Phil Kirshman. “Some SRI funds have been wildly successful, performance-wise, while others have been perfectly miserable, but that”s the same situation as with non-socially responsible funds.”

Of course, most people who seek out SRI funds do so largely for non-financial reasons, as a way to encourage good social and environmental practices. “Performance of any investment product will vary over time,” says Erin Gray of Green Century Funds. “With environmentally and socially responsible funds, you enjoy the peace of mind that your results are obtained by investing in companies that meet standards for their environmental and social performance

Nonetheless, financial returns do still matter, even to SRI fund managers, and lower returns in recent years have led some to change strategy and focus less on screening out the bad and more on including the good. As such, these funds are putting clients” money into companies with forward-thinking policies regarding issues like climate change. “There”s a lot of evidence that companies that do these things well carry less risk,” says Joe Keefe, CEO of Pax World Funds, a socially responsible mutual fund. “We”ve seen what happens to companies that don”t.”

CONTACTS: Domini; Green Century; ProgressivePax World; Asset Management