Can investors do well by doing good?” was the question posed to a team of experts at the Inside Smart Beta ETF conference in New York City earlier this summer. While the panel discussion on socially responsible investing (SRI) was quite lively and provocative, most of us left with a few more questions than answers.

Regardless of one’s opinion about combining personal investment strategies with the ideals of “responsible investing”, the trend has become too big to ignore.

A report from the Global Sustainable Investment Alliance (GSIA) showed a 25.2 per cent increase in SRI assets from 2014 to 2016, with assets now amounting to over $22 trillion. SRI investments have grown faster than the overall market for managed funds across all of the developed regions including Europe, North America, Australia and Japan according to the GSIA study.

Responsible investing has clearly gained traction among younger investors. One of the panellists commented that more than 90 per cent of millennials care about SRI; but even older folks are warming to the concept with approximately 53 per cent of baby boomers showing interest.

Values-based investing has been around for a long time but has more recently become main stream. The relatively loose SRI classification has lately morphed into a more defined acronym: “ESG”, which stands for environmental, social and governance factors. Several independent agencies have been diligently grading publicly-traded companies according to their compliance with defined standards within each of these categories; but the agencies are not all in agreement with their results.

Investopedia defines ‘ESG’ as a set of standards for a company’s operations that socially conscious investors use to screen investments. Environmental criteria measure how a company performs as a steward of the natural environment on climate change, carbon emissions, water pollution and energy efficiency.

Social criteria evaluate performance in health and safety, labour relations and community. The governance factor reviews executive compensation, business ethics, financial compliance and transparency.

With such a large menu of often divergent agendas, the overriding question may not be whether to invest in socially responsible strategies, but exactly how does one define socially responsible?

For example, some see nuclear energy as an environmentally sustainable resource while others point to a several operational disasters over the past few decades and believe otherwise. And then there is the question of what weight should be given to each of the various factors. Hain Celestial Group, one of the large organic food companies, presumably has a very high ‘social’ score given the quality of its ‘healthier-for-you’ products. Last summer, however, Hain announced serious issues with its public accounting which led to a 30 per cent drop in the stock price. Since then, financial statements have been delayed several times. Not such a great score on governance.

Investors who wish to purchase a portfolio of securities which have been screened for ESG criteria can do so through SRI mutual funds or exchange-traded funds (ETFs). The largest ESG ETF is the iShares MSCI KLD 400 Social ETF (ticker DSI) with approximately $864 million in assets. The exchange-traded fund (ETF) segment altogether comprises over $23 billion in assets.

In terms of performance, the KLD fund has modestly underperformed the broader market. Over the past five years, the ETF provided an annualised return of 12.2 per cent compared to 13.02 per cent for the S&P 500 though the end of the latest quarter. Longer-term performance statistics are more difficult to obtain due to the evolving nature of responsible standards.

Returns are important but they may not be everything to everyone. Investors should feel good about their strategies. Being confident in one’s investment philosophy typically leads to more consistent contributions to the financial plan and this helps tremendously in achieving future goals.

In some sense, having a dedicated SRI portfolio seems to suggest that corporate profitability is at odds with doing the right thing — whatever that might be in the eyes of the observer. But is this really the case? Certainly some industries such as coal and tobacco are ostensibly bad for people and the environment. Yet I would argue that the vast majority of today’s corporations must pursue an agenda which is not very different from what ESG strategies purport to achieve.

For example, most successful managers work very hard at attracting and retaining talent which means treating employees well (high social score required). Similarly, business leaders who wish to keep their positions are charged with maintaining good corporate governance practices such as having clean audits and staying out of the new headlines in a negative way.

The rising adoption of social media has only intensified the impact of outside scrutiny. Signet Jewelers Ltd saw its stock tank and profits shrink last year after news of them possibly selling fake diamonds went viral on the internet. Other examples include BP’s tragic oil spill in the Gulf of Mexico and the account fraud scandal at Wells Fargo & Co. Interestingly, probably none of these headline events could have been predicted before they occurred. In fact, just prior to their scandal, Wells was widely considered a financial institution beyond reproach.

At LOM Asset Management, we use ESG factors as a component in evaluating our investments. Sustainability is a broad concept which underscores the importance of consistent, long term performance. Our ideal investments possess business models which are ‘sustainable’ in every sense of the word.

While believing in one’s strategy is important, “do-it-yourself” investors should be careful not to ignore basic investment tenets such as maintaining a discipline and staying diversified. Placing too much on emphasis on niche sectors such as clean energy, for example, may cause heightened volatility and lagging performance over long periods of time.

Bryan Dooley, CFA is the senior portfolio manager and general manager of LOM Asset Management Ltd in Bermuda. Please contact LOM at 292-5000 for further information.

This communication is for information purposes only. It is not intended as an offer or solicitation for the purchase or sale of any financial instrument, investment product or service. Readers should consult with their Brokers if such information and or opinions would be in their best interest when making investment decisions. LOM is licensed to conduct investment business by the Bermuda Monetary Authority