Investing with Social Responsibility: WHO IS IT FOR?

Socially Responsible Investing, or “SRI,” is investing with the intention of both promoting social good and maximizing investor return.

Introduction: As a former financial advisor for a large broker dealer, I specialized in helping non-profit organizations invest in investment products that reflected their social values.

My surprise was that my company had very little information on socially responsible investing. The only piece of literature we had was a list of 25 to 30 mutual fund companies that sold at least one product that fell under the larger umbrella of “socially responsible investing,” but there was no other information.

I quickly realized that there was a limited amount of information available. There seems to be a persistent misconception that investing in SRI results in a loss of investment performance, when in fact the opposite is true. Companies typically perform better financially when their corporate policies promote equality, the environment, and sound management practices.

Once this is widely acknowledged, larger institutions will begin investing more time, resources, and effort in expanding SRI research and product development.

Brief background: Socially responsible investing began during the slave trade in the middle to late 1700s, when investors were encouraged not to participate. Later, it became associated with religious institutions that advised investors to steer clear of “sinful” businesses that produced tobacco, guns, or liquor.

Socially responsible investing took on more social issues like women’s equality, civil rights, and labor equality in the 1960s. In the 1970s, environmental issues and global social issues like South Africa’s apartheid were added.

Positive investments in the environment, social justice, and corporate governance (commonly referred to as “ESG,” although I will use the SRI label because it is still the most widely recognized term as of this writing) have increasingly been included in SRI since the 1990s.

Trends According to a recent Social Investment Forum study, SRI is still expanding at a healthy rate. SRI assets reached over $3 trillion at the beginning of 2010, up more than 380 percent from $639 billion in 1995, when the first report covering these statistics was released by the Social Investment Forum.

SRI assets have increased by 34% since 2005, while assets that are traditionally managed have only increased by 3%. In addition, traditional, professionally managed assets increased by only 13% while SRI assets increased by less than 1% from 2007 to the beginning of 2010 (during the recession). Today, approximately one dollar out of every eight is invested in a socially responsible investment.

The Social Investment Forum credits client demand and, to a lesser extent, legislation and regulation for the majority of this expansion.

STRATEGIES FOR INVESTING There are basically three SRI investment strategies:

Negative and Positive Screening:

Positive screening involves actively looking for good businesses. It lets investors choose businesses whose business practices are in line with their values. For instance, an investor might decide to put their money into a solar energy company if they are particularly concerned about safeguarding the environment.

Many people believe that investing in businesses that support environmental or social causes necessitates sacrificing performance; however, it appears that the opposite is true. The author of Profitable Socially Responsible Investing, Marc J. Lane, discovered that businesses with the highest scores for social and environmental issues actually had better financial results. In point of fact, Lane claims that during the course of his eight-year research, the stocks of those businesses outperformed the Russell 3000 Index by more than 2.5 percent.

The process of weeding out businesses whose business practices or products or services do not align with social good is known as negative screening. This traditionally included tobacco, firearms, alcohol, gambling, and defense contractors for the majority of SRI investors. However, it has also been expanded to include businesses whose management has failed to promote diversity, equality, environmental responsibility, or employee diversity.

Activism by Shareholders Activism by Shareholders is the process of attempting to influence changes in corporate policies or practices by speaking directly with management or by submitting shareholder resolutions for approval by the company’s shareholders. The annual number of shareholder resolutions filed was less than 20 when the concept of shareholder activism was first introduced. The Social Investment Forum reports that over 200 institutions submitted shareholder proposals between 2008 and 2010, with many of them being adopted.

Through local community banks and lenders, also known as “Community Development Financial Institutions” or “CDFIs,” community investing entails the direct investment of capital in underserved members of communities. If these individuals or businesses applied for loans through conventional commercial banks, they would never have access to credit, equity, or capital from these lenders. Venture capital funding can also be used for community investing.

An investor is more likely to have a greater impact on social good by investing directly in a community. Money invested in a CDFI or venture capital fund directly and immediately promotes underserved communities, whereas purchasing company stocks may or may not promote social good.

PRODUCTS OF SRI: Trends in Mutual Funds and Exchange-Traded Funds (ETFs) There are currently more than 250 mutual funds that are designed to align investments with particular social values. Some mutual fund companies, like Calvert, Domini, PAX World, Ariel, Sentinel, and Winslow, are solely focused on SRI. On the other hand, more mainstream mutual fund companies, like Vanguard, Neuberger Berman, Gabelli, Legg Mason, and Dreyfus, to name a few, have one or more investment products that address specific social issues but are not solely focused on SRI.

While mutual funds are a good way to invest in a variety of businesses that embody particular social values, you should be aware of their limitations before making a purchase.

First, mutual funds typically have high costs. In addition to the fees for purchasing or selling shares, many mutual fund companies charge ongoing fees.

Second, mutual funds are a passive method of investing in SRI that do not control the companies that are chosen. You might be surprised to discover that some of the holdings of mutual fund companies that say they invest in socially responsible businesses are not really in line with SRI values if you take a closer look at some of them.

Finally, many mutual funds simply cannot compete with exchange-traded funds (ETFs), which are a straightforward, static product that track an index. The FTSE KLD 400, one of the first SRI indexes, has continued to perform competitively, with returns of 9.51 percent from its inception through December 31, 2009, compared to 8.66 percent for the S&P 500 during the same time period. You can simply purchase shares of an ETF that tracks the FTSE KLD 400 and perform just as well, if not better, than you would by investing in a mutual fund at a fraction of the cost.

There are currently approximately 26 ETFs available, and despite representing only 1% of SRI’s total assets, their assets have grown 225 percent since 2007, the fastest of any registered investment product.

Investing directly in the stocks or bonds of solid, financially sound businesses that align with your values might be a more straightforward approach to socially responsible investing.

There is a common misconception that investing in individual company shares increases risk because you concentrate risk on a small number of investments and reduce the number of companies you invest in. This is only true if you invest in businesses that aren’t financially, socially, or ethically sound and don’t do your homework.

Several publications publish annual lists of the best SRI companies to help you get started. ETFs are a great option if you simply do not have the time or desire to conduct research, or you can sign up for the bimonthly New Paradigm Wealth newsletter, which provides investment ideas, trends, and notable companies to watch.

Alternative investments include hedge funds, venture capital funds, private equity funds, property funds, and other unregistered limited partnerships or limited liability companies that are typically only accessible to accredited and high-net-worth investors. Other examples of alternative investments include property funds. To put it another way, these are investments that are only available to a select few wealthy people and typically require a high minimum initial investment of $50,000 or more.

Although hedge funds employ managers who have the flexibility to buy and sell using investment techniques and strategies that are typically unavailable or even prohibited by mutual fund companies due to regulatory constraints, these are not necessarily suitable for all investors.

In most cases, greater adaptability to changing market conditions and the potential for higher returns come with increased flexibility.

Since 2008, this subfield of SRI has experienced a meteoric rise, with managed assets increasing by 615 percent due to a growing interest in clean technology and renewable energy.

Investing in Community: Community Development Financial Institutions, or “CDFIs,” are made up of the following entities: community development loan funds, community development venture capital funds, and community development credit unions These are all distinct kinds of lenders that provide individuals and small businesses in underserved areas with access to capital.

Since 2007, community investing institutions’ assets have increased by more than 60%.

Many of these institutions are now using the internet to communicate with their intended customers. One such organization is, which focuses on providing microloans to entrepreneurs in developing nations. The repayment rate is 98.99%, and the interest rates vary, but they are less expensive than a savings rate from a bank.

GLOBAL TRENDS The positive outlook for the global economic cycle (coming out of a global recession), demographic shifts (booming population growth in Asia and aging population in the United States), new technology, and climate change are just a few of the global trends that will drive investment in the SRI sector into 2011.

One of the most important themes in 2011 that drove increased investments in SRI and SRI alternative investments, particularly hedge funds and private placements, is green investing in relation to clean technology and renewable energy.

Taking a step back from the various investment vehicles that are available and focusing on the bigger picture is a good idea if you want to make smart decisions about where to put your money. What new developments are influencing investments in the industries and, more specifically, the businesses that are most likely to succeed in the socially responsible sector?

Where Do We Go Next?

New Paradigm Wealth hopes to guide investors through SRI options that make sense right now through weekly posts and a bimonthly newsletter. As a socially responsible investor, I’ve listed a number of resources on our website that will help you choose wise investments.

Now is the time to align your values with investment choices that are in line with what you believe in, care about, and value most.

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