Socially Responsible Investing Gains Momentum

Most people invest money for only one reason … to make more money. It is not that they are greedy; it is just that the general idea behind saving / investing is to sacrifice present consumption so you can buy more of what you want in the future. The average investor doesn’t care whether the companies he or she invests in produce bricks or beanie babies, as long as they produce profits. To that point, many investors might even quote the iconic conservative economist, Milton Friedman (1970), who said, “The social responsibility of business is to increase profits.” On the other hand, people who want to support societal change typically do so by donating time and/or money to non-profit or socially responsible organizations (e.g., schools, medical research, and homeless shelters).

Supporting causes with your investment portfolio:

However, a growing segment of the population wants to use the power of their investment portfolio to support companies that treat the environment, their employees, and their communities in ways that are consistent with their core beliefs. This fast-growing movement is called Socially Responsible Investing (SRI) or Impact Investing. SRI blurs the lines between philanthropy and investing, and its popularity is soaring. An example of SRI might be investing in solar energy, instead of oil due to its impact on the environment. The amount of money invested in SRI funds increased tenfold between 1995 and 2014, including 76% growth from 2012-2014. The total amount invested in Socially Responsible Investment funds is currently estimated to exceed $6.57 trillion (2014 USSIF Trend Report –

3 Types of Socially Responsible Investing (screening, advocacy and community investing):

The most common form of SRI is called “screening.” Negative screening excludes or reduces investments in companies with weak environmental, social, or governance records, whereas positive screening increases investments in companies with strong records. The most common negative screen is to exclude investments in tobacco companies, followed by screens that exclude companies associated with alcohol, gambling, and weapons. Another form of SRI is shareholder advocacy. This involves filing shareholder resolutions that encourage a company to adopt or change various policies. The third major form of SRI is community investing, which directs capital to people and businesses that are underserved by traditional investors (e.g., low income housing, minority owned businesses, affordable childcare, etc.).

Socially responsible investing has evolved:

An entire SRI industry has evolved over the past 30 years, including mutual funds and money managers who offer SRI investments. There are also numerous consultants to help research a company’s environmental and corporate governance track records. A widely followed benchmark among SRI investors is the MSCI KLD 400 Social Index. This index was launched in 1990 and consists of 400 companies, which according to MSCI have the best social and environmental records, out of the 3,000 largest U.S. public companies.

socially-conscious-certifiedSome investment professionals are skeptical about trying to combine profit motives with social causes. This sentiment was expressed by venture capitalist Marc Andressen, who once said that SRI investments are “like a houseboat. It’s not a great house and not a great boat.” However, to many people’s surprise, the MSCI KLD 400 Social Index has performed slightly better than the overall stock market over the past 15 years. So, apparently, you can “do well by doing good” as they say.

One caution is that many mutual funds, bond issues, and money managers are quick to slap a “socially conscious” or “green” label on their funds, which really have not been earned. You need to beware of dubious marketing claims and do a bit of homework if you are serious about SRI investing.