EBI & SRI — What if you want both?

Posted by Robin Powell on December 1, 2015


There are two exciting developments in investing at the moment. One is the rising popularity of the evidence-based approach; the other is the growth of socially responsible investing, or SRI. But what about those of us who want both? What if you’d like to invest in a way that is proven to provide maximum returns for the level of risk you’re willing to take AND has a positive impact on the world around us?

Greg Lessard runs Aspen Leaf Partners, an advisory firm in Colorado that combines evidence-based principles with promoting higher ethical standards and environmental sustainability. Here he explains his dual focus and what the options are for like-minded investors.

Logo - Aspen Leaf Partners 1


Tell me briefly about how you came to embrace evidence-based investing?

I was heavily influenced by two outstanding financial advisers, Jon Duong at WealthEngineers and James Osborne at Bason Asset Management. They are two of my closest friends. Attending the Dimensional Fund Advisors two-day conference in Austin, Texas, also helped me to see the benefits to my clients of an evidence-based approach. 


Why is sustainable investing so important to you personally?

Environmental considerations have been a part of my daily life ever since I read The Monkey Wrench Gang as a teenager. It’s a deeply held value that has spilled over into my professional career. 


There are basically two ways in which a socially responsible fund is created — i.e. screening and tilting. Briefly explain how each of those work.

Screening is a rigid, exclusionary approach that “divests” from offensive securities, such as companies involved in fossil fuel extraction, corporations with poor employment track records, or even companies that don’t align with Catholic values (those involved in stem cell research, for example). This is how Socially Responsible Investing (SRI) has always been executed. 

Tilting is what an ESG approach employs. A scoring system is used to rank how “good” or “bad” a company has historically behaved. The end result is that securities with high overall ESG scores are overweighted in a portfolio, and those with low scores are underweighted.


How easy is it for US investors to combine evidence-based investing with SRI or ESG?

Currently, it’s not easy. There are a handful of passive ESG strategies — i.e. ones that address the environmental, social and governance concerns that many investors have — but not every asset class is fully covered without bending the rules a bit. It’s challenging to get strong scores for the E, the S and the G, all in the same portfolio model. 


Is there a trade-off with this kind of investing? In other words, do you pay for your principles with slightly lower returns?

Returns don’t seem to suffer when you invest with your values. For example, the MSCI KLD 400 Social Index delivered an annualized return of 9.78% from its inception in May 1994 until the end of July 2015. Its benchmark, the MSCI USA Investable Market Index, returned 9.73% over the same period. 


What products are currently available in the US? And do you expect more products to come on stream?

iShares and SPDR have four ESG ETFs collectively, Pax World and Northern Trust have launched two index mutual funds, and Calvert has just released four passively managed ESG strategies. Dimensional has five passive strategies. 

There are also a handful of thematic alternative energy ETFs from various providers. Etho Capital, for example, recently introduced a fossil fuel free ETF.


Are there SRI or ESG options for bond investors?

Unfortunately, there isn’t a passive fixed income strategy that’s strong across E, S and G. However, there are some actively managed funds as well as Separately Managed Accounts (SMAs) in this space. 

This should change soon as both MSCI and S&P Dow Jones have developed fixed income indices. There are a few product providers committed to licensing the indices and bringing them to the retail market. I’m told this is in the works by the second quarter of 2016. 


What’s the situation in the UK?

STOXX has 13 ESG indices by my count, but I’m not familiar with any products tracking any of these indices. Northern Trust manages a few equity ESG index funds, including an Emerging Markets option. FTSE has developed six ESG indices, three of which are branded as fossil fuel free. But again, I’m not sure what products have licensed any of the FTSE indices. 


There’s an impression that socially responsible investors tend to be younger. Has that been your experience?

Most of my clients have embraced an ESG approach, and the majority of them are more “seasoned” investors. But, this is only a small sample size, so it’s not right to derive any conclusive position regarding the ages of a typical SRI/ ESG investor. 

My gut tells me that when the average investor is asked if they’d like to align their portfolio with their values, they’d be interested to learn how. Once they see the historical risk and return results of an ESG approach, most people become likely candidates for adopting an ESG strategy — especially a passive one. 


Do you expect a growth in demand for products that combine EBI with SRI in the future?

It’s my sincere hope that passive ESG investing receives greater attention from both advisers and the financial media in the future. More demand would lead to more products for advisers to recommend, and more pressure on companies to do what’s best for the planet and humanity. 

There is no doubt this style of investing will grow over time. It will be interesting to see how quickly, and if it ever becomes mainstream, as opposed to the niche it is now. 



Robin Powell

Robin is a journalist and campaigner for positive change in global investing. He runs Regis Media, a niche provider of content marketing for financial advice firms with an evidence-based investment philosophy. He also works as a consultant to other disruptive firms in the investing sector.


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