Doing Good Are socially responsible investments much ado about nothing?

Even if you were born on a lily pad, it isn't always easybeing green. Recycling soda cans, detergent bottles and newspapersis simple stuff compared to preserving the wetlands or saving thewhales. When it comes to socially relevant issues, it's wise toremember that the evil men do lives after them, and saving theplanet is everyone's job. Some investors choose to take theirpersonal vision into the realm of their investment portfolios.

Ethical or socially responsible investing (SRI) began as farback as the 1920s, when some church endowments avoided investing in"sin stocks," including liquor, tobacco and gamblingcompanies. Social activism reached new heights during the VietnamWar, and this translated into increased vigilance on the part ofinvestors in the 1960s. For the first time, many investors realizedthat the comfortable companies that provided them with washingmachines 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 minorityhiring practices.

The politically correct climate of the 1990s has revitalizedpublic awareness about investor activism. More and more investorsare considering the products and services of companies in whichthey invest with an eye to a double bottom line: They not only wantto know if the company is a good investment, they also want to knowif the company meets their chosen social criteria.

Over the last several years, the hottest issues to emerge in thefield of social investing have been environment and labor. Interestin the traditional social issues of alcohol, tobacco, gambling andweapons manufacturing has not diminished, either. Other popularsocial 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'tjump 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 enoughto say "I want to invest only in good companies."

Suzanne Harvey, director of the Social Investment ResearchService at Prudential Securities in Arlington, Virginia, says thereare two ways to screen a portfolio: positive and negative. "Anegative screen avoids particular companies or industries--nomining, oil or chemical manufacturers, for example," Harveyexplains. "A positive screen looks for companies withabove-average records in a particular area, like workplacepractices or the environment." The key is to define yourcriteria, then build your portfolio as you like it. Do you careabout cleaning up the environment, or do cigarette manufacturersburn you up? Would you prefer to avoid companies that manufacturenuclear weapons, or do you actively seek companies that areproactive in hiring minorities and have family-friendlypolicies?

If you want to reach your financial as well as social goals, youshould avoid becoming so restrictive that you eliminate wholeindustry groups. By picking your battles carefully and avoiding themost rigid version of every conceivable SRI, you can find companiesthat are acceptable on more than one level and build a profitableportfolio.

To Invest Or Not To Invest

No matter how good, every company has some qualities that may beconsidered socially unredeeming. The question is, When doth theinvestor protest too much? Standards used for judging companies areas individual as investors themselves; what is considered sociallyresponsible or irresponsible is subject to interpretation.

Some socially conscious investors avoid U.S. government-backedsecurities because of government involvement in weapons or becauseof politically conservative or liberal stands on various issues. Onthe other hand, money raised through the sale of these same debtsecurities funds AIDS and cancer research, supports the arts, paysfor school lunches and backs programs designed to help the poor andseniors. For that matter, those who choose to be sociallyresponsible in a strict sense, avoiding, for example, stocks oftobacco companies, may have to wrestle with the idea of using otherproducts made by the same conglomerate. Many investors aresurprised to find that tobacco companies produce widely usedproducts ranging from candies and pickles to cheese and cookies.These same companies may also contribute to society by donatingspace, time and money to museums, ballet companies, strugglingtheatre groups or public TV stations.

Some companies that appear on one list of socially responsiblebusinesses don't appear on others. Strict screens eliminatecompanies that have minor infractions, where others allow morebroadbased criteria. In the end, the decision rests with theinvestor, and more and more investors are considering investmentsthat make them feel good, as well as those that make themmoney.

Investors Labors Lost?

If you're looking for a moral laundering service to do thejob for you, look no further than your friendly financial advisor.Several firms provide research on SRI and can steer investorstoward appropriate individual issues or mutual funds. When it comesto funds, the varieties are as numerous as the opinions. There arefunds that invest on Christian principles; funds designed just forCatholics or exclusively for Muslims; funds that seek out companiesfavorable 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 consciousinvesting is one way investors can take a stand for (or against)company policies, the need for many funds arises. But does usingyour heart mean leaving your head behind? Although somepublications would have investors believe so, performance numbersdispute this contention.

Mutual fund performance is judged against a standard, usuallythat of the S & P 500 for any given period. But comparingsocially responsible funds measure for measure against thisbellwether is like comparing organic apples with inorganic oranges:Funds may include cash, bonds, small and medium-sized companystocks, as well as other securities in their portfolios. Acomparison with a large company stock index is thereforeinappropriate. A more applicable comparison pits the performance ofsocially responsible equity and equity income funds against that ofthe S&P 500.

After leveling the playing field this way, do sociallyresponsible funds stand up to the comparison? According to MichaelVan Dam at Morningstar Inc., an investment publishing company inChicago, of the 7,000 mutual funds Morningstar tracks, only 46select investments based on social criteria. Of these 46, only fourfunds have track records longer than five years, and, in that time,only one beat the index. Most relatively new funds fall short. Overthe past five years, fewer than one-third of the nearly 500standard growth and growth-and-income funds have matched the S& P 500's performance.

Of course, anyone who knows anything about mutual funds willtell you (right after they admonish you to get and read aprospectus before investing any money) that a mutual fund is along-term investment, that five years is nothing in the life of anyfund, and that past performance is no indication of future returns.In other words, as far as the relative performance of sociallyscreened funds is concerned, "the jury is still out,"says Van Dam.

Van Dam reminds us, "There are talented fund managers outthere, and there are also buffoons. Talented managers make moneywhile others may not, no matter what kind of investments theymake." Remember, too, that all mutual funds "screen"the universe of stocks and bonds in some fashion. One screen mayprove more efficacious than another, whether it involves sociallyresponsible criteria or not.

The use of socially responsible criteria in building a portfoliohas its positives. Companies that treat their employees well,don't pollute the environment or produce products and servicesthat better the lives of their customers often face fewerregulatory problems, lawsuits and strikes. It makes good sense (anddollars, too) to consider whether your relationship with a companyor fund will end up as doomed as star-crossed lovers.

On the other hand, some investors may not want to consider theirinvestments on anything more than a financial level. They chooseinstead to go for the best return possible without regard to theirinvestments' social consequences. If that's the route youchoose, you may want to assuage your conscience and donate a shareof your riches to a charity of your choice. That way you'll doyour favorite organization a favor and get a tax deduction,too.

Lorayne Fiorillo is first vice president of investments atPrudential Securities in Charlotte, North Carolina. For informationon her funny, fact-filled investment workshops, send aself-addressed, stamped envelope to her in care ofEntrepreneur, 2392 Morse Ave., Irvine, CA 92614.

Contact Sources

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.