It’s been a while since I’ve touched on the subject of socially responsible investing, a topic that’s generated plenty of controversy. In it’s latest issue, the NRDC’s OnEarth magazine takes an in-depth look at these instruments, and notes that this once-tiny sector of the investment industry has grown as large and complex as any kind of fund category:
The Social Investment Forum, an association of professional investors and financial institutions, defines the category broadly to include the financial arms of churches and other religious organizations; funds that do minimal screening and exclude just one type of business (tobacco, for example); and conventional funds that have few or no limits on the type of stock they own but wield their power as shareholders to promote a particular social agenda. The forum estimates that 9 percent of all investments are now made with social values in mind. It counts 151 socially responsible mutual funds with assets of more than $148 billion, up from $111 billion in 2001. Morningstar, the go-to source for ratings and research on conventional mutual funds, is choosier, counting 60 funds with $28 billion under management — a smaller number, but double what it was a decade ago. …
Among the actively managed SRI funds, there’s a good deal of variation in how aggressively a manager seeks out exceptionally conscientioustious companies. Some stock pickers simply screen out the biggest corporate sinners, while others search for companies that, say, use recycled materials in their manufacturing processes. And whereas some funds do their own digging, others pay research firms such as Innovest, which specializes in analyzing performance on environmental, social, and governance issues.
Obviously, one has to look closely at a particular fund to make sure that its investment practices meet his/her values and financial goals. The good news here is that socially responsible investors can expect higher return rates than in the past, though still not as high as the broader market:
…over the past three years SRI funds had an average return of 8.8 percent while the market posted 12.3 percent. But over the 10-year period that includes the dot-com boom, SRI funds are on pace. The technology companies they favor thrived, which narrowed the performance gap: SRI funds averaged 7.8 percent a year versus 8.6 percent for the S&P 500.
Of course, this all comes down to values: at what point are we willing to give up a little financial return to support corporate practices in line with your broader social and environmental goals? Is it better to earn a larger return through “non-responsible” investing, and then use that money to support the causes we hold dear? Or, does investing in companies with poor records on the issues that matter to us give us a voice in the debate, through shareholder activism? These are all legitimate questions, and legitimate ways to consider using our money to make a difference.
Overall, it seems to me that the growth of SRI raises many of the same issues as the growing use of green claims in other industries: it’s a positive movement, but one that we’ve got to be willing to examine continually…