Socially responsible investing (SRI) is gaining a strong foothold among institutional investors with data suggesting more and more top-level decision makers are prioritizing environmental, social and governance (ESG) principles in the investment evaluation process.

New data from Callan LLC, a leading institutional investment consulting firm, indicates that this year, 37% of plan sponsors that responded to the survey “incorporated factors into their investment decision-making process.”

“The survey conducted in August of 2017 polled 105 unique institutional U.S. plans and trusts totaling more than $1.1 trillion in assets,” said Callan. “Respondents by fund type include: approximately one-third public funds, one-third corporate funds, and one-third endowments and foundations.”

Importantly, institutional investors responsible for large sums of money are increasingly making ESG virtues put of their toolboxes.

“While the top-line percentage is unchanged compared to 2016, plans with greater than $20 billion in assets have increased incorporation of ESG factors into investment decisions by 136% from 2013 to 2017,” according to the Callan survey. These plan respondents now have the highest rate of ESG incorporation at 78%. For those funds, some respondents indicated that stemmed from their greater resources and bigger participant pools with constituents asking for ESG investment options.

The ESG Debate

While more and more professional investors are warming to ESG investing, many are not questioning what ESG virtues actually are. In fact, a significant portion of respondents in the Callan survey are comfortable with the standard definition of ESG.

Half “of respondents did not attempt to define ESG, implying an acceptance of the standard definition,” according to Callan.

When it comes to applications of ESG principles with equities, standard definitions usually include excluding companies that make weapons, produce pornography, are involved in gambling and tobacco manufacturers.

As investor adoption of ESG has grown, so has the availability of funds that incorporate more than the base definition of ESG. In the world of exchange traded funds (ETFs), which is expected to be a fertile growth frontier for ESG investments, investors can access funds that emphasize Catholic values, Christian values, gender diversity in the workplace and exclusion of fossil fuels companies, among other SRI themes.

Is The Juice Worth the Squeeze?

Investors, professional and retail alike, that are new to ESG investing frequently ponder the efficacy of the strategy, wondering if investing with a conscious means sacrificing returns.

Some studies confirm the utility of ESG investing in specific asset classes, such as emerging markets equities, where social and governance standards often lag behind developed economies. Likewise, some data points indicate that companies emphasizing ESG principles can exhibit quality traits, such as sound balance sheets and steady management teams.

Still, there are examples of institutional investors not deriving benefit, at least not yet, from prioritizing ESG investing. A recent report from the American Council For Capital Formation (ACCF) suggests the California Public Employees Retirement System (CalPERS), the largest public pension plan in the U.S., prioritizing ESG investments at the expense of its pensioners and California taxpayers that are stuck footing the bill on CalPERS' shortfalls.

The ACCF report notes CalPERS has taken a bath on at least two investments in Chinese solar companies, one of which eventually went bankrupt. ACCF also said CalPERS previously doubled its investment in Yingli Green Energy Holding Company Ltd. (YGE) while the stock traded between $2.08 and $20.90 only to liquidate almost three-quarters of that position when Yingli traded below $2.30.

In late 2000, CalPERS famously voted to ban tobacco stocks from its portfolio, a ban that was renewed in late 2016. By some estimates, CalPERS missed out on $3 billion in returns by shunning tobacco stocks. Over the past five years, shares of Altria Group (MO) are up more than 125%, compared to 85.4% for the S&P 500.