5 U.S.C. Socially Responsible Investment

SRI—investment made on the basis of environmental, social, and  corporate governance (ESG) criteria—is a global phenomenon and is  growing in popularity in the United States. Officials Identified Several Challenges to SRI Adoption and Said the Long-term Economic Benefits of SRI Were Unknown

		Challenges

Officials at TSP and the other public retirement plans that had considered  adding an SRI option associated a number of common challenges with  the implementation of SRI. While none of the plan officials that we  contacted had plans that were identical to TSP in terms of its federal  scope or participant demographics, many of them shared similar  challenges and concerns with TSP. As shown in figure 3, participant  demand, SRI screening criteria, and costs were the most common  challenges identified by public retirement plans. Benefits

Officials at some of the nine public plans we contacted that offered an  SRI option cited some short-term benefits associated with SRI but said  that the long-term benefits were unknown. Adding an SRI Index Fund Would Not Have Improved Past TSP Portfolio Performance in Most Allocation Scenarios

When compared to the past performance of the TSP stock portfolio (the  C, S, and I Funds), the addition of a hypothetical SRI index fund tracking  the best-performing U.S.-based SRI stock index would not have both  increased returns and lowered volatility in any allocation scenario we  tested. Specifically, over the last 20 years, if TSP had included such an  SRI index fund (SRI Fund) in its existing stock portfolio, it could have  resulted in (1) lower returns and lower volatility, (2) lower returns and  higher volatility, or (3) higher returns and higher volatility, based on our  analysis of evenly distributed portfolio allocations containing the SRI Fund  against the TSP stock portfolio alone (a C, S, and I Funds combination). For example, as shown in figure 4, adding the SRI Fund to the existing  TSP stock funds (an SRI, C, S, and I Funds combination) would have  resulted in lower returns and lower volatility; substituting the SRI Fund for  the C Fund (an SRI, S, and I Funds combination) would have resulted in  lower returns and higher volatility; and substituting the SRI Fund for the I  Fund (an SRI, C, and S Funds combination) would have resulted in  higher returns and higher volatility.based on past performance, this result does not guarantee or imply that   Because this analysis is strictly  the addition of an SRI index would have the same effect on future TSP  stock fund portfolio performance. The managers of the SRI index explained the difference in the index’s  performance over the last 20 years in comparison with the Standard &  Poor’s 500 Index (the C Fund index) was a result of having different  sector weightings than the overall market to align with the fund’s SRI  strategy. SRI Mutual Fund Performance Varied by Asset Class, but Had Similar Costs to Non-SRI Mutual Funds

		After Controlling for Fund Size and Strategy, SRI Bond Mutual Funds and SRI Stock Mutual Funds Outperformed Their Non- SRI Counterparts

Looking more broadly at SRI mutual funds, the most common form of SRI  in the United States, we found that the comparative performance of SRI  and non-SRI mutual funds over the last 15 years varied by asset class. While TSP participants cannot currently invest in mutual funds through  TSP, the Board is authorized to offer a mutual fund window if it  determines that it is in the best interests of participants. SRI and Non-SRI Mutual Funds Had Similar Costs

In fiscal year 2010, the costs of SRI institutional grade mutual funds were  similar to their non-SRI counterparts. We note  that the Board has the authority to open a mutual fund window for  participants to invest in mutual funds managed outside TSP. Agency Comments

We provided a copy of this draft report to the Federal Retirement Thrift  Investment Board, the Department of Labor, and the Department of the  Treasury for review and comment. None of the agencies provided formal  comments.
Why GAO Did This Study

Socially responsible investmentinvestment made on the basis of environmental, social, religious, or corporate governance criteria in U.S.-based mutual funds exceeded $300 billion in value in 2010. TSPa $308 billion retirement plan with more than 4.5 million participantscurrently offers five distinct low-cost investment options, and is authorized to offer a service that enables direct participant investment in mutual funds outside TSP. GAO was asked to consider the value of adding an SRI option to TSP. GAO examined: (1) What challenges might TSP face in adopting an SRI option? (2) How would the addition of an index fund tracking an SRI index have affected past TSP stock portfolio performance? (3) How do the performance and costs of SRI mutual funds compare to those of non-SRI mutual funds?
To analyze the challenges surrounding SRI, GAO interviewed federal officials, SRI experts, and representatives of public retirement plans that had considered SRI adoption. To examine the impact of adding an SRI fund to the existing TSP funds, GAO analyzed monthly benchmark return data. To examine mutual fund performance trends and costs, GAO analyzed historical summary data on US-based mutual funds.
GAO provided a copy of this draft report to the Board, the Department of Labor, and the Department of the Treasury for review and comment. None of the agencies provided formal comments on the report.

What GAO Found

Officials at the Thrift Savings Plan (TSP) and the other public retirement plans that had considered socially responsible investment (SRI) associated a number of common challenges with SRI adoption. While none of these plans were identical to TSP in scope or demographics, many plan officials shared similar challenges and concerns with TSP. For example, they identified participant demand, SRI screening criteria, and costs as the most common challenges. Officials at public retirement plans that had adopted SRI cited some short-term benefits of SRI, such as providing participants an opportunity to invest in accordance with their values, but said that the long-term benefits were unknown.
When compared to the past performance of the TSP stock portfolio, the addition of a hypothetical SRI index fund tracking the best-performing U.S.-based SRI stock index would not have both increased returns and lowered volatility in any allocation scenario that GAO tested. Specifically, over the last 20 years, if TSP had included such an SRI index fund in its existing stock portfolio, it could have resulted in (1) lower returns and lower volatility, (2) lower returns and higher volatility, or (3) higher returns and higher volatility, based on GAOs analysis of evenly distributed portfolio allocations. The managers of the SRI index explained the difference in the indexs performance over the last 20 years was a result of having different sector weightings than the overall market to align with the funds SRI strategy. Moreover, the addition of this SRI fund would have resulted in overlap with the TSP stock portfolio, and would not have provided a substantial opportunity for additional portfolio diversification.
Looking more broadly at SRI mutual fundsthe most common form of SRI in the United StatesGAO found the comparative performance of SRI and non-SRI mutual funds to vary by asset class while costs were nearly the same. Regarding performance, SRI bond mutual funds had better risk-adjusted performance than their non-SRI counterparts over the last 15 years, while SRI stock and balanced funds did not. However, after controlling for various factors such as fund size, SRI stock mutual funds had better estimated performance as well. Regarding costs, in fiscal year 2010, the costs of SRI institutional grade mutual funds were similar to their non-SRI counterparts. Although TSP participants cannot currently invest in mutual funds through TSP, the Federal Retirement Thrift Investment Board (Board) is authorized to offer a mutual fund window if it determines that it is in the best interests of participants.

What GAO Recommends

This report contains no recommendations.