Good Behavior, Heavenly Returns

Owning stock in a well-run, socially responsible company is a way of making a statement. Owning stock in a bunch of responsible companies is a recipe for beating the market.

- Ryan Derousseau

BACK IN 2012, when Andreas INVEST Feiner and his colleagues at asset management startup Arabesque first began pitching investors about including environmental, social, and governance factors (ESG) in their investing decisions, they encountered plenty of skepticism, not to mention eye rolls, sidelong glances, and crooked looks. Investors, recalls Feiner, believed that “if you do something right, you have to pay for it” by accepting smaller profits and lower returns.

A lot can change in six years. Today there’s a growing body of evidence showing that companies that put social responsibility first can also finish first in the market. The question is no longer whether you can do well while doing good, but how best to distinguish the do-gooders from the also-rans. (To learn about 63 companies that fit in the first category, see the Change the World list in this issue.) And several companies—including Arabesque, a spinoff of banking giant Barclays— are deploying data to build tools that can help investors build and test their portfolios.

The demand from investors is certainly there: In a recent survey, Bank of America Merrill Lynch found that about 20% of investors—and 50% of those with a five-year time horizon or longer—considered ESG issues in their analysis. Their motives involve both a sense of public responsibility and commonsense self-preservation: When companies make decisions that show respect for the environment, their communities, and their employees, there’s less likelihood that they’ll be hit with the kinds of fines, public backlash, and boardroom turmoil that can slam their share prices.