This article was excerpted from the new white paper, <>Socially Responsible Investing: Delivering competitive performance, written by Lei Liao and Jim Campagna, Quantitative Portfolio Managers for Social Choice Equity Strategy at TIAA-CREF. To download the full white paper, click here.
Interest in socially responsible investing (SRI) is increasing rapidly. From 2003 to 2012, SRI assets in the U.S. grew 54% to reach $3.31 trillion
1, according to the Forum for Sustainable and Responsible Investment (US SIF Foundation). This represents roughly 10% of assets under professional investment management in the U.S. as tracked by Thomson Reuters Nelson.
SRI strategies apply various environmental, social and governance (ESG) criteria in selecting public companies for inclusion in a portfolio. The process of incorporating nonfinancial criteria restricts the range of investment opportunities, potentially limiting returns. On the other hand, companies that wisely manage ESG risks and opportunities may also improve financial measures, potentially enhancing stock performance.
The key question for investors: Does investing in an SRI strategy require sacrificing performance or taking on additional risk, compared to a broad market index?
Many studies on the performance of SRI mutual funds versus non-SRI funds have attempted to answer this question. However, the range, variety and diversity of SRI fund management strategies make apples-to-apples comparisons difficult. Instead, TIAA CREF sought answers through a simpler comparison, analyzing the performance of several leading SRI indexes versus broad market benchmarks. We focused on equity strategies because indexes with longer-term track records are readily available — and represent the majority of SRI assets. It is important to note that SRI indexes themselves are not perfectly comparable due to differences in index construction and ESG evaluation processes. However, they provide a close proxy for SRI as a strategy versus the broad market.
Highlights from this paper include:
• A TIAA-CREF analysis of leading SRI equity indexes over the long term found no statistical difference in returns compared to broad market benchmarks, suggesting the absence of any systematic performance penalty.
• Moreover, incorporating environmental, social and governance (ESG) criteria in security selection did not entail additional risk. SRI indexes and their broad market counterparts had similar risk profiles, based on Sharpe Ratios and standard deviation measures.
• Although return patterns were similar over the long term, there were significant return and tracking error differences between SRI indexes and broad market benchmarks over shorter periods. By narrowing the range of eligible investments, the SRI process introduced biases that caused short-term index performance to deviate from broad market benchmarks, resulting in tracking error.
• SRI index construction methodology is an important determinant of tracking error. Investors should consider specific ESG methodology and the relevant market benchmark when selecting an SRI strategy.
This article was excerpted from the new white paper, <>Socially Responsible Investing: Delivering competitive performance, written by Lei Liao and Jim Campagna, Quantitative Portfolio Managers for Social Choice Equity Strategy at TIAA-CREF. To download the full white paper, click here.
1Total includes assets managed under ESG incorporation strategy alone or in combination with shareholder advocacy, but excludes assets only under shareholder advocacy strategy.
Consider the investment objectives, risks, charges and expenses carefully before investing. Please call 877 518-9161 or go to tiaa-cref.org for product and fund prospectuses that contain this and other information. Read the prospectuses carefully before investing.
Investment, insurance and annuity products are not FDIC insured, are not bank guaranteed, are not bank deposits, are not insured by any federal government agency, are not a condition to any banking service or activity, and may lose value.
Certain products and services may not be available to all entities or persons. Past performance does not guarantee future results. Investments in Socially Responsible Funds are subject to the risk that because social criteria excludes securities of certain issuers for non-financial reasons, investors may forgo some market opportunities available to those that don't use these criteria. TIAA-CREF products may be subject to market and other risk factors. See the applicable product literature, or visit tiaa-cref.org for details.
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