Responsibility Won't Wreck Your Returns

Conventional wisdom loves to argue that any form of socially responsible investing will inevitably endanger your portfolio returns. But as new evidence reveals, designing a positive portfolio doesn't necessarily mean that your dividends will be all heart -- and no hard cash.

Defy convention
Earlier this week, GovernanceMetrics International released its report, "Ten Things to Know about Responsible Investment & Performance." (You can download it from The Corporate Library by filling out a quick form.) The organization studied abstracts and research papers to derive conclusions about the performance of responsible investments -- RI for short.

"On average and in the aggregate," the report begins, "RI portfolios perform comparably to conventional ones." Further fascinating revelations follow:

  • A portfolio consisting of stocks in firms rated "The Best Companies to Work for in America" would have outperformed benchmarks over the 25-year period from 1984 to 2009.
  • A portfolio consisting of companies with positive Innovest ratings, which rank energy efficiency, would have beaten out returns of a portfolio of low-efficiency counterparts during the 1995 to 2003 time frame.
  • Between 2002 and 2006, U.S. companies with more inclusive policies toward gay and lesbian stakeholders had higher stock returns, with research showing evidence of a causal link between the two.

The report also cited findings that show a positive relationship between stock returns and GovernanceMetrics International's corporate governance ratings.

The many paths to responsibility
The report also spelled out the web of complex factors one must weigh when navigating the world of responsible investment. Some methods screen out corporate evildoers, while others use a "best-in-class" philosophy, choosing industry players that beat out their peers on environmental, social, or governance factors. Still other strategies focus on areas that may be highly profitable in the future, such as clean energy. Despite their stringent standards, many of these methods still allow investors to achieve a certain level of diversification across industries.

It's not always easy to figure out how to measure which companies are fulfilling the complicated criteria that would make them responsible investments. Fortunately, plenty of organizations try to give good examples of companies having positive impacts on the world.

Earlier this week, I touched on Corporate Responsibility magazine's annual "100 Best Corporate Citizens" list, which named Johnson Controls (NYSE: JCI  ) , Campbell Soup, and IBM (NYSE: IBM  ) as this year's top three picks.

This past week, Forbes covered think tank Ethisphere Institute's fifth annual ranking of "The World's Most Ethical Companies." The list lauds 110 organizations out of 3,000 nominations. Some of these companies nominated themselves, which at least shows that companies nowadays want to be perceived as ethical.

In compiling this list, Ethisphere ran the nominees through its "Ethics Quotient," reviewed their ethics and litigation incidents, sustainable business practices, and corporate citizenship initiatives, and cross-checked them against governance lists from the likes of GovernanceMetrics International and FTSE for Good.

The think tank automatically excludes certain companies, including producers of tobacco, alcohol, or firearms. Altria (NYSE: MO  ) somewhat questionably landed at No. 35 in Corporate Responsibility's ranks, but it's clearly out of the running for the Ethisphere list.

Ethisphere's list is unranked, so no company's marked as "better" than its peers on the list. Companies lauded for their ethics include well-known consumer names like Microsoft (Nasdaq: MSFT  ) and Best Buy (NYSE: BBY  ) , as well as lesser-known firms like Ecolab (NYSE: ECL  ) .

Such lists are great tools to give responsible investors stock ideas. For example, construction company Fluor's (NYSE: FLR  ) presence on Ethisphere's lineup caught my attention. Fluor's website touts solid practices, including an inclusive stakeholder view of its business and a spirit of good corporate governance. The company proudly boasts that 10 of its 12 directors are independent.

More responsibility = less risk
Dismissing strong corporate governance's role in a stock's success seems downright short-sighted. Investors who write off responsibility are only jeopardizing their own returns -- while those who embrace it may be ensuring better portfolio performance for the very long haul.

Check back at Fool.com every Wednesday and Friday for Alyce Lomax's columns on corporate governance.

Best Buy and Microsoft are Motley Fool Inside Value recommendations. Best Buy is a Motley Fool Stock Advisor pick. Motley Fool Options has recommended a diagonal call position on Microsoft. The Fool owns shares of Altria Group, Best Buy, IBM, and Microsoft. Try any of our Foolish newsletter services free for 30 days.

Alyce Lomax does not own shares of any of the companies mentioned; for more on this and other topics, check back at Fool.com, or follow her on Twitter: @AlyceLomax. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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  • Report this Comment On March 18, 2011, at 5:46 PM, XMFConnor wrote:

    "On average and in the aggregate," the report begins, "RI portfolios perform comparably to conventional ones." Further fascinating revelations follow:"

    Is that really that fascinating? I don't believe in the Efficient Markets Hypothesis, but there is certainly some truth in it..the markets are pretty darn efficient... so taking any large group of stocks and saying they perform comparably to the general market is really not all that surprising IMO.

    Secondly, I would question some of the data. Why are they using different time periods? This seems to hurt the integrity of the research.

    Finally, there are many other research reports that disagree with this. For this to really be convincing, I think the article would have to wrestle with that fact head on-- I think providing a few of the research data points is insufficient and hardly convincing.

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