Many investors have strong opinions that don't involve their views on interest rates and stock prices. They want their holdings to reflect their values by avoiding companies that profit from activities they oppose, and supporting those that behave in ways they consider appropriate or responsible. At the same time, they still want to earn a reasonable return on their portfolios.
Socially responsible investing ("SRI") helps investors meet these goals by practicing an investment strategy designed to deliver an acceptable level of performance while excluding companies that don't meet certain ethical standards.
Increasing Interest
While socially responsible investing has received heightened attention recently, it has actually been around for centuries. Many historians credit 17th century Quakers with bringing the concept to the United States. As of December 2005, approximately $2.3 trillion was invested using a socially responsible strategy, according to the Social Investment Forum, a nonprofit group promoting socially responsible investing. In fact, that same report estimates that such strategies grew by an astounding 258% in the last decade from $639 billion to $2.29 trillion in the U.S. alone. 1
The Association of Small Foundation's 2004—2005 Foundation Operations and Management Survey confirmed the increasing popularity of social investing. In response to the question, Do you believe it is important to ensure that your investment portfolio has a Socially Responsible Investment focus that complements your mission? , 35% of the member foundations responded that they did. In addition, the 2005 survey conducted by the National Association of College & University Business Officers found that 23.7% of institutions with investment pool assets less than or equal to $25 million consider social responsibility criteria. 2
Why has social investing become more popular? One reason for the gain in popularity may be that investors posed themselves a question similar to: While my number one investment goal will always be to create a properly diversified portfolio, how can I also do a bit of good for the environment, for the world or to improve society?
Another reason for SRI's popularity is that some of the nation's most prominent institutional investors have increasingly added a social focus to their investment decisions. These institutions, many with significant assets and often with great public, political and media clout, have become well-known advocates for social issues. Their advocacy is often demonstrated by investing in socially responsible projects.
A third reason for increased interest in SRI is the simple fact that it is now much easier to access professionally managed SRI vehicles. Many investment firms have created specific investment processes that exclude companies that, in the investor's view, focus on non-socially responsible or acceptable activities. Once these decisions have been made the manager constructs a diversified portfolio within the desired constraints.
It is now much easier to assess the performance of social investing thanks to the development of several broad, "socially defined" benchmarks. Two of the most common are:
- The Domini 400 Social IndexSM , a capitalization-weighted index of 400 U.S. companies that have passed multiple, broad-based social screens. Created by the research firm of KLD Research & Analytics, the index consists of approximately 250 companies included in the S&P 500 Index, 100 firms not included in the S&P but that provide comparable industry representation, and approximately 50 other firms judged to have strong socially responsible characteristics.
- The Calvert Social IndexTM takes 1,000 of the largest companies in the U.S. stock market, based on three-month average market capitalization. The Calvert Group, an investment firm, audits each company on a number of different social criteria, including product safety, environmental sensitivity, workplace issues and human rights. Stocks that meet the firm's social criteria are included in the index.
While each socially responsible investment is subject to the portfolio manager's skill and process, many investors have realized that investing in a socially responsible manner doesn't mean sacrificing performance or growth potential.
The relative performance of socially responsible strategies—as represented by the Domini Index—has been quite favorable over the past nearly 15 years. A $100,000 portfolio earning the same returns as the Domini Index would have grown to nearly $613,664 from the end of September 1990 to the end of December 2005. A portfolio earning the same returns as the S&P 500 would have grown to just over $526,790 during the same period; the same investment in the Russell 1000 Index could have grown to $546,237.
Conclusion
As the nation's foundations and endowments continue to direct their considerable strength to improving the human and social condition in an increasingly complex world, the interest in socially responsible investing may well continue to rise.
For more information about socially responsible investing and specific investment management firms that construct portfolios adhering to social and ethical criteria, please contact me.
Michael Reisin, F.P.S.
Smith Barney, Financial Advisor
345 Park Avenue, 21st. Fl.
New York, NY 10154
212-230-3419
Michael.Reisin@smithbarney.com
Website: http://fa.smithbarney.com/michaelreisin/
Past performance is no guarantee of future results.
1 2005 Report on Socially Responsible Investing Trends in the United States , Social Investment Forum, January 24, 2006
2 2005 National Association of College and University Business Officers
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