A better world and better returns?
Socially responsible investing—where conscience and cash come together—is now one of the fastest growing segments of Wall Street, with yields in some cases said to rival non-SRI investments.
"Study after study shows there's no penalty for choosing socially responsible investing, SRI," says Peter DeSimone, director of programming at the Social Investment Forum, an association of firms, professionals and institutions engaged in SRI. "SRI funds across the board outperform their benchmarks three quarters of the time. It's quite remarkable really."
Investors seem to agree. A recent study from Harvard University found that $400 billion in investment money poured into mutual funds that invest in socially conscious firms, from 2001 to 2007. That turned out to be a 19-percent increase over the six years.
"The main business of Wall Street is getting the most return for the risk and institutional investors are interested in SRI," says Amanda Adkisson, a professor at the Mays Business School of Texas A&M University. "While SRI may not be main stream, it is more than a sideshow with several big investment houses catering to it."
Even in a slow economy, money is still coming in; SRI funds now have more than $2.5 trillion under management in the U.S. alone. Analysts say the US should reach $3 trillion by 2011. Europe is now at $2 trillion.
The number of social responsible mutual funds (stock and bonds) has mushroomed from 181 in 2001 to more than 260 today—with funds targeting specific areas like small businesses, green technology and affordable housing, to list just a few. And ETF's are now focused on SRI with at least 17 exchange traded funds dedicated to alternative energy.
So, what is social responsible investing? Simply put, it's investors favoring corporate practices that promote social, religious, business or environmental issues that reflect their own personal values.
That can mean turning to shareholder activism—where shareholders advocate socially responsible policies within a corporate structure. But to reap a true capital gain—investors these days have found SRI means putting money where their values are.
"There's been a growing rise in environmental and social consciousness since the 60's and 70's," says Lou Abel, managing director of First Foundation Advisors. "This has spilled into areas of investing in SRI."
Take Stephanie Davis, executive director ofGeorgia Woman for a Change, a public policy and advocate center in Atlanta, Ga.She invests 100 percent of her portfolio in SRI stock and mutual funds and has done so since 1988.
"I consider myself an activist on a lot of social issues," says the 63-year-old Davis. "So it just made no sense for me to make money off of corporations whose products I despise. I focus on women in leadership positions as well as companies that are green and aren't involved in weapons."
SRI is hardly new—its origins go back to Biblical times, when Jewish law issued decrees on how people should invest ethically. Fast forward to the Quakers in 18th century America to see a re-birth of sorts for SRI as church elders prohibited members from actively participating in the slave trade.
But it was in the 1960's, experts say, that the modern model for SRI came about as economic development projects started through the Civil Rights movement, coupled with a backlash to the Vietnam War and apartheid in South Africa, established a benchmark for responsible investing.
The goal then was mainly to punish firms—like those in defense or companies seen as non-progressive on integration—that were thought to be wrong on the issues by withholding investment funds from them.
That's been labeled the "negative approach" to SRI and for the most part, the guiding light on how to invest.
"Some investors hold strong beliefs," says James Ma, a professor of finance at Oklahoma City University. "For example, certain groups or investors don't like tobacco or alcohol companies and don't want their money invested in them. They invest in other companies. This is a passive strategy to avoid the 'bad guys.'"
But while avoiding the 'bad guys' is still a dominant factor in SRI, taking a positive and more active approach is nearly its equal—as the trillions in assets now shows.
"Wall Street has closed the gap in terms of 'good and bad' investments," says Alex Urbani, managing director at MainStreet Advisors, an investment advisory group based in Chicago, Illinois. "There are more street offerings in the past couple of years like alternative energy, clean water and almost anything else that's considered 'green'. These days the growing trend is toward positive screens— investing in firms—rather than being negative or screening firms out."
Another example is the rapid growth in community investing—where capital is invested to improve such areas as schools, housing, local businesses as well as to empower minority groups.
"Over the past decade, community investing in the US and under-developed parts of the world, has grown over 540-percent, from $4 billion to $25.8 billion in assets," says Social Investment Forum's DeSimone. "You now see Main Street investors jumping into this area."
What about those returns?
But before someone jumps into any type of SRI, there is that issue of returns. While DeSimone points to better than average results compared with non-SRI, others aren't so sure.
"There's been a lot of debate regarding the financial performance of social funds," says Oklahoma City University's James Ma. "And there's really no consensus. Some studies say there's no performance loss, others say there is. From a purely theoretical point of view, adopting social screening will reduce an investor's investment set and therefore will have a diversification cost to the portfolio."
Doug Langen, a VP with Star Financial Bank's wealth management business who advises clients on socially responsible investing, with a focus on religious values, also sees limits to SRI.
"There might not be a huge disparity in returns for SRI compared to non-SRI," says Langen. "But when you manage assists for clients that screen companies, you do handcuff your returns and your asset allocation. You do sacrifice some of your returns."
Committed SRI investors are probably less likely to lose sleep over that than the problems than the inequities or injustices that bother them.
"The investor population in the US is aging with the 'baby boomers'," says Adkisson. "Your values might matter more as you age, rather than less, so SRI is not going to go away in my opinion."
"I think my investments have done better in this economic downturn than non-SRI's," says Davis. "But if I were to suffer financially, it would still be worth it because I wouldn't feel I was compromising my values for a higher return."