The indexing methodology hopes to capitalize on the fact that companies found in the socially responsible index historically pay better, create more jobs, pay fewer fines, give twice as much to charity, emit less greenhouse gas, and have higher return on equity, compared with the rest of the Russell 1000.
JUST Capital discovered three specific ways companies can improve worker treatment while maximizing profit, pointing to policies implemented by 3M, Texas Instruments, PepsiCo, and among other. The research found that employers that promote work-life balance, provide career development opportunities, and implement anti-discrimination measures consistently generate higher returns-on-equity than their peers, regardless of industry.
JUST Capital also found that 83% of the benchmark index’s financial outperformance can be attributed to alpha even after controlling for common investment factors like profitability, investment, value, size, growth, and momentum.
“Undiscovered alpha is bit like finding $100 on a Wall Street sidewalk,” Hernando Cortina, Director of Indexes and Analytics at JUST Capital, said in a note. “People assume it couldn’t possibly be there – but the American public seems to have hit on a compelling source that’s been hiding in plain sight and well worth deeper exploration.”
For more information on ESG-related investments, visit our socially responsible ETFs category.