Friday, May 05, 2006

Socially Responsible Investing: Part 1

I'm surprised I've gone this long without writing about Socially Responsible Investing (SRI)! This is a two-parter: I'll start with the basics of what SRI is, and Part 2 will describe some specific SRI options you might be interested in looking into, as well as including links to other resources to learn more about SRI (and to relevant pfblog posts!)

What is SRI?

Socially responsible investing is the process of incorporating your personal values and concern for society into your investing and financial decisions. This is commonly done through mutual funds, but that's not the only form of SRI.

There are three different SRI strategies, which often are combined. The first and most well-known is social screening, but the other two, which in my opinion are even more important, are shareholder activism and community investing.

Social Screening: Social screening can be "positive" or "negative." Positive screens seek out especially good companies on a certain issue, while negative screens avoid certain companies. Companies can be screened on their policies (environmental impact, labor, diversity and discrimination, etc) and/or on the products or services they provide (alcohol, tobacco, gambling, nuclear energy, weapons manufacturing, etc). Individuals can do their own social screening when they pick their portfolios, but it's most often done in the context of SRI mutual funds, which dedicate significant resources into doing detailed research into the social impact of the companies they invest in or are considering investing in.

Shareholder activism: SRI mutual funds holding stock in certain companies will often initiate a dialogue with corporate management if they have concerns about certain practices or policies (or the lack thereof). Often this dialogue is enough to lead to change. If the company is unwilling to make changes, the mutual funds (or other investors) may file a shareholder resolution to put the question out to all stockholders. There are hundreds of these resolutions filed every year, and the various SRI mutual funds will consider all of them and often vote against managment on most. (Traditional mutual funds usually vote with management.) Individuals who own stock can vote on these resolutions too-- if you own even one share, you should get a proxy ballot every year. Since the default vote is "with management," the resolutions rarely get a majority (and are non-binding anyway). But any time they get a significant percentage, it sends a strong message and really helps the dialogue process.

Community Investing:
I talked about this back in March when I discussed my money market account, so I won't go into too much detail here. But the central idea is that community investing means using your banking and investing dollars in ways that prioritize helping financially underserved communities get access to credit and capital. Lending is targeted to individuals and organizations that help low-income communities. Most commonly this is done through banks and credit unions (with savings accounts, CDs, money market accounts, etc), but there are also community development loan funds and venture capital funds out there. There is a nationwide 1% or More in Community campaign which encourages individuals, institutions, and mutual funds to put at least 1% of assets into community investing. As for me, I'm at about 50%!

How common is SRI?

SRI is growing. Between 1995 and 2005, the amount under SRI management rose from $639 billion to $2.29 trillion. (Over the same period, the total universe of managed assets went from $7 trillion to $24.4 trillion.) So as you can see, SRI makes up about 10% of professionally managed money. And $19.6 billion is currently in community investments, up from $5.4 billion in 2000.

Does SRI mean giving up financial performance?

The short answer is no. The medium-length answer is that it depends on the particular fund, and the time period you look at, but SRI funds sometimes overperform and sometimes underperform the market. (Community investment options vary-- some are at or close to market rate, while others let you voluntarily choose below-market interest rates in order to have a higher social impact.) And the long answer-- try reading these seventeen studies!

What are some specific SRI options?

Please check out part 2! One thing I want to make sure to point out is that while SRI is typically associated with a "progressive" set of values and priorities, there is actually a great diversity of SRI options to fit people with a variety of different values (including a strong religious SRI sector). I'll be describing some of them next time.



Tiredbuthappy said...

Excellent post! After spending several hours this week trying to find SRI funds in different asset classes, I was thinking I really needed to write more (and learn more) about SRI. I'm so glad you laid everything out so clearly. Now I can just point people to your blog for a good explanation.

Looking forward to Part II.

Anonymous said...

MoneyLIFE, a fortnightly personal finance magazine understands socially responsible investments.

This magazine is sharply focused on stocks, mutual funds, careers, consumer rights plus enterprise & smart spending.

Debashis Basu, a C.A. by qualification with 22 years of experience as a journalist & the author of several business books is the Editor & Publisher.

Sucheta Dalal, among the best known financial journalists in India (awarded Padma Shri in 2006) is the consulting editor.

Mel and Stacy Marten said...

We are seeing huge growth here, many individuals are now requesting SRI when they search for advisors on our website - ClaroConnect - both from a green and socially responsible point of view and from those who feel this is a hot area that has long-term high returns.