Socially Responsible Investing

Socially Responsible Investing
Increasingly, investors seek to align their personal beliefs with their
financial actions.

Not so long ago, the phrase “socially responsible investing” might have brought to mind
environmentalists keeping their investment dollars out of companies they believed to be damaging the
Earth or animal rights activists rejecting companies who tested their products on harmless creatures.

As the socially responsibly investing, or SRI, sector has grown, its definition
has also diversified. Today the phrase encompasses any investment strategy
targeted at aligning an individual’s portfolio with their personal convictions.
The Social Investment Forum’s 2005 Report on Socially Responsible
Investing Trends in the United States identified $2.29 trillion under
professional management involved in one or more of the three primary
socially responsible investment strategies.

Screening, shareholder advocacy and community investing are the three
most common SRI strategies. Screening – the practice of choosing or
excluding investments from a portfolio based on the investor’s personal
criteria – may be the most commonly known. Individuals may choose to
invest, for example, only in companies headed by women or individuals of a
particular ethnicity. Or, they may choose not to invest in companies that
conflict with their personal beliefs. In addition to the traditional “sin” stocks of
gambling, pornography and alcohol, an investor’s “anti” list might include
tobacco, nuclear weapons, defense, companies with poor records on labor
relations or the environment, religious issues, animal testing or any other

Shareholder advocacy uses the voting rights associated with stock
ownership to promote change within the company. Anti-apartheid
organizations used this strategy to get companies to pull out of South Africa
in the early 1980s. Community investing directs capital from investors to
communities that lack traditional financial services such as
credit, equity,
capital and basic banking products – services that a community needs to
grow and thrive.

According to the Social Investment Forum’s study, socially screened mutual
fund assets grew 15-fold over the same 10-year period from $12 billion to
$179 billion, outpacing the growth percentage of the mutual fund industry, as
a whole, in the U.S. However, financial professionals who specialize in
socially responsible investing point out that excluding certain companies –
or in some cases, certain sectors – from an investment plan can result in potential financial
consequences. Performance, benchmarking, implementation and diversification issues may make these
investments more difficult to evaluate. In some cases, that may mean an investor has to choose between
his beliefs and his bottom line.

If you do choose to factor your personal definition of social responsibility into your financial plan, keep
that trade-off in mind. Trying to compare your SRI-screened portfolio’s performance to general indexes
like the Dow and S&P 500 may not be accurate comparisons. The Domini 400 Social Index, run by KLD
Research & Analytics Inc., attempts to provide a SRI-related benchmark but again, index results may not
adequately reflect the result of including or excluding specific investments.

If aligning your investments is important to you, talk to your financial advisor about socially responsible
investment strategies and their potential impact on your portfolio. If your objection to a company’s
practices or politics doesn’t keep you up at night, you may be better off donating cash or time to the
organization than weeding through thousands of investments looking for a soul mate.
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