Socially Responsible Investing

There was a time not too long ago when investors were limited in their ability to invest with their hearts — to build a portfolio that reflected their personal, social or political beliefs. Those who did often discovered that Socially Responsible Investing (SRI) meant sacrificing returns for social goals, as many SRI funds had difficulty keeping up with the returns generated by other funds because, by their nature, there was a smaller pool of companies they could invest in compared to non-SRI funds.

Today the increasing popularity of this type of investing and the improved quality of SRI managers make it easier for investors to balance their financial goals with their social objectives.

In short, SRI recognizes investor influence on more than a company’s bottom line. By blending corporate responsibility with societal concerns, investors can direct their dollars toward funds that invest in companies that, for example, encourage sustainable energy or help struggling communities.

The most popular approach to socially responsible investing is called “screening,” in which potential investments are “screened in” or “screened out” based on their services or products. Some funds, for instance, are designed to include (or screen in) companies with environmentally sound practices while others exclude (or screen out) those involved in weapons production.

Shareholder advocacy and community investing are two other approaches. With shareholder advocacy, funds and managers take an active role in ensuring the companies within their portfolio continue to act in a socially responsible manner by talking with company management and sponsoring shareholder resolutions on issues like labor practices or corporate governance. Community investing directs capital to underserved communities to help fund businesses and services that are vital to the community.

According to the Social Investment Forum, there were 55 socially screened mutual fund products in the U.S. with assets of $12 billion in 1995; in 2007 the number had grown to 260 with $201.8 billion in assets. This expansion reflects a greater diversification and signals a potentially new investment option for anyone who wanted to make socially responsible investments in the past but were put off by poor performance. Whereas socially responsible investors used to know their funds would be performing at the bottom 10 to 20 percent in their category, some companies have gotten exceedingly savvy at picking solid performers, resulting in certain SRI funds placing in the top 10 to 20 percent today.

Through SRI, investors are given an opportunity to align with corporations that share their values and encourage corporations to adopt practices that will have a positive impact on society. The key for them, or anyone interested in building an SRI portfolio, is to work with somebody who is experienced in this area of investing. Talk with your personal or business investment advisor and ask which SRI options could be right for you.