Socially Responsible Investing or what is now commonly called Environmental, Social, and Corporate Governance (ESG) was recently discussed over on Seeking Alpha. Pure logic tells us that any time one applies any type of screen to investments it will have a negative impact on performance. Is this true, and if so, what is the impact? While these results are not intended to be a definitive answer to this question, the following data will partially answer the question.
One well known socially screened fund is the Domini (DSEFX) mutual fund where approximately 100 "inappropriate" companies are removed from the S&P 500. What I did was to take DSEFX, SPY, and VFINX and calculate performance over five different time frames. I used three, five, fifteen, and twenty years as comparison periods. Then I ran another check beginning on 01/02/2001 until the present. Here are the results.
Over a three-year period, SPY outperformed DSEFX by 1.2% annually and VFINX topped DSEFX by 110 (1.1%) basis points. Those are not trivial differences.
Over a five-year period ending on 10/4/2012, DSEFX was the best performer, topping SPY by 0.67% annually and VFINX by 0.74% annually. This is the only test period where the DSEFX fund was the top performer.
When using 01/02/2001 as the starting date, the SPY and VFINX outperformed the DSEFX fund by 0.61% and 0.62% respectively. All the differences are annualized figures.
Now we come to the 15- and 20-year periods, or the most valuable bits of data since they cover more bear and bull markets. We do not have 20 years of data for the SPY so only VFINX is compared with DSEFX and the S&P 500 equivalent outperforms DSEFX by 0.58% annualized.
Data is available for the SPY over the 15-year period. Once more, SPY does better than DSEFX by 0.35% while VFINX tops DSEFX by 0.43% annually.
While the percentage differences are not huge, even small deltas add up over the years. For large-cap blend stocks, it appears as if social screening is a negative drag on performance. What is missing in this analysis is what risk is involved in these investments. Also, portfolios are made up of more asset classes than large-cap stocks so one cannot draw complete conclusions from these results.