Here's some good news for those interested in companies that do good: According to a recent Goldman Sachs (NYSE: GS ) report, "companies that are considered leaders in environmental, social and governance (ESG) policies are also leading the pack in stock performance -- by an average of 25%." It also found that nearly three-quarters of the companies that made its list outperformed their industry peers. Woo hoo!
The company is even advocating socially responsible investing (SRI). Anthony Ling of Goldman explained, "If you are not taking these factors [ESG ones] into consideration and investing ... you're going to lose competitive advantage. The success ratio of stocks picked [in the report] is in excess of 70%. On a long run average I think the best hedge funds and investors are typically looking at around a 50% or 55% success rate."
One interesting thing going on here is that a method of SRI is being used that's a bit different from the traditional approach. In the past and even today, SRI investing has often involved starting with a broad group of companies and eliminating those involved in objectionable practices -- for example, tobacco purveyors, gun makers, alcohol producers, companies that test products on animals, polluters, etc. This Goldman approach belongs in another strategy camp: It evaluates and selects companies based on what they're doing right, not what they're doing wrong.
Meanwhile, not only are the Goldman Sachs-designated ESG leaders making money from the high road, but even Goldman Sachs is doing so. It recently launched its new "GS SUSTAIN" focus list, an index of up to 50 companies selected for their long-term promise and their ESG frameworks. Denizens of the list include Bristol-Myers Squibb (NYSE: BMY ) , Merck (NYSE: MRK ) , Kellogg (NYSE: K ) , and PepsiCo (NYSE: PEP ) .
So far, so good, right? Well, the new index might not be quite as dreamy as it appears. For one thing, it only includes companies that have had their ESG practices studied and evaluated by Goldman Sachs. So the screen employed hasn't been cast as wide as it might have been. I found other reservations about the index at the This Week in SRI blog, where William Michael Cunningham shared ethical concerns, among other things, about Goldman Sachs. Of course, not every socially responsible investing advocate is anti-Goldman -- the Calvert Large Cap Growth Fund (CLCIX) recently had nearly 2% of its value invested in the company.
What to do
So what should you do with this information? Well, consider the Goldman data as evidence that companies that do good can also perform well as investments. Don't assume that your best odds of investing success are with ruthless, profit-at-all-costs companies. And if you're so inclined, seek out companies with strong socially responsible records (most firms love to brag about such achievements on their websites).
If you'd like to learn more about socially responsible investing, here are some articles on the topic:
- Stocks with Scruples
- Mixing Money With Morality
- Socially Responsible, My Eye
- Ethical Investments
- A Fund for Democrats
- Finding Feel-Good Companies
One efficient way to invest responsibly is to let some smart money managers do so for you, via socially responsible mutual funds. Shannon Zimmerman recommended one in our Champion Funds newsletter about two and a half years ago, and it's outpacing its benchmark by more than 15%. The newsletter offers some terrific fund recommendations monthly in an easy-to-digest format. (I've found a bunch of winners there myself.) Overall, its picks have trounced the market. A free trial will give you full access to all past issues, so you can read about each recommendation in detail.