Social Responsible Investments : PROs and CONs

[Ex Pat]

Hey

As I continue to better understand the investment world, I've found out about the concept of Social Responsible Investments (SRI). From the prospectus of iShares MSCI USA SRI UCITS ETF:

> Firstly, companies are excluded if they are identified by the index provider, MSCI, to have any tie to controversialweapons, to be manufacturers of nuclear weapons or related equipment or providers of services auxiliary to nuclearweapons, or to be producers of civilian firearms or tobacco. Companies which are identified by MSCI as engagingin the following activities are excluded if their revenues from such activities (or related activities) exceed thebusiness involvement thresholds set by MSCI for: alcohol, gambling, tobacco, or civilian firearm distribution,nuclear power, adult entertainment, conventional weapons, genetically modified organisms, thermal coal, oil sands,unconventional oil and gas extraction and fossil fuel reserves ownership.

And then, the index keeps only the top 25% of companies that meet the criteria ("best in class").

The SRI effects:

• much less companies in the index (less theoretical diversification)
• the magnificent 7 are not included in the SRI index

The obvious downsides:

• 3-4x bigger TER than plain index funds
• the funds are much smaller, being less liquid.
• some markets are excluded: there are no big enough SRI ETF equivalents that would include Canada, Australia, Hong Kong, Singapore
• the top 10 concentration problems becomes worse with SRI funds (even if the holdings are capped at 5%)

Does anyone here have experience with SRI funds? If so, which one(s) did you pick and why?

I was looking at regional SRI ETFs to be able to limit US exposure to 50%, but there are no VXUS equivalents in the SRI world. It's pretty difficult to limit US exposure with the SRI offering.

Below are some LLM-made tables.

Table 1 — The Vanguard "plain market" stack​

	VT (World)	VTI (US)	VXUS (ex-US)
Stocks	10,118 per holdings file	~3,500 (profile)	~8,860 (holdings file)
Top-10 concentration	~25%	~35%	~14%
US concentration	~65%	100%	0%
AUM	~$70bn	~$690bn (Vanguard)	~$900bn+
TER	0.06%	0.03%	0.05%
CAGR 2018–25	~11.0%	~13.0%	~6.0%
Volatility (ann.)	~16.5%	~18.5%	~14.0%

Table 2 — The SRI equivalents​

	World SRI (VT-equiv)	USA SRI (VTI-equiv)	"ex-US SRI basket" (VXUS-equiv)
Fund(s)	iShares MSCI World SRI (IE00BYX2JD69)	iShares MSCI USA SRI (IE00BYVJRR92)	Europe SRI IE00B52VJ196 + Japan SRI LU1230561679 + EM SRI IE00BYVJRP78 (56/24/20)
Stocks	~373	~150	~390 (122+60+207)
Top-10 concentration	~30%	~40%	~20% (blend)
US concentration	~68%	100%	0%
AUM	€7.0bn	€2.8bn	€3.0bn + €0.29bn + €2.8bn
TER	0.20%	0.20%	~0.22% blended
CAGR 2018–25	11.3%	13.6%	6.3%
Volatility (ann.)	17.5%	18.3%	13.0%

​

 

[Baptiste Wicht]

the magnificent 7 are not included in the SRI index

That's not accurate, I believe. If you take iShares MSCI USA SRI UCITS ETF, NVDA and TSLA are included.

Also, this could be both a downside and an upside:
* Some people really do not want to invest in huge multinational companies.
* But a lot of the returns are driven by these 7 stocks.

Does anyone here have experience with SRI funds? If so, which one(s) did you pick and why?

I have looked at them and considered them but never used them.

The problem for me is actually the balance between returns and sustainability. Very strict funds often have low returns because they have taken out big performers. On the other hand, funds that are not very strict are still including companies that are all but sustainable in my opinion (very subjective). Nvidia, for instance, included in the SRI example, is senselessly pushing AI for profits only without any regard for sustainability. And taking the ESG USA fund from Vanguard, it's even worse; they include Meta, which is pushing hard for social media on teens and causing mental harm, and Amazon, which is simply encouraging very high consumption, which is not sustainable.

 

[gaijin]

Nvidia, for instance, included in the SRI example, is senselessly pushing AI for profits only without any regard for sustainability. And taking the ESG USA fund from Vanguard, it's even worse; they include Meta, which is pushing hard for social media on teens and causing mental harm, and Amazon, which is simply encouraging very high consumption, which is not sustainable.

As you mentioned, these judgements are subjective. I agree with you on your assessment of Meta (though I use Whatsapp every day ). But Nvidia brought us the AI revolution. Amazon is a two edged sword. It has it cheap shopping aspect. But it also powers a large part of the earth's cloud internet, enabling many more kinds of businesses or the transformation of existing businesses.

In general, my view on SRI is similar to ESG: it's a money making scheme that does not benefit the end investor.

 

[Ex Pat]

In general, my view on SRI is similar to ESG: it's a money making scheme that does not benefit the end investor.

Yea, the way I see it is that if I can easily avoid industries that are not according to my moral values, I would. For example, I would like not to invest in gambling, tobacco and adult entertainment. And I would also like not to invest in large conglomerates that destroy local communities in poor countries for mining.

That's not accurate, I believe. If you take iShares MSCI USA SRI UCITS ETF, NVDA and TSLA are included.

Indeed. I should have said "most of ...".

But it also powers a large part of the earth's cloud internet, enabling many more kinds of businesses or the transformation of existing businesses.

Like in the old days, the Roman Empire would build roads and infrastructure and the rule of law. But it would also crush its opponents.

 

[gaijin]

Congratulations on your position. I find it great when people think about how to invest their money. I also highly salute if profit is not the only goal of investing.

I would like not to invest in gambling, tobacco and adult entertainment. And I would also like not to invest in large conglomerates that destroy local communities in poor countries for mining.

Not sure I fully understand your exact goals. But I have the impression that these guidelines rule out quite a lot of companies. Would you still consider Coca Cola or Nestle in such a strategy? They don't use mining in the traditional sense but are also accuses of NGOs of depriving local communities from their natural resources. Just thinking aloud that an actively managed social responsibility fund might be better to meet your criteria.

 

[Sjs]

I’ve been thinking about this too. I currently have several ESG/SRI ETFs and notice that each one has a different filter. It is messy as there doesn’t seem to be common standards.
Still, perhaps better an imperfect system than none at all ?
I’m now seeking to simplify my portfolio and am wondering whether or not to maintain the ESG nature of the portfolio.
The ETF are slightly more costly (eg TER 0,24%) but if that is what it takes to exclude armement related businesses, e.g. that is more than worth it in my view. However I do wonder whether it makes any difference, given how intertwined the economy is.

Any other thoughts on the matter?

 

[Baptiste Wicht]

I’ve been thinking about this too. I currently have several ESG/SRI ETFs and notice that each one has a different filter. It is messy as there doesn’t seem to be common standards.
Still, perhaps better an imperfect system than none at all ?

This is one of the main issues about these sustainable ETFs in my opinion as well. You get ESG, you get SRI, you get SDG, and you get sustainable and probably more. Each of these criteria is different. Some are very lax and some are a little strict.

But none of them are totally strict because they need to make money in the fund, and the truth is that non-sustainable companies do return a lot. So, I think that an imperfect sustainable ETF is better than none.

The ETF are slightly more costly (eg TER 0,24%) but if that is what it takes to exclude armement related businesses, e.g. that is more than worth it in my view. However I do wonder whether it makes any difference, given how intertwined the economy is.

If you think it's worth more and you feel better about the investment, I think that's enough. Sustainable investing is subjective and needs to be based on your own feelings.

 

[Ex Pat]

Not sure I fully understand your exact goals.

I'm a Christian and I've just become more aware of the fact that in the lists of companies that I invest in passively might be companies that may be going against my principles (to various degrees - I'm not a puritan).

Just thinking aloud that an actively managed social responsibility fund might be better to meet your criteria.

Thanks. In my research I've actually discovered that there are actually various Christian ETFs.

Would you still consider Coca Cola or Nestle in such a strategy? They don't use mining in the traditional sense but are also accuses of NGOs of depriving local communities from their natural resources.

I am not sure yet.

For example, Biblically Responsible Investing (BRI) excludes Nestle.
See Timothy Plan ETF : https://timothyplan.com/our-etfs/summary-etf-int-holdings.php
And Inspire ETF : https://www.inspireetf.com/etf/bles

The Catholic funds are less strict - Franklin MSCI World Catholic Principles UCITS ETF USD includes Nestle (and Nvidia at 14% lol).

However I do wonder whether it makes any difference, given how intertwined the economy is.

My opinion is that it would make a difference. Even if the economy is intertwined and maybe Nvidia escapes some screening factors because it doesn't manufacture the chips itself.

Also, I've read some time ago that the way of judging if an action is moral or not is to ask ourselves "what if everyone in the world would do the same thing?" (I think this is Kant's "Categorical Imperative"). If everyone would use ESG / SRI or some level of better fund screening, then there would actually be a strong incentive for companies to put more effort into meeting the screening criteria. And probably the TER would decrease as well because of volume.

The big question is how can we avoid green washing. But that's a complex thing.