The Art of Business

Socially Responsible Investing:
Where is Your Money Going?
by Jeffrey Altomari

With the proliferation of sources of investment information out there, you may have come across a concept known as Socially Responsible Investing (SRI).

What it is: SRI in its simplest terms is the practice of screening your investments according to your personal values and principles. A simple example would be an individual or an institution choosing not to invest in the shares of a company that manufactures products considered health hazards or pollutants. Today, more and more investors are interested in aligning their values and beliefs with where they are investing their money. SRI takes into consideration the investor’s financial goals, together with the investment’s impact on society.
How it works: The process that’s used to invest in these companies is similar to making a traditional investment. An investor or financial institution would look at the type of company, what the company does, what it produces, and its current financial picture. All of these inputs would be taken into consideration to determine if it is the type of company that merits investment dollars. The SRI process would be taken a step further by adding a “social filter” to determine if that company makes the grade from a social standpoint. Each individual or institution may have its own social screening process, however there are a few screens that many encompass. Here are some examples of the social screens an institution or an individual may employ.
Environment: How’s the company’s environmental track record? Does its product or its process pollute the environment? Does the company employ methods for recycling, conserving water, energy, and raw materials? Does the company disclose its environmental practices to its employees and shareholders? Does it comply with local environmental laws?

Global Labor Practices: How employee friendly is the company? Does the company employ overseas labor? What is the company’s track record regarding gender or racial discrimination in the workplace?
Types of Products or Services Produced: Does the company produce and distribute nuclear power? Does the company produce weapons?
The social screens are constantly changing with the times, particularly with all of the scandals happening on Wall Street regarding accounting practices, tax evasion, insider trading, etc. This will continue to be an issue with shareholders, and the companies’ managements will continue to answer questions regarding their social as well as moral issues.

Here’s where the beauty of supporting SRI comes in. You, the individual investor, now have a voice. One of the strategies that has evolved over the years is shareholder advocacy. As you know, being a shareholder in a company allows you the right to have a say in what happens to the company regarding management issues, etc. How? By voting your number of shares that you have in the company. Well, many of my clients say to me, “Jeff, I only own 100 shares of the company, how can my vote make a difference?” Here’s how: By supporting SRI, through the purchase of a mutual fund, you can now leverage your ownership. The concept of a mutual fund is that you share ownership in hundreds of companies, mutually together with other shareholders in the fund. The bigger the fund, in terms of invested assets, the more shares the fund owns of each of the underlying companies that encompass the fund. It is not uncommon for a mutual fund to own hundreds of thousands of shares, and in some cases millions of shares of its underlying companies. Now, you have a huge voice in terms of what the company can do, and many of the SRI-oriented institutions have exercised their power to make these companies clean up their acts. Basically, for as little as a $1,000 investment, you now have the power to make a difference.

This strategy has become known as shareholder advocacy. (You may also take the opposite track and simply choose not to make an investment in a specific company.) Shareholder advocacy seeks out socially irresponsible companies with the idea of making changes to some of their policies regarding social issues. There are many examples of where this approach has worked to make huge changes in the way that corporations do business. In the year 2000, according to the Shareholder Action Network (www.shareholderaction.org) the hot issues were genetically modified organisms (GMOs) and reporting on global warming emissions. This affected companies like Monsanto, McDonalds, Coca-Cola, Texaco, Goodyear, and Chevron. In 1999 Home Depot announced its intent to phase-out the sale of wood products from “endangered forests.” That will be completed sometime this year. DuPont was persuaded by environmentalists and religious groups to sign a no-mining agreement with state and local groups regarding the Okefenokee National Wildlife Refuge in Georgia. In 1998, RJ Reynolds, after a decade of challenges from shareholder advocates announced that they would discontinue the Joe Camel ads that targeted teens. There have been more examples over the years where shareholders have changed the courses of many issues.

The final piece of the pie in SRI is the idea of community investing. This is defined as investing which supports low-income communities, affordable housing, and loans for small business owners. The idea here is to create jobs and help those communities here in the US, as well as in developing countries, to begin to prosper, thus improving living and working conditions.

The most common types of institutions to invest are community banks, community credit unions, community loan funds, and micro-enterprise lenders.

The way this works is that when you open an account with one of these organizations, the money that comes in from deposits and investments is used to provide financing to the local community that may have been overlooked by traditional lenders. This helps to strengthen the community by providing it with affordable housing, locally owned and minority owned businesses, as well as health and child care. There are a number of financial institutions with the goal of having one percent of their managed assets in community investments. (See www.communityinvest.org for details on those companies, and the difference this small amount is making in these communities.) Here again, it does not require a large investment in one of these institutions. The latest statistics show that there is currently $5.4 billion involved in community investing. All of this is making a difference.

So, you may be thinking that all of this sounds really great, but how does this help you achieve your financial goals? Can you, the individual investor, earn a competitive return from SRI? This question has been the subject of much debate since SRI began. In the early part of the 1990s the SRI industry was beginning to fall behind the traditional investment avenues, from a return standpoint. The problem had stemmed from poor day-to-day management of the funds, rather than the social screens. SRI had been given a “black eye,” because the money managers were failing to do a good job providing their shareholders competitive returns, versus the non-SRI types of investments. That began to change though, as the decade progressed. In 1990, the Domini 400 Social Index was launched (www.domini.com). This index of 400 socially screened companies has become the equivalent of the S&P 500 in the world of SRI. As the decade progressed, more and more demand for SRI alternatives helped to launch more mutual fund families, each with their own stable of mutual funds in which to invest. With many funds now more than five years old, it has become easier to make a true comparison between SRI and non-SRI. According to Morningstar, a mutual fund rating company, of the 54 SRI funds that they track, having a three-year or longer track record, 15 funds currently rate four or five stars, their highest ratings. That is 28 percent, compared to 32.5 percent of the ranked unscreened funds. Now that the gap has narrowed in performance, the choice to look towards SRI becomes even easier.

Remember, helping performance does not always mean moving forward. Sometimes it means not moving backwards. Socially responsible screens have kept some of the companies making today’s headlines out of an otherwise non-screen portfolio. Companies like Worldcom and Enron, that may not have passed the social screens in some cases, can do an investor’s psyche good, knowing potential disasters have been avoided. So you now have a choice when it comes to your investments. You can have a positive impact on the world, earn competitive returns, and sleep soundly knowing that you’re supporting your beliefs.

Financial Consultant, A.G. Edwards & Sons Inc., Hudson Valley Office, Fishkill. Jeffrey Altomari can be reached at (800) 477-2505.
Web: www.agedwards.com/fc/jeffrey.altomari
E-mail: jeffrey.altomari@agedwards.com