This is a question we often receive: I want my investments to help move companies in a positive direction but I don’t want to sacrifice performance.  How does the performance of Socially Responsible Investments (SRI) compare with traditional index investments?

To compare performance, we are using the MSCI KLD 400 Social Index and the S&P 500.

The Standard and Poor’s 500 (S&P 500) is a US stock market index based on the market capitalization of 500 large companies having common stock listed on the NYSE or NASDAQ.

The MSCI KLD 400 Social Index is designed to provide exposure to companies with high environmental, social and governance (ESG) ratings while excluding companies whose products may have negative social or environmental impacts. It consists of 400 companies selected from the MSCI USA IMI Index, which includes large-, mid- and small-cap US companies.

In addition, it excludes companies incompatible with a common set of values screens: alcohol, tobacco, gambling, civilian firearms, military weapons, nuclear power, adult entertainment and genetically modified organisms (GMOs).

Table 1 shows the annual returns of the US market (S&P 500) and a Socially Responsible Investing market (MSCI KLD 400 Social Index). Over the past 10 years the KLD index has been +5 to -4% different than the S&P 500 index.  Note that this is only one SRI index compared to the large US stock index (S&P 500).  There are other funds and indexes that vary from this one.

It can be seen that the Social Index performs as well or better than the S&P 500 more often than not.

Table 1: Annual ReturnsTable 2 compares the industry exposure of the S&P 500, the KLD Index

NameS&P 500MSCI KLD 400 Social IndexDifference
Annual Ret 20161211-1
Annual Ret 2015110
Annual Ret 201413130
Annual Ret 201332364
Annual Ret 20121614-2
Annual Ret 2011220
Annual Ret 20101512-3
Annual Ret 200926326
Annual Ret 2008-37-352
Annual Ret 200754-1

What accounts for the performance difference between the SRI index and the S&P 500?  Exposure in different sectors.  The SRI index has more exposure in some sectors and less in others.  If the sectors that the SRI index is over exposed to outperform the average return of the S&P 500, the SRI index return will outperform the S&P 500 index.

Table 2 shows the sector exposure of the sectors that are most different between the S&P 500 and the SRI index.

Note that the SRI index has more in Technology and Sensitive stock sectors and less in the Financial Services and Defensive sectors.

Table 2: Industry Exposure from the S&P 500 and SRI Indexes

NameS&P 500MSCI KLD 400 Social Difference
Technology %20.0527.677.62
Sensitive %40.7846.816.03
Consumer Cyclical %11.1713.172.00
Real Estate %2.323.371.05
Basic Materials %2.903.400.50
Consumer Defensive %9.379.700.33
Communication Services %
Industrials %10.399.55-0.84
Energy %6.325.33-0.99
Utilities %3.181.76-1.42
Healthcare %14.2811.95-2.33
Cyclical %32.2329.64-2.59
Defensive %26.8323.41-3.42
Financial Services %15.839.70-6.13

In Table 3, we look a little deeper into the differences in industrial sectors between the S&P 500 and this SRI index.  Table 3 shows the sectors with the largest difference (over 1.5%) between the S&P 500 and the SRI index. Note that the SRI index is overexposed in Software, Biotechnology, Personal Products and is under exposed in Banks, Consumer Electronics, Oil &Gas, Aerospace & Defence, and Drug Manuafacturers.

Table 3: Industrial Sectors

NameS&P 500MSCI KLD 400 SocialDifference
Software – Infrastructure %3.407.313.91
Biotechnology %2.314.512.20
Household & Personal Products %
Internet Content & Information %4.626.341.72
Insurance – Diversified %1.920.19-1.73
Credit Services %2.510.75-1.76
Tobacco %1.780.00-1.78
Specialty Retail %2.530.56-1.97
Drug Manufacturers – Major %4.822.81-2.01
Aerospace & Defense %2.250.00-2.25
Oil & Gas Integrated %2.640.03-2.61
Consumer Electronics %3.680.00-3.68
Banks – Global %4.650.00-4.65

These differences will vary from fund to fund and with different indexes but in general SRI funds will be underexposed in Defense, Banks, and Energy and overexposed in Technology.  When the overexposed sectors perform better than the overall market or when the underexposed sectors underperform the market, SRI indexes will generally outperform traditional indexes.

In an efficient market, where stock prices are based on publically available information, there are no overpriced or underpriced stocks, making in impossible to predict which will perform better in the long run.  Based on the 10 year returns, the SRI index performs very close (slightly better) than the S&P 500.