A Comparative Analysis of Socially Responsible Investment (SRI) Funds: How Sustainable Are SRI Funds?

Between 2012 and 2014, socially responsible investments (SRI) grew by 76%, with over $6.5 trillion now being held in managed SRI assets (Schueth et al., 2014). This remarkable growth accentuates the blossoming interest that retail investors in particular are showing in investment products that not only seek economic returns but also adhere to certain principles, such as aversion to particular industries or business practices (Berry, 2013). While investment managers have readily approached this fast-growing segment of the investment market, a persistent issue that plagues the industry is the lack of uniform understanding of what truly defines a socially responsible investment. Furthermore, while investment returns are easily measured, reported, and assessed, the sustainability profiles of ostensibly responsible investments are rarely reviewed, assessed, or challenged by third parties. It is therefore conceivable that investment managers responsible for developing and managing SRI funds, for retail investors in particular, may veer toward some investment products that do not correspond to their sustainability mandates in order to achieve much-desired economic returns at the expense of non-economic factors. This dire possibility would clearly entail some exploitation of the faith that investors place in investment managers’ practices, and thus calls for further examination. This research focused on determining whether the companies that constitute SRI funds are generally sustainable relative to conventional funds, with the goal of answering the fundamental question: Are SRI funds’ portfolio companies markedly more sustainable than those in traditional funds? From this research question, a hypothesis was developed and examined: Companies whose equity or debt is represented in SRI retail funds do not have inherent sustainability characteristics that differ from those of the companies in non-SRI funds. A subordinate hypothesis this research also explored was that there is significant overlap between the companies whose equities and debt are included in SRI funds and those whose equities are included in non-SRI funds. Another perspective of this premise is that SRI funds, in particular, typically include companies that do not rate highly as sustainable enterprises at least as often as they include companies that do rate highly as sustainable enterprises. The research methodology focused on establishing two sample sets of mutual funds: the first group comprising the 10 largest SRI mutual funds and the second group comprising 10 conventional mutual funds of comparable sizes (in terms of assets under management). A scorecard was then developed using commonly accepted measures of corporate sustainability—such as adherence to GRI reporting frameworks, existence of robust sustainability programs and governance structures, and activity in select industries. The scores of the top 10 most significant holdings in each of the 20 funds were assessed using the scorecard, and a comparison of the SRI group vs. the conventional group was conducted. The study conclusively determined that SRI mutual funds are not necessarily a more effective solution for investors with socially responsible investing inclinations. The traditional fund group scored higher (64.55) than the SRI group (61.39) on average. Therefore, SRI fund holdings were not shown to be any more socially responsible than holdings in traditional funds. Ultimately, this research study determined that the top holdings in the SRI funds did not materially possess sustainability attributes that differed from the traditional group. This research study not only determined that socially responsible funds were somewhat following their SRI mandates, but also introduced a framework for the assessment of these funds from a sustainability perspective going forward.