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Socially responsible investing

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Socially Responsible Investing or Socially Responsible Investment, often abbreviated to SRI, is an umbrella term for a philosophy of investing by both financial and social criteria. SRI investors seek to align their personal values and financial goals by choosing to invest in companies and organizations displaying values comparable to their own.

A recent LOHAS study indicates that only half the people in the U.S. have heard of SRI. Of those, some 98% think of it only as screening (avoiding companies by selling their shares). But SRI has three levels, of which Screening is just the starting point. The other levels are Community Investing and Shareholder Activism, both of which have far more beneficial impacts because they seek to engage and transform a situation rather than ignore it and hope it goes away. See article: ['What is SRI?'].

Contents

History

Social investing began in the 1920s with churches, who divested of the so-called 'sin stocks' -- alcohol, tobacco and gambling. As the ability to conduct substantive social and environmental research on companies improved, 'negative' or 'avoidance' screening was joined by 'positive' or 'inclusionary' screening -- the practice of looking for companies with leading policies and practices.

A major shift forward came with the founding of the [Interfaith Center on Corporate Responsibility] (ICCR) in the 1970's. Headquartered in New York, ICCR is an umbrella organization that helps to orchestrate the activities of its constituent membership -- some 285 institutions who collectively control more than $110 billion in investment assets. ICCR is credited with creating the South African Divestiture Movement, and in 1978 an ICCR member filed the first shareholder-sponsored resolution to General Motors. They continue to be leaders in the active use of assets to express or support their members' larger purpose in the world.

Performance

An important issue to confront with SRI is its critics' oft-repeated claim that social investors must sacrifice return in order to invest more in line with their values. This has been shown to be an unsupportable assertion, both by the 14+ year experience of the Domini Social Index, and by a host of longitudinal studies conducted by academic and research institutions. The Domini Social Index was launched to be a financial mirror of the S&P 500 Index, but with a broad range of social and environmental screens applied. Over its nearly 15-year history it has faithfully mirrored, and modestly outperformed, the S&P 500.

For a synopsis of a number of the studies of SRI performance referenced above, see section 4, "Competitive Performance", under the header "FOUR MEASURES OF SRI'S SUCCESS" in the article ['What is SRI?'].

It is useful to realize that every investment manager (whether a mutual fund or separate account manager) does financial analysis first. Then, once financial criteria are met, SRI managers conduct additional social and environmental research. Many feel that this 'double due-diligence' gives SRI managers insight into and the ability to avoid potential liabilities. Others feel that a company's environmental preparedness is a sound proxy for management's foresightedness and a harbinger of out-performance in the future.

Of course, no market cycle consistently favors any group or style of investing, and there are both good and bad managers among the ranks of SRI -- just as there are among traditional Wall Street managers. But one thing is certain -- whenever money moves it has an impact. Socially concerned investors try to influence those impacts, and they can successfully do so while still being fiscally prudent and while fulfilling their fiduciary duty.

Different approaches

In recent years Socially Responsible Investing has evolved into two groups that are largely differentiated by political orientation. Progressive SRI investors follow criteria that support a variety of values, ranging from environmental protection to workers' rights. The vast majority of SRI money invested (over $2.3 trillion a/o late 2005) is invested with this progressive bent. In contrast to this, conservative SRI investors tend to follow criteria that mirror the values of particular religious denominations.

While there is no one standard of criteria across Socially Responsible Investing, most SRI mutual funds, whether conservative or liberal, employ screens that exclude companies that manufacture tobacco or alcohol products.

Future directions

An important thought leader study, [The Future of Socially Responsible Investment], was published in 2005. It captured and analyzed the 10-year-ahead thinking of 42 of the world's leading SRI practitioners, who collectively see SRI, and in particular Screening, as becoming mainstream investment practice -- entirely because SRI analysis does provide valuable insight into management's ability and thoughtfulness. Other significant trends include the continued growth and robustness of Community Investing, and in particular the evolution of Shareholder Engagement as the defining factor that distinguishes the 'Deep SRI' firm from others.

Examples of socially responsible mutual funds

See also

Funds focused on environmental and social issues

Funds focused on religious and moral criteria

Ethical Finance Organisations in the UK

SRI Resources

External links


Investment management
Collective investment schemes:  Common contractual funds • Fonds commun de placements • Investment trusts • Hedge funds • Unit trusts • Mutual funds • ICVC • SICAV • Unit Investment Trusts • Exchange-traded funds • Offshore fund • Unitised insurance fund
Styles and theory:  Active management • Passive management • Index fund • Efficient market hypothesis • Socially responsible investing • Net asset value
Related Topics: List of asset management firms • Umbrella fund • Fund of funds • UCITS

 

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