One Idea for Outperforming This Scary Market

With all the scary talk of fiscal cliffs and financial crises, many investors have been terrified to risk putting their money in stocks (or to hold on to their existing stocks). However, there's a safer way to invest that's strongly emerging after being long overlooked. Take the rise in considering environmental, social, and governance (or ESG) factors as part of the investment thesis.

The U.S. Social Investment Forum released its 2012 Report on Sustainable and Responsible Investing Trends in the United States earlier this week. Among the report's interesting findings: U.S. assets directed to sustainable and responsible investment (also known as socially responsible investing, or SRI) are up 22% in two years.

Another interesting fact: Long-neglected considerations like corporate governance are finally gaining the attention and sense of legitimacy they deserve as solid pillars for good investments.

Good growth despite bad times
At one time, investing in this manner was considered esoteric, ineffectual, and touchy-feely. Today, $1 out of every $9 under professional management in the U.S. is aimed at investing with ESG criteria in mind.

In 1995, when USSIF published its very first report on SRI trends, just $639 billion, or 9% of the $7 trillion in total assets under professional management, were identified as linked to SRI. That trajectory continued to climb, until $3.07 trillion in SRI assets were pinpointed in 2010, a dramatic increase that came about despite the S&P 500's broad decline.

Today, the Foundation reports that total SRI assets stack up at $3.74 trillion, which includes the growth in institutional investors that are strongly weighing governance factors like executive pay and board issues in their decisions.

The report isn't just factoring in investment in publicly held companies on ESG principles. It points out that the investment strategy can be applied across asset classes, including cash, fixed income, private equity, venture capital, and real estate.

This isn't your father's SRI
Obviously, for this kind of growth, SRI has moved far beyond its old reputation for screening out traditional sin stocks, such as companies involved in alcohol, tobacco, pornography, and weapons -- although that's still part of the universe.

For example, the SRI universe includes shareholder advocacy now, including owning shares of companies in order to try to bring about social or environmental change. Take the Humane Society of the United States' successful efforts to encourage animal welfare supply chain changes at big companies like McDonald's (NYSE: MCD  ) , or As You Sow's shareholder resolutions encouraging companies like Procter & Gamble (NYSE: PG  ) , Kraft (Nasdaq: KRFT  ) , and Kroger (NYSE: KR  ) to take responsibility for collection and recycling of packaging waste.

The arena also includes screening in for positive companies. Investors have a huge array of such companies to consider these days: Take green-energy upstarts like biofuel company Solazyme (Nasdaq: SZYM  ) or electric vehicle maker Tesla (Nasdaq: TSLA  ) .

The SRI area also includes divesting from or avoiding investing in companies that do business in countries with oppressive regimes, such as Sudan or Iran; according to the USSIF report, that criteria affects about $1 trillion in assets.

The corporate governance piece was identified as another top concern among those surveyed, with assets at $914 billion in institutional investor capital, a 161% increase since the end of 2009. This area encourages shareholder-friendly attributes like reining in out-of-control CEO pay, board issues, and political contributions. Corporate governance has come out of relative obscurity following the Dodd-Frank Act, as well as the recognition that many aspects of the financial crisis involved massive corporate governance failures.

Building a good foundation
For years, the conventional wisdom insisted that socially responsible investing was a guarantee of underperformance. In recent times, increasing numbers of long-term studies have shown that SRI can do just as well or even better than conventional investing styles.

Meanwhile, let's face it: If you're putting your investments through numerical screens and weighing the responsibility of their businesses, you're really screening for the best companies out there. Good companies have a far better chance at surviving troubled times, especially since they will be naturally less likely to suffer from lawsuits, regulatory challenges, consumer boycotts, and so forth.

There's a revolution under way, and it's giving investors in the know the comfort of long-term strength and lower risks in their portfolios. Building an SRI foundation into a portfolio can help protect and grow returns in the future, regardless of today's hysterical headlines.

Check back at Fool.com for more of Alyce Lomax's columns on environmental, social, and governance issues.


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