Investor Wisdom

For some, SRI is about aligning personal values and their financial goals by choosing to invest in companies and organizations displaying values comparable to their own. Others see SRI as a tool to use investor influence to achieve social or environmentally goals. And a third category see SRI from a purely financial perspective - as a way to profit from, for example, the economic changes associated with climate change.

There are four kinds of SRI:

1. Screening, which mostly involves excluding companies on the basis of social, ethical or environmental criteria, but it may also involve preferentially including companies with strong positive social features (e.g. renewable energy companies).

2. Community Investing involves providing capital to socially beneficial projects, particularly those that would otherwise find it difficult to attract capital (e.g. Microcredit), sometimes this is done at sub-commercial rates of return.

3. Shareholder Activism involves engaging with companies to seek to achieve positive changes to management and performance. In the U.S. this is typically supported by shareholder resolutions, in Europe more informal engagement methods are more frequently used. This activity is often closely related to activism on corporate governance.

4. Investment Integration involves seeking to integrate analysis of social, ethical and environmental criteria with conventional financial analysis in order to maximise investment returns. (This approach is particularly attractive to fiduciary investors, and is practiced mostly in Europe)

Social investing began in the 1920s with churches, who divested of the so-called 'sin stocks' -- alcohol, tobacco and gambling. As the ability to conduct substantive social and environmental research on companies improved, 'negative' or 'avoidance' screening was joined by 'positive' or 'inclusionary' screening -- the practice of looking for companies with leading policies and practices.

A major shift forward came with the founding of the Interfaith Center on Corporate Responsibility (ICCR) in the 1970's. Headquartered in New York, ICCR is an umbrella organization that helps to orchestrate the activities of its constituent membership -- some 285 institutions who collectively control more than $110 billion in investment assets. ICCR is credited with creating the South African Divestiture Movement, and in 1978 an ICCR member filed the first shareholder-sponsored resolution to General Motors. They continue to be leaders in the active use of assets to express or support their members' larger purpose in the world.

During the 1970s and 1980s a number of mutual funds were established in the US and Europe, mostly using the screening model. Globally these have attracted billions of dollars of investment on behalf of millions of customers.

Since 2000 there has been a growing interest in SRI from mainstream investors, including large pension funds and insurance companies. In several companies (including the UK, France and Australia) of legal requirements for pension funds to disclose their policy on SRI. In the UK, for example, this has led a number of large institutional investors with several hundred billion dollars of assets to adopt SRI policies across all their assets (mainly using shareholder activism or investment integration methods).

PERFORMANCE: An important issue to confront with SRI is its critics' oft-repeated claim that social investors must sacrifice return in order to invest more in line with their values. This has been shown to be an unsupportable assertion, both by the 14+ year experience of the Domini Social Index, and by a host of longitudinal studies conducted by academic and research institutions. The Domini Social Index was launched to be a financial mirror of the S&P 500 Index, but with a broad range of social and environmental screens applied. Over its nearly 15-year history it has faithfully mirrored, and modestly outperformed, the S&P 500.

It us useful to realize that every investment manager (whether a mutual fund or separate account manager) does financial analysis first. Then, once financial qualifications are met, SRI managers conduct additional social and environmental research. Many feel that this 'double due-diligence' gives SRI managers insight into and the ability to avoid potential liabilities. Others feel that a company's environmental preparedness is a sound proxy for management's foresightedness and a harbinger of out-performance in the future.

Of course, no market cycle consistently favors any group or style of investing, and there are both good and bad managers among the ranks of SRI -- just as there are among traditional Wall Street managers. But one thing is certain -- whenever money moves it has an impact. Socially concerned investors try to influence those impacts, and they can successfully do so while still being fiscally prudent and while fulfilling their fiduciary duty.

DIVERGENCES WITHIN SRI: In recent years Socially Responsible Investing has evolved into several approaches that are differentiated in various ways.

Firstly, by political orientation. Progressive SRI investors follow criteria that support a variety of values, ranging from environmental protection to workers' rights. The vast majority of SRI money invested (over $2.3 trillion a/o late 2005) is invested with this progressive bent. In contrast to this, conservative SRI investors tend to follow criteria that mirror the values of particular religious denominations. While there is no one standard of criteria across Socially Responsible Investing, most SRI mutual funds, whether conservative or progressive, employ screens that exclude companies that manufacture tobacco or alcohol products.

Secondly, by the extent to which SRI criteria are integrated with mainstream financial analysis and corporate governance activism. Often because of perceived fiduciary constraints, many institutional investors do not wish to employ ethical screens but prefer to seek to integrate social, ethical and environmental factors into their investment and activism. Some have criticised these approaches to ethically weak. Their defenders argue that they are effective at mobilising large institutional investors who would otherwise ignore SRI.

THE FUTURE OF SRI: An important thought leader study, The Future of Socially Responsible Investment, was published in 2005. It captured and analyzed the 10-year-ahead thinking of 42 of the world's leading SRI practitioners, who collectively see SRI, and in particular Screening, as becoming mainstream investment practice -- entirely because SRI analysis does provide valuable insight into management's ability and thoughtfulness. Other significant trends include the continued growth and robustness of Community Investing, and in particular the evolution of Shareholder Engagement as the defining factor that distinguishes the 'Deep SRI' firm from others.