Money is pouring into sustainable investments, which has surged by more than $2 trillion in the last two years. Demand is growing as clients want to increasingly invest responsibly. Yet investors have heard the argument before: Socially responsible investments don't perform as well as traditional stock market funds. If you want to feel good about the stocks you're holding, you'll pay the price in lower performance. The truth is finally starting to emerge about how bad SRI really is: It's no worse than any other approach to investing. Investors should not expect to do better than traditional stock investing, but as long as fees are not too high, there is no reason to expect a broad-based SRI investment to perform worse than a traditional stock portfolio.

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CNBC reviewed years of Morningstar data on the performance of socially responsible funds versus traditional funds and benchmarks and found that there is no significant performance drag. With one key caveat: Funds designed to exclude stocks, such as the "sin" sectors — no tobacco, alcohol and guns — don't tend to measure up. Jon Hale, head of sustainability research at Morningstar, said academic research has shown that stock exclusion tends to be a negative factor in performance, while companies that score highly on ESG metrics (environmental, social and governance) show performance that is consistent with traditional benchmarks. "The ESG performance of companies appears to be something that can be used to generate value in a portfolio; traditional exclusion can be a drag," Hale said. In other words, it's better to identify reasons to invest in a stock than harp on reasons to avoid owning one.

Social index vs. broad US stock market Period KLD 400 Social Index MSCI USA Investable Market Index 1 year 17.03 17.67 3 year 9.56 9.75 5 year 15.33 15.27 10 year 7.13 7.13 Since inception (May 31, 1994) 9.8 9.72

"The weight of academic research on the performance of sustainable/responsible portfolios, mutual funds and indexes suggests that there is no performance penalty," Morningstar wrote in a 2016 report on SRI investing. Similar research goes further back: A 2013 meta-analysis of 25 primary studies on socially responsible investment performance found that roughly 75 percent showed no significant performance difference — either out- or underperformance. A 2015 meta-analysis covering 85 studies reached a similar conclusion that there's neither a big cost, or benefit, to investors. "There is no significant relationship between SRI and performance," the authors wrote. "The adoption of ESG standards does not generate notable costs or benefits for an investor

with a global perspective, challenging the theory of SRI inefficiency, which implies poorer

performance due to a limited investment universe."

Percentage of mutual funds that beat their category index Period All mutual funds SRI funds 1 year 40 41 3 year 34 33 5 year 36 35 10 year 28 29

Hale said as ESG algorithms become better and SRI funds gravitate more to finding better companies rather than excluding bad ones, there's reason to believe these funds may not only continue to keep up but more often beat conventional funds. "In the past, these portfolios haven't fully reflected the idea that it does improve an individual company's bottom line, but the ability to identify these things really only became sophisticated recently," Hale said. "The process of collecting and understanding information on company performance on ESG has definitely entered the realm of big data. ... Going forward it may be more likely to result in outperformance." The big hurdles will continue to be that any active manager — whether SRI or not — will struggle to beat an index fund, and these funds as a rule are more expensive than the "rock-bottom prices of simple Vanguard portfolios," Hale said.

Hale said for now a performance edge may be easier to achieve in markets where companies are less likely to be driven by ESG as a general societal principle — for example, Europe versus the United States. "Lots of international large-cap companies that find their way into these ESG funds are sustainability leaders, relatively speaking, so there may be less differences even if a traditional international manager isn't even trying. Basic holdings in international large-cap will be similar. It's less so in the U.S. now." The iShares MSCI EAFE ESG Optimized ( ) ETF, which has 451 holdings based on ESG traits, is notching nearly similar returns to the parent index. Nestlé and Roche Holdings are its largest holdings. The expense ratio of 0.40 percent is only slightly higher than the iShares MSCI EAFE (EFA) ETF's 0.33 percent annual fee. The ESG version of the EAFE index fund has turned in virtually the same performance year-to-date, though it lacks performance history, having launched less than a year ago.

A rougher ride the more narrow you slice it