Even if you were born on a lily pad, it isn't always easy being green. Recycling soda cans, detergent bottles and newspapers is simple stuff compared to preserving the wetlands or saving the whales. When it comes to socially relevant issues, it's wise to remember that the evil men do lives after them, and saving the planet is everyone's job. Some investors choose to take their personal vision into the realm of their investment portfolios.
Ethical or socially responsible investing (SRI) began as far back as the 1920s, when some church endowments avoided investing in "sin stocks," including liquor, tobacco and gambling companies. Social activism reached new heights during the Vietnam War, and this translated into increased vigilance on the part of investors in the 1960s. For the first time, many investors realized that the comfortable companies that provided them with washing machines and TV sets also made warheads and tanks.
With the birth of the Council on Economic Priorities in 1969, public companies were rated on the essential issues of the period, including military contracts, environmental pollution and minority hiring practices.
The politically correct climate of the 1990s has revitalized public awareness about investor activism. More and more investors are considering the products and services of companies in which they invest with an eye to a double bottom line: They not only want to know if the company is a good investment, they also want to know if the company meets their chosen social criteria.
Over the last several years, the hottest issues to emerge in the field of social investing have been environment and labor. Interest in the traditional social issues of alcohol, tobacco, gambling and weapons manufacturing has not diminished, either. Other popular social investment concerns include contraceptives, abortion, pornography, animal rights and nuclear power, to name a few.
To Thine Own Self Be True
Before you embark on a mission to save the portfolio, don't jump at the first investment touted as socially responsible. Perhaps the most important criteria to keep in mind are your own. Individual social priorities vary widely, and it isn't enough to say "I want to invest only in good companies."
Suzanne Harvey, director of the Social Investment Research Service at Prudential Securities in Arlington, Virginia, says there are two ways to screen a portfolio: positive and negative. "A negative screen avoids particular companies or industries--no mining, oil or chemical manufacturers, for example," Harvey explains. "A positive screen looks for companies with above-average records in a particular area, like workplace practices or the environment." The key is to define your criteria, then build your portfolio as you like it. Do you care about cleaning up the environment, or do cigarette manufacturers burn you up? Would you prefer to avoid companies that manufacture nuclear weapons, or do you actively seek companies that are proactive in hiring minorities and have family-friendly policies?
If you want to reach your financial as well as social goals, you should avoid becoming so restrictive that you eliminate whole industry groups. By picking your battles carefully and avoiding the most rigid version of every conceivable SRI, you can find companies that are acceptable on more than one level and build a profitable portfolio.
To Invest Or Not To Invest
No matter how good, every company has some qualities that may be considered socially unredeeming. The question is, When doth the investor protest too much? Standards used for judging companies are as individual as investors themselves; what is considered socially responsible or irresponsible is subject to interpretation.
Some socially conscious investors avoid U.S. government-backed securities because of government involvement in weapons or because of politically conservative or liberal stands on various issues. On the other hand, money raised through the sale of these same debt securities funds AIDS and cancer research, supports the arts, pays for school lunches and backs programs designed to help the poor and seniors. For that matter, those who choose to be socially responsible in a strict sense, avoiding, for example, stocks of tobacco companies, may have to wrestle with the idea of using other products made by the same conglomerate. Many investors are surprised to find that tobacco companies produce widely used products ranging from candies and pickles to cheese and cookies. These same companies may also contribute to society by donating space, time and money to museums, ballet companies, struggling theatre groups or public TV stations.
Some companies that appear on one list of socially responsible businesses don't appear on others. Strict screens eliminate companies that have minor infractions, where others allow more broadbased criteria. In the end, the decision rests with the investor, and more and more investors are considering investments that make them feel good, as well as those that make them money.
Investors Labors Lost?
If you're looking for a moral laundering service to do the job for you, look no further than your friendly financial advisor. Several firms provide research on SRI and can steer investors toward appropriate individual issues or mutual funds. When it comes to funds, the varieties are as numerous as the opinions. There are funds that invest on Christian principles; funds designed just for Catholics or exclusively for Muslims; funds that seek out companies favorable to women, minorities or any number of specific groups; even two funds that provide a screened version of the Standard & Poor 500.
Why so many variations on a theme? Because socially conscious investing is one way investors can take a stand for (or against) company policies, the need for many funds arises. But does using your heart mean leaving your head behind? Although some publications would have investors believe so, performance numbers dispute this contention.
Mutual fund performance is judged against a standard, usually that of the S & P 500 for any given period. But comparing socially responsible funds measure for measure against this bellwether is like comparing organic apples with inorganic oranges: Funds may include cash, bonds, small and medium-sized company stocks, as well as other securities in their portfolios. A comparison with a large company stock index is therefore inappropriate. A more applicable comparison pits the performance of socially responsible equity and equity income funds against that of the S&P 500.
After leveling the playing field this way, do socially responsible funds stand up to the comparison? According to Michael Van Dam at Morningstar Inc., an investment publishing company in Chicago, of the 7,000 mutual funds Morningstar tracks, only 46 select investments based on social criteria. Of these 46, only four funds have track records longer than five years, and, in that time, only one beat the index. Most relatively new funds fall short. Over the past five years, fewer than one-third of the nearly 500 standard growth and growth-and-income funds have matched the S & P 500's performance.
Of course, anyone who knows anything about mutual funds will tell you (right after they admonish you to get and read a prospectus before investing any money) that a mutual fund is a long-term investment, that five years is nothing in the life of any fund, and that past performance is no indication of future returns. In other words, as far as the relative performance of socially screened funds is concerned, "the jury is still out," says Van Dam.
Van Dam reminds us, "There are talented fund managers out there, and there are also buffoons. Talented managers make money while others may not, no matter what kind of investments they make." Remember, too, that all mutual funds "screen" the universe of stocks and bonds in some fashion. One screen may prove more efficacious than another, whether it involves socially responsible criteria or not.
The use of socially responsible criteria in building a portfolio has its positives. Companies that treat their employees well, don't pollute the environment or produce products and services that better the lives of their customers often face fewer regulatory problems, lawsuits and strikes. It makes good sense (and dollars, too) to consider whether your relationship with a company or fund will end up as doomed as star-crossed lovers.
On the other hand, some investors may not want to consider their investments on anything more than a financial level. They choose instead to go for the best return possible without regard to their investments' social consequences. If that's the route you choose, you may want to assuage your conscience and donate a share of your riches to a charity of your choice. That way you'll do your favorite organization a favor and get a tax deduction, too.
Lorayne Fiorillo is first vice president of investments at Prudential Securities in Charlotte, North Carolina. For information on her funny, fact-filled investment workshops, send a self-addressed, stamped envelope to her in care of Entrepreneur, 2392 Morse Ave., Irvine, CA 92614.
Morningstar Inc., 225 W. Wacker Dr., Chicago, IL 60606, (800) 876-5005;
Prudential Securities, 1911 N. Ft. Meyer Dr., #905, Arlington, VA 22209, (800) 905-6255, (703) 276-0055.
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