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Socially Responsible Investing

Sunday, March 7, 2010 9:00 am
by Jaya's Blog

From the March 1, 2010 Issue

Socially Responsible Investing

Socially responsible investing, also known as socially-conscious or ethical investing, describes an investment strategy which seeks to maximize both financial return and social good.

In general, socially responsible investors favor corporate practices that promote environmental stewardship, consumer protection, human rights, and diversity. Some (but not all) avoid businesses involved in alcohol, tobacco, gambling, weapons, the military, and/or abortion. The areas of concern recognized by the SRI industry can be summarized as environment, social justice, and corporate governance (ESG).

The origins of socially responsible investing (SRI) may date back to the Religious Society of Friends (Quakers). In 1758, the Quaker Philadelphia Yearly Meeting prohibited members from participating in the slave trade-buying or selling humans.

The Ceres organization formed in 1989 as a network of investors, environmental organizations, and other public interest groups interested in working with companies to address environmental concerns.[7]

Socially responsible investing (SRI) is a booming market in both the US and Europe. Assets in socially screened portfolios climbed to $2.71 trillion in 2007, an increase over the $2.16 trillion counted in 2003 according to the Social Investment Forum's 2007 Report on Socially Responsible Investing Trends in the United States. From 2005-2007 alone, SRI assets increased more than 18 percent while the broader universe of professionally managed assets increased less than 3 percent.[11] As of 2007 about one out of every nine dollars under professional management in the United States is involved in socially responsible investing-11 percent of the $25.1 trillion in total assets under management tracked in Nelson Information's Directory of Investment Managers.

Government-controlled funds such as pension funds are often very large players in the investment field, and are being pressured by the citizenry and by activist groups to adopt investment policies which encourage ethical corporate behavior, respect the rights of workers, take environmental concerns into account, and generally avoid violations of human rights. One outstanding endorsement of such policies is The Government Pension Fund of Norway, which is mandated to avoid "investments which constitute an unacceptable risk that the Fund may contribute to unethical acts or omissions, such as violations of fundamental humanitarian principles, serious violations of human rights, gross corruption or severe environmental damages." [14]

Many pension funds are currently under pressure to disinvest from the arms company BAE Systems, partially due to a campaign run by the Campaign Against Arms Trade (CAAT).[15]

According to the Social Investment Forum, socially responsible mutual funds have grown from $12 billion in 1995 to $179 billion, far outpacing the overall growth of mutual funds in the US.[18]

Regulations governing shareholder resolutions vary from country to country. In the United States they are determined by the Securities and Exchange Commission, which also requires mutual funds to disclose how they voted on behalf of their investors[36]. U.S. shareholders have organized various groups to facilitate jointly filing resolutions. These include the Council of Institutional Investors, the Interfaith Center on Corporate Responsibility, and the Social Investment Forum.

Community investing, a subset of Socially Responsible Investing, allows for investment directly into community based organizations. Community investing institutions use investor capital to finance or guarantee loans to individuals and organizations that have historically been denied access to capital by traditional financial institutions. These loans are used for housing, small business creation, and education or personal development in the U.S., or are made available to local financial institutions abroad to finance international community development. The community investing institution typically provides training and other types of support and expertise to ensure the success of the loan and its returns for investors.[21]

Investing in capital markets

Social investors use four basic strategies to maximize financial return and attempt to maximize social good. These strategies may satisfy the ethical principal of non-harming, but with the exception of shareholder activism, they do not necessarily create positive social impact.

* Negative Screening

Negative Screening excludes certain securities from investment consideration based on social and/or environmental criteria. For example, many socially responsible investors screen out tobacco company investments. In a recent 8 year period, the Domini 400 Social Index - a benchmark that measures the impact of social screening on financial performance - returned 18.54% vs. 16.95% for the S&P 500.[22]

Despite the impressive growth, the knock against SRI has long been that investors had to settle for lagging returns in exchange for assuaging their consciences. So-called "sin stocks," including purveyors of tobacco, alcohol, gambling and defense contractors, were banned from portfolios on moral or ethical grounds. And shutting out entire industries hurts performance, the critics said. [23] However, in a comprehensive study, financial economists Lobe, Roithmeier, and Walkshäusl taking the position of the advocatus diaboli, answer the question whether to invest in a socially responsible way - or not? They create a set of global and domestic sin indexes consisting of 755 publicly traded socially irresponsible stocks around the world belonging to the Sextet of Sin: adult entertainment, alcohol, gambling, nuclear power, tobacco, and weapons. They compare their stock market performance directly with a set of virtue comparables consisting of the most important international socially responsible investment indexes. They find no compelling evidence that ethical and unethical screens lead to a significant difference in their financial performance, which is in contrast with the results of prior studies on sinful investing.[24].

* Divesting

Divesting is the act of removing stocks from a portfolio based on mainly ethical, non-financial objections to certain business activities of a corporation. Recently, CalSTRS (California State Teachers' Retirement System) announced the removal of more than $237 million in tobacco holdings from its investment portfolio after 6 months of financial analysis and deliberations.

* Shareholder activism

Shareholder activism efforts attempt to positively influence corporate behavior. These efforts include initiating conversations with corporate management on issues of concern, and submitting and voting proxy resolutions. These activities are undertaken with the belief that social investors, working cooperatively, can steer management on a course that will improve financial performance over time and enhance the well being of the stockholders, customers, employees, vendors, and communities. Recent movements have also been reported of "investor relations activism", in which investor relations firms assist groups of shareholder activists in an organized push for change within a corporation; this is done typically by leveraging their enhanced knowledge of the corporation, its management (often via direct relationships), and the securities laws as a whole.[citation needed]

* Positive investing

Positive investing is the new generation of socially responsible investing.[23] It involves making investments in activities and companies believed to have a positive social impact. Positive investing suggested a broad revamping of the industry's methodology for driving change through investments.[25][26] This investment approach allows investors to positively express their values on corporate behavior issues such as social justice and the environment through stock selection - without sacrificing portfolio diversification or long-term performance.[27] Marc J. Lane, author of the 2005 book "Profitable Socially Responsible Investing?", demonstrates that companies with the highest marks for social justice and environmental concerns actually outperformed the Russell 3000 benchmark by an annual return of 2.53% in his eight year research ending 31 December 2003.[25][28][29] "Since good management is a prime indicator of financial success," Lane says, "investors' inclination to invest in only ethical companies should serve them well." [30] Socially responsible investing strategy is evolving and a growing chorus of non-idealistic institutional investors has decided that with the positive screening method, SRI is not just noble, but a good business and a way to create changes first in the boardroom and ultimately in society.[31] Positive screening pushes the idea of sustainability, not just in the narrow environmental or humanitarian sense, but also in the sense of a company's long term potential to compete and succeed.[23]

In 2006, the United Nations Environment Programme launched its Principles for Responsible Investment. The Principles provide a framework to help investors incorporate environmental, social, and governance (ESG) factors into the investment process.

look up:

Community Development Financial Institution
First Affirmative Financial Network
Social Investment Forum
SRI in the Rockies Conference

* Ave Maria Mutual Funds
* Business ethics
* Calvert Social Index
* Community wind energy
* Corporate social responsibility
* Disinvestment
* Domini 400 Social Index - KLDs SRI Index
* Ethical banking
* First Affirmative Financial Network
* Interfaith Center on Corporate Responsibility
* Microfinance
* Mutual fund
* Pax World Funds
* Social responsibility
* SRI in the Rockies Conference
* Strategic Sustainable Investing
* Sustainable development
* Vice Fund
* The Timothy Plan
* Terror-free investing

 

 


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