Introduction to Socially Responsible Investing

You've heard about Socially Responsible Investing – but does it make a difference, what is it, and is it for you?

You may drag your recycling to the curb once a week and insist on recycled paper at the supermarket - but do you also consider investing with your conscience? Maybe you've purchased a t-shirt from American Apparel instead of Gap to protest their use of overseas sweatshops – but do you know if your mutual fund owns Gap? Do you know that if you own stock, you own a proportionate share of that company? Did you even know that mutual funds own stock in individual companies – usually around 100 different companies, some of which you may avoid as a consumer (or some you may have actively protested against)?

Socially responsible investing (SRI) is many things to many people. On a basic level, all socially responsible investing involves aligning your investments with your values. When introducing SRI, people usually refer to the “three pillars” of social investing. First, SRI may involve avoiding investment in companies that violate social issues you are concerned with – e.g. not investing in Altria if you are opposed to tobacco companies. Our Mutual Fund Screening Tool™ addresses this approach to socially responsible investing. Second, SRI can involve intentionally investing in companies that violate social issues which concern you. By owning stock in a company, you are able to participate in shareholder meetings and votes. This strategy changes companies from the inside. Third, SRI may involve investment in community development financial institutions (community banks, community loan centers, etc.). These institutions often serve communities ignored and avoided by larger financial institutions.

This introduction to SRI will focus on the first pillar of social investing – avoiding investment in companies that violate social issues. Subsequent articles will address the remaining approaches to SRI.

Does SRI make a difference?

From the 70's to the early 90's, large institutions avoided investment in companies that were related to the government and apartheid policies of South Africa . After the Sharpeville Massacre in 1960, international opposition to apartheid strengthened. In 1976 the United Nations imposed a mandatory arms embargo against South Africa . In 1971, Reverend Leon Sullivan (at the time a board member for General Motors) drafted a code of conduct for practicing business in South Africa which became known as the “Sullivan Principles.” These principles sought to document the practices of American companies within South Africa . Reports documenting the application of the Sullivan Principles discovered that US companies were not attempting to lessen discrimination within South Africa . Because of these reports and mounting political pressure; cities, states, colleges, faith-based groups and pension funds throughout the United States began divesting (or removing their investments) from companies operating in South Africa . The subsequent negative flow of investment dollars eventually forced a group of businesses, representing 75% of South African employers, to draft a charter calling for an end to apartheid. In 1994, everyone was allowed to vote for the first time in 50 years. This vote resulted in the end of the apartheid regime and the election of Nelson Mandela as president of South Africa . While the SRI efforts alone didn't bring an end to apartheid, it did focus persuasive international pressure on the South African business community.

What is Socially Responsible Investing?

Invested Interests™ and the efforts of thousands of investment professionals are making investing in socially responsible investments easier every day. SRI is the fastest growing segment of professionally managed investments. You will not be alone, and we will show you how easy it is to get started as a socially responsible investor – that's our job.

The beginning of socially responsible investing could be attributed to many people and many places. However, one of the most articulate, and perhaps influential, early adopters of SRI was John Wesley (1703-1791) – one of the founders of the Methodist Church . A sermon of his, appropriately named “The Use of Money,” outlined his basic tenants of social investing – e.g. not to harm your neighbor through your business practices and to avoid industries like tanning and chemical production that pollute our rivers and streams.

Modern SRI came to be during the Vietnam War. Almost all Americans alive during the era remember a picture in June of 1972 of a naked nine year-old girl running towards a photographer screaming and her back burning from the napalm dropped on her village. That picture crystallized outrage against Dow Chemical – the maker of napalm – and prompted protests across the county against Dow Chemical and other companies profiting from the Vietnam War. In the late 70's, SRI activism turned its attention to the elimination of nuclear energy and called for greater emission standards on automobiles. These issues, and the people that promoted them, established the groundwork for SRI as it is today.

When you invest in stocks you are becoming a proportionate owner of a company. That is why the stock price can increase and decrease – it is a function of how profitable your share of the company is expected to be. It is important to understand this, because as an owner you are making an implied endorsement of the company. Traditionally, this endorsement was entirely financial. By investing in a stock, you placed your trust in the management of that company to make money for your proportionate share of ownership. Today, many investors acknowledge that this implied endorsement extends beyond financial measures. Social investors believe that ownership in a company also implies that they are participants in the company's social practices.

Many call the consideration of social issues while investing the “double bottom line.” If you are unfamiliar with accounting jargon – the first bottom line is where companies report their profits or losses. If you calculate a “double bottom line,” you are looking at the social impact of a company after considering their accounting profit and loss. So, a company that makes $100 million but egregiously pollutes rivers and streams may record no profit at all to a social investor who considers a “double bottom line.”

How many people are investing in SRI?

In 2003, one out of every nine dollars invested was screened – that's over $2.16 trillion. In 1997, screened investments totaled a modest $529 billion. The growth of SRI from 1995 to 2003 was 240%! In the future, it's possible that the majority of investments may have a social component.

Today there are over 100 different socially screened mutual funds. Invested Interests has the web's most comprehensive list of these funds in our socially responsible mutual fund performance section.

In addition, social investing has its very own investment index – the Domini 400 Index. This index follows companies that have passed a battery of social screens and are prestigious enough to be included in the familiar S&P 500 index. The Domini 400 Index is followed and listed by almost all major financial institutions.

The first steps to getting started as a socially responsible investor

You must understand your goals and the limitations of each investment. In short, you must grasp the basic concepts of investing before you can become a successful social investor. Think of social investing as an elective course while you get your degree in investing. We recommend talking with one of our socially responsible investment advisors. We have many years of experience investing on behalf of clients. We can sort through your investment objectives and the social issues that are important to you. After your investment is selected, we will monitor the day-to-day performance of each investment and remain updated on all social issues.

Once your financial goals are determined, establish your social issue priorities. What types of social issues are you most passionate about – make a list of 3-4. Selecting too many screens will greatly limit your investment options. We will go into further detail about the reasons for this in subsequent articles.

Here's an example:

• Environment – I work for a non-profit that protects local rivers and streams from pollution; this is my most important social priority.
• Human Rights – I am very concerned about the treatment of workers around the world. I understand that American companies have supported repressive regimes; I don't want to invest in any company that has a poor human rights record.
• Defense Industry – I am fully against armed conflict; anywhere and anytime. I support American troops, but I do not want to participate in the production of cruise missiles, tanks and warships.

Now, you must ask yourself how strict you want your screens to be. Will you invest in a company that simply supplies or is supplied by a company with a bad environmental record? Will you only avoid the worst of the worst offenders? Will you invest in companies that pollute, but are the best in their industry and have committed themselves to improvement? These questions will prepare you for the selection of an investment.

If you want to invest on your own you will want to research the SRI options available to you, start with these social investing resources.

Invested Interests™

Mutual Fund Social Screen Tool™
The Mutual Fund Social Screen Tool™ allows you to see whether your current mutual fund is investing in companies that are in conflict with your values.

Socially responsible mutual fund performance
Invested Interests™ maintains a comprehensive list of the returns and screening information of all available socially responsible mutual funds.

Socially Responsible Investing Bibliography Search Tool™
Our Socially Responsible Investing Bibliography Search Tool™ catalogues the major research in the field of social investing.

Can socially responsible investing create positive change? Does it help or hurt your return? We believe in the efficacy of social investing. We have witnessed first hand the benefits of socially responsible investing and Invested Interests™ has delivered exceptional investment returns to clients for many years. However, we've also organized all the relevant academic research available today so you can make these important decisions for yourself.

The tool allows you to easily search for research based on social issues (environment, animal rights, corporate governance, etc.), how the research was conducted or by the name(s) of the author(s).

Discussion forum
We also maintain a socially responsible investing discussion forum for those interested in asking questions or posting information relevant to personal finance and social investing. Our advisors will answer any questions that are posted within the discussion forums.

Other considerations
It is very important to carefully read the prospectus and accompanying literature before investing in any fund – especially screened funds. Look for information about how the screens are applied. As a note, many funds will actively invest in companies that fail screens in order to submit shareholder resolutions and change the company from within. This approach to socially responsible investing has proven very successful in the past, but many investors may not understand its rationale. To fully understand the strategy of each social mutual fund, you have to read the prospectus closely.

In addition, many funds have minimum investment requirements of $250-$2,000. You can find all fund requirements in our list of socially responsible mutual funds. If you agree to invest a set amount every month, fund companies will require less of an initial investment. In addition, fund companies usually require less upfront when you open a retirement account as opposed to a non-retirement account.

If you would rather invest directly into individual companies, please understand that this is much more risky. With risk comes reward, and with social investing this approach can lead to more ‘pure' investments that are not compromised by holding many ‘extra' companies. However, owning only one company will increase your risk exponentially. In addition, finding social information on specific companies is difficult and expensive. For all but the most advanced investors, investing in social mutual funds is the best way to become involved in socially responsible investing.

Pros and cons of Socially Responsible Investing

At Invested Interests™ we believe the best and most relevant research points to the benefits of SRI; however we also know our readers deserve to see both sides of this issue. Our extensive Socially Responsible Investing Bibliography Search Tool™ covers all the major SRI research during the past 20 years. The research listed in this bibliography presents arguments both for and against socially responsible investing.

Conclusion

Did we leave something out? Did we make this discussion appropriate for an introduction to SRI? Let us know if you have any questions or concerns.

If you would like to contact an advisor at Invested Interests, please fill out our short contact form or email us at advisor@investedinterests.com

If you would like to open an account, complete our secure online application.

Thanks,
Invested Interests

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