Investors who pursue a strategy of socially responsible investing (SRI) are making sure that their capital is used in a manner that aligns with their personal ethical values–taking responsibility for what their money is doing to the world around them. There are many different definitions of what it means for an investment to be socially responsible, but basically the strategy is to avoid companies that damage the environment (either by treating nature or people poorly), and to favor companies that provide positive goods and services. SRI is not in any way a new idea. Adam Smith himself was concerned about the issue, and the anti-trust and 19th century child labor debates hinged on the same basic issues.
One of the simplest examples of a socially responsible investment is a mutual fund that avoids so-called “sin” investments, namely companies that are involved with liquor, tobacco, or gambling. However, the term is sometimes applied to banks and credit unions based on their lending practices, etc.
Does it work? This is a multi-faceted question. If the question is whether a strategy of SRI achieves a good return on investment, the answer seems to be that it does (see below for more details). If the question is whether companies that are shunned by a SRI strategy have difficulty in raising capital in the markets, I think the answer is no. At least at the present, there are enough investors who pursue returns without worrying about issues like a company’s policies. However, presumably investors are sleeping better at night knowing that they have made a statement, however small, about their beliefs, and that factor should not be neglected.
The following list of frequently asked questions was contributed by, and is copyright by, Dr. Ritchie Lowry, maintainer of the GoodMoney site (URL at end of this article).
What is SRI?
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In one sense, SRI is just like traditional investing. Socially concerned investors pursue the same economic goals as all investors: capital gains, higher income and/or preservation of capital for future needs. However, socially concerned investors want one additional thing. They don’t want their investments going for things that cause harm to the social or physical environments, and they do want their investments to support needed and life-supportive goods and services.
What’s the history of the movement?
The idea of combining social with financial judgments in the investment process is not really that new. The oldest social screen around is the sin screen: no tobacco, liquor or gambling investments. This screen has been used for over a hundred years by universities and churches. However, the current movement really began during the Vietnam War when increasing numbers of investors did not want their money going to support that war. After the war, a number of corporate horror stories (including Hooker Chemicals and the controversy concerning Love Canal, Firestone Tire & Rubber’s exploding 500-radial tires, A. H. Robins and the Dalkon Shield, and General Public Utilities and Three Mile Island) added fuel to the movement. The issue of American corporations doing business in South Africa and with the government of that country really pushed SRI into a full-blown social movement. It is estimated that around $1 trillion is involved in some type of social investing in the U.S. (about 10% of all total investments), and the number of socially and environmentally screened funds have increased from only a handful in the 1970s to over 100 by 1996.
How does one pick SRI stocks?
First, determine your financial goals. Second, pick several social issues that are the most important to you. Don’t try to solve all the problems of the world at once. Next do research on those corporations that appear to be the best investments in terms of both your financial and social goals. For social information on investments, there are a growing number of resources, most of which are included in the GoodMoney site’s directory.
What sorts of judgement calls are involved in the process?
Actually, the judgement calls are not that much different from the judgments an investor has to make using only financial factors. No investment is perfect in meeting every possible financial criteria. If it were, everyone would be a millionaire. In the same way, there is no such thing as corporate sainthood. However, you can pick what have been called “the best-of-industry” or “the try-harders.” For example, making pharmaceuticals is a very dirty business and pumps large quantities of carcinogens into the environment. But, Merck & Company and Johnson & Johnson both have pollution-control programs in place that go far beyond government requirements, while other pharmaceutical companies do not.
What do the critics of SRI say?
Interestingly enough, SRI has been criticized from both the right and the left. Wall Street and the traditional investment community thinks it is liberal flakiness by people who hate capitalism. The left thinks it is a cop-out to capitalism. Both criticisms completely miss the point. SRI is about several things. It is saying that any economic system, including capitalism, that lacks an ethical component is due to destroy itself. In addition, SRI is about personal empowerment and economic democracy. A corporation doesn’t belong to its executives, and money in a retirement fund doesn’t belong to the managers of the fund. It is time for shareholders and others to take control of their money, not only for profit but also to resolve some of the major economic and social problems the world faces. This is probably why the traditional business community, such as Fortune magazine, doesn’t like SRI.
That is the traditional view, but on-going research suggests that just the opposite may be true — that doing well economically goes hand-in-hand with doing good socially. For example, each year Fortune magazine conducts a survey of America’s Most Admired Corporations. In March of 1997, the Corporate Reputations Survey reported on the results for 431 companies. Fortune asked more than 13,000 executives, outside directors, and financial analysts to rate (from zero for worst to 10 for best) the 10 largest companies by revenues in their industry (if there were that many) for each of 8 criteria. Interestingly, only 3 of the criteria were purely financial — financial soundness, use of corporate assets, and value as a long-term investment. The other 5 involved social factors and judgments — ability to attract, develop, and keep talented people; community and environmental responsibility; innovativeness; quality of management; and quality of products and/or services. The average score for the 8 criteria was then calculated. As has been the case in surveys for previous years, companies favored by socially and environmentally concerned investors did very well. For 1997 survey, 14 (compared to 12 for the previous year) such companies finished in the top 50. Eleven were repeaters from 1996. In addition, the February 24, 1997, issue of Business Week reported on a study by Judith Posnikoff of CalState Fullerton that found that the share prices of companies whose planned pullouts from South Africa were announced in the national press appreciated in the two or three days surrounding the announcements. She concluded that the stocks produced “abnormally positive” returns.
What’s the future of SRI?
It is growing exponentially in numbers of individual and institutional investors participating, in the amount of invested money involved, and, most importantly, in the movement’s ability to persuade corporations to develop a sense of social responsibility in the conduct of their businesses. The German philosopher Arthur Schopenhauer put it this way:
There are three steps in the revelation of any truth: in the first, it is ridiculed; in the second, resisted; in the third, it is considered self-evident.
SRI is somewhere between the second and third steps.
Some resources for more information:
- The GreenMoney Journal’s site
http://www.greenmoney.com/ - Dr. Ritchie Lowry’s site
http://www.goodmoney.com/ - The Social Investment Forum (US) is a national nonprofit membership organization promoting the concept, practice and growth of socially responsible investing.
http://www.socialinvest.org - SocialFunds.com has over 1000 pages of strategic content to help you make informed investment decisions regarding socially responsible investing.
http://www.socialfunds.com/ - The Calvert Group is one of the largest SRI fund managers in the US and offers a variety of investment services. It was the first to offer a socially-screened global fund. Its web site is focused on promoting itself, but it does provide general information on SRI issues.
http://www.calvertgroup.com - Kinder, Lydenberg, Domini are the people behind the Domini 400 Social Index, the SRI equivalent to the S&P 500. Their web site not only promotes the organization but also features an international list of links to SRI web sites in Europe and North America, among other Internet resources.
http://www.kld.com - Russell Sparkes’s The Ethical Investor, originally published in 1995 by Harper Collins, London. It is out of print, but was once available on the net and may survive; please let me know if you find a site that has it.
Article Credits:
Contributed-By: Chris Lott, Ritchie Lowry, Reid Cooper