Responsible Markets
What is Socially Responsible Investment?

Socially Responsible Investment (SRI) is the rapidly growing practice of integrating values and societal concerns with investment decisions. SRI considers both the investor's financial needs and an investment's impact on society.

There are four distinct but related aspects involved in a socially conscious investment strategy:

  1. avoiding companies whose records conflict with the investor's values;
  2. seeking companies that are consistent with those values;
  3. investing directly into the community with targeted investments; and
  4. taking an active role as a shareholder in influencing corporate policies.

Conscious investors will often seek to include corporations with positive records on product quality and consumer relations, environmental performance, corporate citizenship, and employee relations, while screening out corporations involved in industries such as tobacco, military weapons and nuclear power.

Exactly what values and standards are used to guide investment decisions varies with each investor. For example, the manager of a union pension fund might be especially interested in looking at the labor relations records of companies in the fund's portfolio, and avoiding companies that use child labor or sweat shops. Some SRI brokers offer indigenous screens to assess companies' records specifically with regard to indigenous peoples and lands, which may be of particular interest to managers of Hawaiian trust assets.

Origins of SRI

Socially responsible investing has its roots in the colonial era when abolitionist Quakers refused to invest in any business associated with slavery. SRI began to blossom in the 1970s fed by strong social movements focusing on the environment, fair labor practices, the military-industrial complex, and the rights of minorities and women. Members of the anti-nuclear movement began to avoid stocks of companies that invested in nuclear power or nuclear weapons. Then in the 1980s, anti-apartheid activists brought the idea of socially responsible investing into full public view by insisting that their schools and churches stop investing in companies which did business in South Africa. This very successful campaign to remove foreign capital from South Africa marked a powerful new era for socially responsible investing. The SRI movement has been rapidly growing in strength since the early 1990s, as the popular consciousness of social movements has begun to penetrate the previously socially unaware financial world.

SRI growing rapidly

SRI is a rapidly growing segment of the investment world. About $1 of every $8 under professional management - some $2 trillion over all - was involved in socially responsible investment in 1999, according to the Social Investment Forum, a Washington group that surveys the landscape every two years. That sum, the bulk of it invested under social screens, is up 82% from 1997. Dozens of new SRI mutual funds have been created as increasing numbers of investors have chosen to put their money into socially screened funds. However, the growth of SRI among the union pension funds, educational endowments, and not-for-profit foundations which control substantial resources is hampered by the lingering misperception that socially responsible investments will not fulfill the trustee's fiduciary responsibility to achieve a reasonable rate of return on their funds.

Superior financial performance

Many people incorrectly expect a lower return from socially responsible investing because they believe that SRI is a combination of philanthropy and investment, or because it narrows the field of investment options. However, exactly the opposite is true. As they have become well established, SRI funds have demonstrated their financial soundness over the last five years, showing that not only are social and environmental concerns not a handicap in investing, but that social and environmental standards can actually correlate with superior financial performance.

Throughout the 1990s, the socially screened Domini 400 stock index consistently outperformed the S&P 500. Socially responsible mutual funds have been twice as likely as non-screened funds to receive top performance ratings from the Morningstar mutual fund rating firm. Studies by investment firms ranging from Spare, Kaplan, Bischel & Associates to Merrill Lynch demonstrate that in recent years, SRI stocks have outperformed non-SRI stocks by up to 2% per year. These and other SRI performance studies have been compiled on a web site called SRIstudies.org. Some of these studies conclude that socially responsible investment significantly enhances performance; others argue that SRI's outperfomance is not statistically significant. However, they all agree that SRI does not underperform.

Reasons for strong performance

In the narrow sense, social screens lower liability in a portfolio. Companies that manufacture questionable products or break environmental laws face the danger of lawsuits and criminal penalties. Companies with poor community or labor relations face the possibility of boycotts or strikes. And when a company cuts corners in the areas of employee relations or environmental law, it may be a sign of financial difficulties or poor management. On the other hand, companies whose management is far-sighted enough to avoid these risks and liabilities are often well managed overall, and thus perform better financially.

In the broader sense, SRI's strong financial performance is rooted in the political and cultural evolution of our society. The development of mass social movements for environmental and social justice is changing the framework in which corporations function. As the ill effects of environmental destruction become more apparent and increasing numbers of people organize to prevent this devastation, corporations which depend on environmentally unsound practices will be at a serious disadvantage relative to companies which strive for environmental sustainability. As Nike recently discovered, the negative publicity generated by anti-globalization activists makes the use of child labor and sweatshops a serious business liability. While the conventional wisdom on Wall Street ignores the impact of these environmental and social concerns on corporations' long-term prospects, SRI is attuned to these important trends. Thus socially screened funds have avoided tobacco companies, nuclear energy firms, and other investments which have turned out to be financially as well as ethically unsound.

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