Investing for social impact takes off
Interest in socially responsible investments has surged in the past decade
Whether the focus is on advancing environmental causes, building healthy communities or promoting corporate ethics, investors interested in making a difference in the world are spurring interest in social responsible investments.
Socially responsible investing, or SRI, traces its roots to religious concerns and expanded in scope in the 1970s and 1980s as investors joined other protestors against apartheid by choosing not to invest in companies involved in South Africa. From there, the definition of SRI evolved to include the avoidance of “sin stocks” — stocks of companies that derive earnings from gambling, alcohol or tobacco. More recently, the concept has expanded further to include any number of social and environmental issues as well as a growing concern with “corporate character” — seeking out companies that have commendable records on corporate governance.
Interest in socially responsible investments has surged in the past decade. According to US SIF (the forum for sustainable and responsible investment), assets in professionally managed SRI funds totaled $569 billion in 2010, up from $12 billion in 1995. And the number of funds that utilize environmental, social and governance factors into their portfolio construction has risen dramatically.
With more than 250 mutual funds, 25 exchange-traded funds and 175 alternative investment vehicles available to U.S. investors (such as hedge funds and private equity funds) that utilize ESG factors in their selection criteria, there are many opportunities for individual investors to find suitable socially responsible funds. Among some of the more popular options:
• Alternative energy funds hold baskets of securities of corporations that are actively involved in researching or producing alternative energy sources -- corporations that are involved with technologies like solar and wind power, biofuels, hydropower and other sustainable and renewable energy sources.
• Eco-friendly funds are mutual funds that focus on eco-friendly corporations and have a broader range of investment options than more targeted SRI funds. These funds can include companies that strive to improve the environment, produce environmentally friendly products or take steps to minimize their negative impact on the environment.
• Sustainable resource funds invest in companies that strive to maximize returns while ensuring the survival of natural resources. Examples include sustainable water and sustainable climate.
One of the ways to find these funds — or to invest in individual stocks or bonds of these companies — is through screening. Screening is the practice of evaluating investments by defining certain guidelines.
Originally, the focus of SRIs was to avoid companies that were engaged in undesirable activities that were harmful to individuals, communities or the environment. More recently, this negative (or exclusionary) screening technique has given way to a positive (or inclusionary) screening approach to invest in companies that make progressive contributions to society via strong environmental practices, making products that are safe and useful and employing policies that respect human rights around the world.
Another way to engage in socially responsible investing is through shareholder activism. Investors seek to positively influence corporate behavior of the companies whose securities they own by prodding management to steer a more responsible social and/or environmental course. These efforts can include initiating conversations with corporate management on issues of concern and by submitting and voting on proxy resolutions.
A third way is through community investing. Community investing projects are small and local, and work by lending individuals and local groups the capital they need to improve their own communities in a socially positive and environmentally sustainable way. They can focus on affordable housing, small business creation, development of community facilities and the empowerment of women and minorities. You can invest in community investing institutions such as community development banks, credit unions or loan funds.
Proponents of socially responsible investments have always had to combat the notion that SRI underperforms the broader universe of investments. Yet there is a growing body of evidence that suggests otherwise.
For instance, the MSCI KLD 400 Social Index (which screens out sin stocks and companies with poor human rights records) shows that since 1990 (the year of its inception), the index posted annualized returns of 9.51 percent versus 9.07 percent for the S&P 500.
Still, skeptics of sustainable and responsible investing say selecting one or two quality funds from the SRI fund universe is one thing, but building a well-diversified portfolio consisting entirely of socially screened funds is quite another. Even though top-performing SRI funds can now be found in all major asset classes, adequate diversification remains a key consideration.
Donald E. Sommese is a financial advisor at Morgan Stanley Smith Barney located in Manchester, and may be reached at 603-629-0233