Do-gooder companies do well for their investors.
Morgan Stanley’s Institute for Sustainable Investing found that US companies that eschew controversial industries and adhere to a relatively strict moral code tend to have better returns and less volatility than most public companies.
The ISI based its findings in part on the performance of MSCI’s KLD 400 Social Index, which plucks out companies in fields such as nuclear energy, guns, tobacco, and genetically modified food from the wider universe of public firms. The iShares exchange-traded fund based on the KLD 400 has outperformed the S&P 500 since it started trading in late 2006—up 53% to the S&P 500’s 49%. It’s not a huge difference, but it’s something.
The thinking goes that companies with fewer ethical quandaries are more stable and can better focus on building sustainable businesses. A paper published in the November edition of the journal Management Science came to a similar conclusion. Researchers tracked a group of 90 public companies who created strong environmental and social policies in the early 1990s, and found that they did much better than companies who didn’t.
“The high sustainability companies outperform the low sustainability ones in terms of both stock market and accounting measures while the market did not actually expect this outperformance,” the researchers wrote. They simply had systems that better accounted for the world around them, which resulted in a better bottom line.