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Socially Responsible Investing

What is Socially Responsible Investing?

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By Michael Grodsky

socially responsible investing

Many philanthropic foundations have long drawn a wall between their socially conscious mission statements that drive grant making, and the investment holdings of their endowment. There is a truism that investing for social benefit results in lower returns. But just as scientific peer consensus eventually embraced the Big Bang theory, so has the thinking of philanthropic foundations changed. The reasons are twofold: A recognition that corporate responsibility and societal concerns are valid parts of investment decisions, and a growing number of academic studies have demonstrated that socially responsible investment (SRI) mutual funds perform competitively with non-SRI funds over time. For example, according to University of Maastricht and Erasmus University Rotterdam economists in their prize-winning paper, "we find little evidence of significant differences in risk-adjusted returns between ethical and conventional funds for the 1990-2001 period." Foundation investment choices seem to be increasingly be guided by effect upon society as a whole, not just financial gain, according to a recent Los Angeles Times article.

Fresh thinking in the nation's largest foundations may be driving the impetus ever faster: The $8.5- billion William and Flora Hewlett Foundation (Menlo Park), the $6.1-billion John D. and Catherine T. MacArthur Foundation (Chicago), the $7.8-billion W.K. Kellogg Foundation (Battle Creek, Michigan) all have made recent changes to improve the social effect of their investments.

SRI assets are also growing faster than assets as a whole: according to the non-profit Social Investment Forum’s 2005 biennial report, SRI assets rose more than 258 percent from $639 billion in 1995 to $2.29 trillion in 2005. Over those ten years, SRI assets grew four percent faster than the entire universe of managed assets in the United States.

What is Socially Responsible Investing?

Socially Responsible Investing (SRI) is a broad-based approach to investing that now encompasses an estimated $2.3 trillion out of $24 trillion in the U.S. investment marketplace today.7 The release of the United Nations Principles for Responsible Investment–subscribed to by some of the world’s largest institutional investors, asset managers, and related organizations representing over $9 trillion in assets as of mid- 2007–underscores the widespread acceptance of the principle that investors cannot, in the long run, achieve their goals by investing in corporations that externalize their costs onto society.

How do I research SRI funds?

A good place to start is the Social Investment Forum (http://www.socialinvest.org). Look at the resource list at the end of this article too.

How do I start?

If you participate in an employer-sponsored retirement plan, there may be SRI funds already available to you. If you manage your own IRA or other plan, look into what's available. But don't just go adding a fund without considering the entire makeup of your portfolio.

The key to earning decent long-term returns and limiting overall risk is to have a proper asset allocation, meaning you don't have all your eggs in one basket.

For do-it-yourselfers, check out the government's website about asset allocation (http://www.sec.gov/investor/pubs/assetallocation.htm), or purchase "All About Asset Allocation" by Richard A. Ferri ($13.57 at Amazon), a great introduction to the topic. Your personal financial advisor or company where you have your investment or retirement accounts can help. How do I know which funds will produce the highest returns?

You don't, you can't, and you won't, so just forget about it because past performance doesn't predict future results. The day-to-day ups and downs of the market receive the media attention, but the daily, quarterly, or even yearly returns are largely irrelevant in constructing an individual’s portfolio whose objectives are long-range. What you want to look for are funds that perform well over the long run within their particular sector, as compared to the appropriate benchmark indices. Various areas of the economy are always moving up and down and sideways, and so far no one has ever been able to know ahead of time what the pattern will be. Asset allocation, I'll say again, may be the key to long-term success in building a financially secure future. Not panicking helps too!

What makes an SRI fund different?

If a prospective company is a fit according to a fund’s stated objectives, research is performed to determine whether or not it’s a good idea to buy stock at the current offering price. It boils down to the question “Within the guidelines of the stated objectives of the fund, will this purchase help to achieve the highest possible return for the fund's shareholders?"

The three core socially responsible investing strategies are screening, shareholder advocacy, and community investing. Screening means a fund will include or exclude companies based upon criteria such as alcohol, tobacco, animal testing, and human rights, among others. These screens can be positive (e.g., including companies that treat employees well) or negative (e.g., excluding companies who do business with disturbed musicians).

Keep in mind that, as with all mutual funds, SRI funds have no guarantees of future return.

If you use electricity, drive a car, and participate in many other activities of daily living, in a very true sense you are already investing in the companies that allow and encourage your consumption. In other words, you are part of the "market" whether or not you actually own stocks or mutual funds. Socially responsible investing can be a way to make your dollars work toward something in which you believe, and support those companies you believe have a vision in line with your own.

For further reading & investigation about social investing

  • "The Mission in the Marketplace: How Responsible Investing Can Strengthen the Fiduciary Oversight of Foundation Endowments and Enhance Philanthropic Missions." Social Investment Forum Foundation's resource guide for foundations to manage risk and leverage their investment assets more fully with their core philanthropic purpose, while creating lasting value. http://tinyurl.com/35t49h
  • "10 best" list of companies. Corporate Responsibility Officer magazine rates the citizenship disclosures, policies and performance of large-cap, public companies in the following industries: Auto & Vehicles, Paper, Technology Hardware, Technology Software, Transport, and Travel & Lodging industries, Chemical, Energy, Financial, Media and Utilities industries. http://www.thecro.com/node/580
  • Social Science Research Network. http://www.ssrn.com/
  • United Nations' "The Principles for Responsible Investment." An investor initiative in partnership with UNEP Finance Initiative and the UN Global Compact. http://www.unpri.org/
  • The Social Investment Forum; national membership association dedicated to advancing the concept, practice, and growth of socially and environmentally responsible investing. http://www.socialinvest.org/
  • Social Investment Forum’s 2005 biennial report. http://tinyurl.com/258794
  • Sristudies.org, a resource for quantitative aspects of socially responsible investing. Includes an annotated bibliography of studies of socially responsible investing. A project of the Moskowitz Research Program, which is affiliated with the Center for Responsible Business at the Haas School of Business, University of California, Berkeley.
  • Socially Responsible Mutual Fund Charts of Financial Performance. http://www.socialinvest.org/resources/mfpc/
  • SocialFunds.com, an advertising-driven website with information on SRI mutual funds, community investments, corporate research, shareowner actions, and daily social investment news.
  • "Handbook on Responsible Investment Across Asset Classes." For asset allocation junkies, individuals and institutional investors the Boston College Center for Corporate Citizenship created this work. http://tinyurl.com/2ffqbu

About the Author:

Michael Grodsky is a financial advisor (aquariusfinancial.com) who works with artists, collectors and business owners.

Aquarius Financial
21031 Ventura Bl, Suite 705
Woodland Hills, CA 91364
818-266-3838
aquariusfinancial.com

This column is meant to provide general information, and should not be construed as providing investment, legal, or tax advice. There is no guarantee as to the accuracy or completeness of the information in this article. There are no guarantees of future return for any fund, nor an endorsement of any investment product. Mutual funds are sold by prospectus only. For complete information on mutual funds including sales charges and expenses, call your financial professional for a prospectus. Please read the prospectus carefully before investing. Links are provided herein as a courtesy, and no guarantees are made as to the accuracy of the content on the referenced websites.



Edited by Carolyn Allen, owner/editor of California Green Solutions
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