Taking Stock

Investing with your head—and your heart

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Ever wished you could conjure up an investment portfolio that made money for you—and made the world a better place? With so many companies claiming they’re the best place to put your money, it can be difficult to know which has your best interests at heart. Whether you’re looking to expand or change your portfolio, consider investing in socially responsible funds—funds that seek to match your capital to the companies that best represent your moral and ethical values.

As a recent college graduate in my late 20s, I thought I’d found a gateway to success working in the business office of a major hospital. The hours were good, the job interesting and the salary more than I’d ever earned. I wore slacks instead of jeans, and shirts with ties, plus squeaky new shoes. My better-late-than-never decision to attend college was now paying off in the best components of the American Dream: a fresh start, youth and opportunity—and a 401K plan. I really liked the sound of that. “I have a 401K,” I enjoyed telling my friends and relatives. It was going up in value too. I considered myself very wise in the ways of money.

Then I looked at the 401K to see which enterprises were yielding such stellar growth rates and was jolted to see that RJ Reynolds and Philip Morris were some of the top producers among the mutual funds.

“Did you know that our 401K mutual funds are full of tobacco stocks?” I asked my supervisor.

“Well?” he asked.

“Well, the hospital is about health and healing. Isn’t that inconsistent? Shouldn’t we do something about that?”

“Don’t make a fuss about it,” he said. As I left he added, “Oh, by the way, don’t tell anybody. No one will care.”

How to Get Involved

That was in 1991. Socially responsible investing (SRI) had been around for a while, but my boss and many others had not yet taken it seriously—in spite of the fact that the refusal of conscientious individuals worldwide to invest in companies that did business in South Africa had recently toppled the Apartheid South African government.

SRI can affect changes closer to home. For example, an SRI advocate who values health and longevity could avoid buying stock in tobacco and alcohol companies, seeking instead the stocks of those whose products promote healthy living.

Or consider the opportunities for investing in the meatpacking industry. Vegetarians might choose not to participate in the profits of such businesses, selecting instead to seek profits in non-meat food industries. Many who invest in the Whole Foods Market or Wild Oats Markets, Inc., grocery chains do so because they like both the ethics and the financial opportunities in organic and natural products.

Many of the environmentally and socially responsible screened mutual funds have sustained competitive returns over five-year, ten-year and longer periods. Investing in screened mutual funds is one way to put your money to work for a better world.

The Early Days of SRI

Despite my former employer’s contention that nobody cares, I discovered that many people care a great deal about matching their financial practices to their values. For me, the 401K conflict was more than I could bear. Tobacco is killing millions while enriching perhaps thousands. Profiting from it goes against my values, let alone the professed values of a major hospital. So I left the job and began researching SRIs. I learned that the means to pursue socially responsible investing were accessible. Many mutual-fund managers adhered to strict values of profit as well as social and environmental concerns, and these funds were earning money for their shareholders. I learned about codes of conduct for businesses such as the CERES (Coalition for Environmentally Responsible Economies) Principals, a set of environmental and accountability reporting guidelines.

In the early days of SRI, although the earnings were respectable, many brokers urged investors to separate business from morality. “Earn it in the markets, give it at church” was the mantra of many investment advisors. Or even more absurd, “Invest in Philip Morris and donate to the American Cancer Society.”

A few financial pioneers were getting involved in conscience-guided investing, helping investors align their money with their values. A decade ago, less than 5 percent of US-invested dollars was involved in SRI. Today, approximately 12 percent of US investors use SRI strategies, according to the Social Investment Forum, a Washington, DC-based SRI trade association. Even better: Approximately half of the largest 3,000 publicly traded US companies meet most socially responsible mutual funds’ screening criteria.

The main SRI index that measures performance against the overall market is the Domini 400 Social Index (DSI 400). It contains 400 companies that pass multiple social and environmental screens, 250 of which are from the Standard & Poor (S&P)500. The DSI 400’s performance shows that financial sacrifices are not necessarily inherent in socially and environmentally responsible portfolios. Consider these numbers from the DSI 400, which has outperformed the S&P 500 almost every year: In the last 10 years through June 2002, the DSI 400 demonstrated the long-term profitability of socially responsible investing by returning an average of 12.6 percent per year compared to 11.4 percent for the S&P 500.

Potential SRI participants should ask pension administrators which companies they’re invested in. Even if the answers are troubling, participants in 401K or similar retirement plans are usually able to ask for the inclusion of SRI mutual funds.

The Four Key Strategies of SRI

At a time when corporate irresponsibility to CEO malfeasance dominates the news, SRI is coming to the forefront. Socially aware companies hardly invented ethical behavior, but SRI advocates claim that business ethics and social responsibility are linked by the awareness that bottom-line profits are just one measure of a product’s success. To ensure your portfolio includes responsible companies such as the ones in SRI mutual funds, follow these strategies.

•Screen companies. Exclude securities from companies whose products you find objectionable, such as tobacco or alcohol, who pollute the environment or who accept unethical practices such as sweatshops.

• Seek companies. Include securities in companies whose products you want to invest in, such as renewable energy or natural foods.

• Support communities. Invest in community development through responsible banks, credit unions and loan funds that support low-income housing efforts.

• Influence companies. Use shareholder activism and resolutions to influence corporate behavior in areas such as the environment, executive compensation and independent boards. Shareholders file several hundred social and environmental resolutions each year.

The Future of SRI

SRI awareness and participation have expanded exponentially in the past 10 years. In the United States alone, investors have over $2 trillion in values-screened SRI portfolios. Investment brokers, including those who once denigrated SRI, are now well educated on the subject. Many mainstream investment firms such as Smith Barney, Piper Jaffray, Morgan Stanley and TIAA-CREF are continuing to expand their SRI commitment with new funds or money-management services.

SRI is a global movement and continues to experience growth worldwide. The UK, Europe, Australia, Canada and Asia have devoted funds, money-management firms, publications and trade associations to SRI. The SRI catch phrases—sustainability, the triple bottom line and corporate accountability—are becoming part of corporate conversations in America. Sustainability involves questioning if companies operate for the long-term benefits of investors, customers, the community and the planet. The triple bottom line means weighing people, the planet and profit equally in investment decisions. Corporate accountability requires disclosing company information—positive or negative—to the public.

The movement of SRI strategically places such companies after last summer’s corporate crisis of confidence. SRI advocates believe everyone can invest responsibly to make a positive impact on the planet. They also believe that most people want to leave the world a better place for their children and future generations.

“Socially responsible investing stands on the cusp of enormous growth. The next 10 years will bring widespread, even universal, acceptance of the social investment industry’s credibility and impact,” says Amy Domini, president of Domini Social Investments. With the new awareness of corporate responsibility and accountability, the SRI industry will help you make money and make a difference for a long time to come.