A SRI Performance Lesson from Energy Stocks

Energy is hot and energy investments are hotter. At a time when the economy is struggling, investment capital is flowing to alternative energy firms. That’s because investing is largely about expectations and the expectations are that solar, wind, hydro, etc. will be the market leaders of tomorrow as people run from fossil fuels.

That’s good news for socially responsible investors, a group that's never been fond of oil or natural gas exploration companies. It should also be good for their portfolios. If ever there was a sector that traditional investors could point to and say “See, SRI can’t compete with investing on fundamentals,” it has been energy. Consider the iShares Goldman Sachs Natural Resources Index Fund, whose top 10 holdings include Exxon Mobil Corp., Chevron Corp., Occidental Petroleum Corp. and Halliburton Company. During the 10-year period ending May 31, the fund had an average annual growth rate of 14.07 percent. During the same period the New Alternatives Fund, for example, a mutual fund investing in alternative energy, had an average annual return of 8.82 percent.

The New Alternatives Fund did much better if we look at only a five-year period, with an average annual return of 19.82 percent. But the Goldman Sachs Natural Resources Index, the type of fund that hard-core socially responsible investors would love to hate, rose on average 29.5 percent each year.

This is not to make a point about the New Alternatives Fund in particular, but about energy-focused socially responsible investors in general. They made a choice based on principle. But in strict financial terms it cost them.

“They get their compensation in the form of a psychic benefit as opposed to a dollar benefit,” says Thomas Muldowney, a managing director at Savant Capital Management in Rockford, IL. “There’s a measure for which they would take credit, being a contributor to the movement towards cleaner energy. You can’t measure that in dollars.”

And that’s where the line of distinction is drawn between socially responsible investors and traditional investors – “the great mass of us who are unwashed” – as Muldowney jokes, who are content to maximize their return.

That’s not to say that being a socially responsible investor means always sacrificing the money you can make to support a cause. The Domini Social Index, a group of 400 companies that have exemplary environmental and social records, has performed essentially the same as the S&P 500 since it was founded in 1990. But just as people who invest only in medical device companies or banks are aware that at times they’ll lag the market, so too there will be times when being a socially responsible investor has its trade offs. That's important for those new to the concept to understand.