Traditionally, a portfolio’s performance has been judged by two variables: risk and return. Through this scope, it is an investment manager’s responsibility to construct a portfolio that generates the highest return while maintaining a tolerable risk level. One faulty assumption imbedded in this two-variable philosophy is that the investor has no interest in the social costs incurred through the creation of this portfolio. For a variety of reasons, whether environmental, religious or political, investors arein fact concerned with how their money is generating its return. From this social awareness has emerged the money management strategy known as socially responsible investing, or SRI.
SRI assets rose more than 258 [percent] from $639 billion in 1995 to $2.29 trillion in 2005, while the broader universe of assets under professional management increased less than 249 [percent] from $7 trillion to $24.4 trillion over the same period,” according to a recent survey of the industry by the Social Investment Forum. Today, nearly one out of every 10 dollars under professional management is held by an SRI fund.
SRI managers use three fundamental approaches to invest in a more sustainable and humane society:
Screening is the practice of filtering possible investments through evaluation of a company’s compatibility with criteria used by a specific fund. Some funds focus on environmental issues and others on labor conditions, while many use a wider scope and require a general history of corporate social responsibility. It is still the job of the manager to achieve desired returns while managing risk, but some promising investments will surely be omitted if they can’t meet the relevant standards.
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Shareholder Advocacy takes a proactive line of attack to responsible investing. In contradiction to screening strategies, those practicing shareholder activism often invest in unethical companies, hoping to bring about positive change through shareholder resolutions. This process can raise awareness on specific issues and create dialogue with management that otherwise would be nonexistent.
Community Investing is an effort to direct capital into neighborhoods often overlooked by traditional financial services. This approach focuses on issues such as affordable housing, small business creation and development of community facilities. For individual investors, holding cash with financial institutions dedicated to community development–such as credit unions, local savings and loans and development loan funds–can provide competitive returns while helping support economic growth in areas shunned by capitalism. For institutional investors, participation could come in the form of venture capital funding or ownership of real estate, such as low income housing. More information on community investing options can be found at www.communityinvest.org.
What about performance? Do those involved in socially responsible investing sacrifice returns in an attempt to fund a sustainable society? The answer is simple, and it is a definite no. SRI mutual funds, some of which have been active for more than 20 years, perform competitively against benchmarks such as the S&P 500.
But socially responsible investing doesn’t exist without flaws. Critics argue that investing with social awareness does little to promote change in the world, and they may be right. An efficient way to scientifically track social impact does not exist. Another problem arises with conflicting ideals of investors: An idea deemed acceptable by one person may be completely unethical to another. Even with its imperfections, socially responsible investing is a fast growing trend, but this popularity could bring about more troubles. Socially responsible investing risks becoming a trendy marketing ploy used simply to catch the attention of potential customers, leaving sincere efforts to promote social sustainability behind.
A smart investor is wary of any trend, careful to avoid seemingly inevitable bursting bubbles. Will socially responsible investing fall victim to the demons of irrational exuberance? While it is impossible to know for sure, the fundamentals of SRI allow for stable growth. Unlike the dot-com bubble, SRI is not based on investment in new technology that hasn’t yet proved profitable. Because there are so many ways to practice socially responsible investing, classic tools of diversification remain on the table.
Socially responsible investing encompasses many different strategies and ideas, which could make it difficult for investors to know what is relevant for them. Community investing, which includes real estate and microfinance activities, is the fastest growing sector of SRI, swelling from $4 billion in assets in 1995 to $20 billion in 2005. Foreign SRI mutual funds offer opportunities to achieve competitive returns. There are countless ways for interested investors to get involved in socially responsible investing, regardless of how much time and money they can invest.
The Domini 400, created in 1990, is the oldest index that specifically tracks SRI funds. Since its inception 17 years ago, it has returned an average of 11.20 percent annually. This performance only slightly trails the S&P’s lifelong average of 12.02 percent annual returns. The Social Investment Forum provides a chart tracking the performance of SRI funds which shows that foreign funds are particularly successful in providing high returns. The top three performers, all returning more than 25 percent since inception, are comprised of international investments. Of all the foreign SRI funds tracked by the Social Investment Forum, the average return since inception is 12.30 percent, a number that outperforms the historical S&P 500 average.