What is Socially Responsible Investing?

The socially responsible investment industry in the United States is a young phenomenon. Even referring to it as an “industry” a dozen years ago may have been a bit of a stretch. While having grown dramatically in recent years, socially responsible investing (SRI) is an area of work, study, and practical application that continues to evolve in significant ways.

One intriguing example of the ongoing development of the field can be found in a review of the language used to describe it. A wide array of terms are used by different players: social, socially responsive, responsible, ethical, socially aware, socially conscious, green, natural, values-based, stewardship, sustainable, and mission-related investing. These terms describe very similar approaches to investment decision-making within a socially and environmentally responsible context.

The origins of what has become known as socially responsible investing date back hundreds of years. The modern roots of this phenomenon can be traced to the impassioned political climate of the 1960s. During that tumultuous decade, a series of themes served to escalate sensitivities to issues of social responsibility and accountability. Concerns regarding the Vietnam war, civil rights, and equality for women broadened during the 1970s to include management and labor issues and anti-nuclear convictions.

The ranks of socially concerned investors grew dramatically through the 1980s, as millions of people, churches, universities, cities, and states focused investment strategies on pressuring the white minority government of South Africa to dismantle its racist system of apartheid. Then, with the Bhopal, Chernobyl, and Exxon Valdez incidents and vast amounts of new information about global warming and ozone depletion coming into public view, the environment moved to the forefront of the minds of socially concerned investors.

More recently, school shootings, issues of human rights, and healthy working conditions in factories around the world producing goods for U.S. consumption have become rallying points for investors with dual objectives for their investment capital.

Two Investor Motivations

The motivations of investors who are attracted to socially responsible investing tend to fall into two, often complementary, categories.

Some wish to put their money to work in a manner that is more closely aligned with and reflective of their personal values and social priorities. Others are interested inputting investment capital to work in ways that support and encourage improvements in quality of life in society at large. The group is more focused on what their money can do to catalyze movement toward a more economically just and environmentally sustainable world that works for all inhabitants. They tend to be more interested in the social change strategies that are an integral part of socially responsible investing in the U.S.

Three Dynamic Strategies

Socially responsible investing can be defined most succinctly as the process of integrating values, societal concerns, and/or institutional mission into investment decision-making. The process considers the social and environmental consequences of investments, both positive and negative, within the contest of rigorous financial analysis.

Screening involves selecting profitable companies that make positive contributions to society and avoiding those perceived as harmful. Social responsibility oriented investors ask their investment advisors to overlay a qualitative analysis of corporate policies, practices, attitudes, and impacts on the traditional quantitative analysis of profit potential. This double bottom line analysis can result in the inclusion of enterprises with outstanding employee and environmental policies that make and sell safe, useful products and demonstrate respect for human rights worldwide.

Reality Check: There are no perfect companies. Qualitative social screening serves as a proxy for what some call “corporate character analysis.” The result is often an ability to identify better-managed companies. The combination of quantitative and qualitative analysis provides the basis for designing investment portfolios aligned with an investor’s personal values and social priorities, while potentially producing the returns needed to pursue their financial goals. Screening decisions are rarely simple.  Tough choices, informed by careful research, are part of the process.

Shareholder Advocacy—or shareholder activism—efforts include engaging in dialogue with companies and submitting and voting on shareholder resolutions. Action is focused on positively influencing corporate behavior. Socially conscious investors often work cooperatively to steer management on a course that they believe will improve financial performance over time and enhance the well-being of all of the company’s stakeholders—customers, employees, vendors, communities, and the natural environment, as well as stockholders.

Community Investing provides capital to people in low-income, at-risk communities who have difficulty accessing it through conventional channels. Many social investors earmark a percentage of their investments to community development financial institutions (CDFIs) that work to alleviate poverty, create jobs, and provide affordable housing and small business development financing in disadvantaged communities.

Over $2 Trillion Under Management

The Social Investment Forum published its most recent bi-annual Report on Socially Responsible Investing Trends in the United States in December 2003*. The forum’s research found $2.16 trillion under professional management in the United states involved in one or more of the three primary socially responsible investment strategies—nearly four times the $639 billion the forum identified in 1995.

Assets under professional management involved in social screening, shareholder advocacy, and community investing have grown nearly 40% faster than all professionally managed investment assets in the U.S. Between 1995 and 2003, SRI experienced 240% growth versus 174% general market growth during the same eight-year period.*

The growth of socially screened portfolios has been even more dramatic: from $165 billion in 1995 to over $2 trillion in 2003—over 1,153% in eight years. In 2003, socially responsible portfolios accounted for 11.3% of the investment assets under professional management in the U.S.*

What Is Fueling the Growth?

Information. Investors are significantly better educated and informed today. Social research organizations are more capable and are providing much higher quality information than ever before. The better informed investors are, the more responsible their actions tend to be.

Corporate Scandals. A primary result of the numerous instances of accounting fraud and other scandals that came to light in the past few years was an erosion of trust in company leadership. Many investors are attracted to an investment process based on research that goes deeper and considers qualitative information designed to identify corporate character.

Sustainability. The growth of socially responsible investing has closely followed and benefited from the maturation of the alternative energy, natural foods, sustainable building, and alternative healthcare fields. The fast-growing concept of sustainability provides new inspiration and expanding investment opportunities.

Values. A yearning to integrate personal values or institutional mission into all aspects of life, including finance and investing, is found among the growing ranks of socially conscious investors.

Availability. In 2003, there were 200 investments designed for socially conscious investors.** Employers are increasingly offering socially screened options within retirement plans, and employees are increasingly moving assets into them. Many independent asset managers identify themselves as managers of socially responsible portfolios for institutional investors and high net worth individuals. The broad range of competitive socially responsible investment options now permits the development of a diverse, well-balanced portfolio for nearly every social responsibility oriented investor.

Women. As women have moved into the work force—filling the ranks of MBA programs, working their way up the ladder within large organizations, starting their own companies, taking seats on boards of directors, and assuming roles as fiduciaries—they have brought a natural affinity for the concept of socially responsible investing with them.

Performance. Maybe most significant is the growing body of evidence that dispels the myth of underperformance. There is no longer any reason to separate good fortune from good will. There is no need to expect to sacrifice performance when investing in a socially and environmentally responsible manner. Academic studies and real-world results have shown that socially screened portfolios do not necessarily underperform traditional non-screened portfolios. Many investors are realizing that responsibility can now walk hand-in-hand with prosperity.

Consistently Competitive

The Social Investment Forum regularly assesses the performance of socially responsible investments by looking as data from two objective and unrelated third-party sources: Lipper, a Reuters Company, and Morningstar, Inc. Since the forum began publishing this data in 2000, SRI investments as a group have consistently exhibited strong relative performance characteristics in one or both of the independent analyses reviewed.***  Top-performing socially responsible investments are found in all major asset classes including global, international, domestic equity, balanced, and fixed-income categories.****

Investing to Create a Better Future

All investing is future-oriented; socially responsible investing is even more so. Socially conscious investors are not only looking to secure their own financial futures—they are also looking for ways that their money can work to improve our collective future.

The three strategies that together define socially responsible investing in the U.S. allow investors to choose their level of involvement. Screening provides an opportunity for investors to align their values with their financial goals while targeting competitive returns. Shareholder advocacy efforts facilitate direct communication with management and boards of directors about desired changes in corporate policies, practices, and impacts, and encourage companies to become more responsible corporate citizens. Community investing allows investors to put money to work in local and rural communities, where capital is not readily available, to create jobs, affordable housing, and environmentally friendly products and services.

For most, socially responsible investing is about pursuing one’s financial goals while encouraging changes in corporate behavior aimed at  having a positive effect on society at large. Thus, socially conscious investors put capital to work within traditional market mechanisms to assist in the creation of a more just, sustainable, and healthy society—and to enhance quality of life for all.

Socially conscious investors know that business is the most powerful institution on the planet. It is clear that the reach and impact of business has far surpassed the influence of either religion or government. More importantly, it is painfully obvious that if we are going to get a grip on many of the issues that threaten our quality of life, business must shoulder a large share of the responsibility.

Many people are consciously casting a ballot with every consumer purchase and investment decision. When it is perceived that a company is exploiting workers in unsafe foreign factories, informed consumers stop buying that company’s product, and informed investors push management for changes in business practices.

Socially conscious investors, no matter how large or small, are most satisfied with investments that reach beyond purely financial goals to address a need to make a difference. Fortunately, making money and making a difference with your money has never been easier.

Getting Started with SRI

Getting started with SRI with Sorensen Financial Management does not require an all-or-nothing approach. We can structure a portfolio of SRI investments only or integrate SRI with traditional vehicles. Each portfolio and each investor is different—there is not one right answer. Come in and discuss what would work best for you.

*Social Investment Forum.  2003 Report on Socially Responsible Investing Trends in the United States.  www.socialinvest.org/areas/research/trends/sri_trends_report_2003.pdf.

**The 200 socially screened investments identified in the Social Investment Forum’s 2003 Report on Socially Responsible Investing Trends in the United States are up from the 168 identified in 1999.

***The SRI investments involved in this analysis include all members of the Social Investment Forum that were at least three years old as of the date of the analysis.

****Past performance is never a guarantee of future results.  Investing in securities involves risk and investors may incur a loss.  It is always advisable to work with a knowledgeable investment professional who can help you plan and implement investment strategies designed to pursue your financial goals.

*****Article written by Steven J. Schueth, President, First Affirmative Financial Network, LLC.  www.firstaffirmative.com.