Published on November 28th, 2007 | by Stephanie Evans4
Green and Socially Responsible Investing
A huge drawback to investing is the complexity involved in deciding where to invest your money. Faced with nearly incomprehensible prospectus or annual reports, the majority of us invest by buying shares of mutual funds, a process that usually leaves us uninformed about exactly which companies our money supports.
When a person buys shares of mutual funds they are buying a piece, or a share, of the overall return on investment—or the interest earned—on a group of companies. Which companies are included is decided by the fund manager based on certain criteria. Socially Responsible Investing (SRI) is a way of looking at the companies to identify investment possibilities based on social and ethical standards rather than based purely on profits.
A Brief History of Socially Responsible Investing
While social investing has been around since the 1700s when the Quakers refused to endorse business that aided in the slave trade, modern SRI got its start in the 1970s. First there was a public outcry against Dow Chemical, maker of napalm, during the Vietnam War and then public pressure caused American investors to withdraw from companies doing business in South Africa in protest of Apartheid. The economic pressure on these companies brought about abrupt change in their business practices and helped force an end to Apartheid in Africa.
Even so, SRI was thought to be a fringe fad and suffered for many years from a lack of credibility in the mainstream investment world. Not only did investors view green companies as risky and experimental—they also expected such stocks to be low-volume trading with even smaller returns on the investment. SRI was the "feel good" thing to do, but serious investors with serious money weren’t interested.
All that changed as green banking exploded into mainstream investing, giving birth to a number of specialized investment companies and products. In recent decades, the success of environmentally and socially responsible businesses has drawn trillions of dollars into the investment arena, making SRI impossible to ignore. It is estimated that SRI encompasses $2.3 trillion out of $24 trillion in the U.S. investment marketplace, making it clear that corporate social responsibility is increasingly a valid factor in determining investment strategies.
Today there are a number of SRI firms and funds for the investor to seek out, while the staid old firms are increasingly adding green mutual funds and other green products to their portfolios. In today’s marketplace, it’s probably harder to find a firm that doesn’t offer SRI products compared with the long list of those that do.
But for those of us who don’t spend our lives reading the financial pages, how do we know where to even begin? The investment world is a huge and complicated place and most of us can be easily overwhelmed by it all. How can we know that our money is actually going to socially responsible companies? It’s an unfortunate truth that many companies out there engage in green washing, a practice that involves claiming your company is environmentally friendly or worker friendly when it is, in fact, exactly the opposite. Often, the highly publicized green-oriented programs pushed by these companies are simply a veneer designed to disguise unethical practices occurring behind the scenes. What are the criteria for deciding if an investment really is a socially responsible choice?
Investing is always a risk. But if what you’re looking for is a way to use your money that will bring clear and visible results to people and communities while securing some income for yourself, community investment may be just the ticket for you.
According to the Social Investment Forum (SIF), there are three distinct approaches that investors typically use in making socially responsible investing decisions: Screening, Stockholder Advocacy, and Community Investment.
Screening processes used by fund managers can be vastly different. Some use positive screens, for example, to screen in a company working on alternative energy sources; some use negative screens, for example, to screen out a company that is a gross polluter. There may be only a few screens, or many. When it’s time for you to consider mutual fund investments you’ll want to ask: What is the fund’s philosophy that drives its selection process?
- Get a list of all the companies currently in the fund
- Ask about the screening criteria. Do they screen only for positive or only for negative criteria?
- How much does profitability count in the criteria? Some investors would rather have their money invested in lower performing companies if they are engaged in, say, emerging technologies that promise independence from fossil fuels.
For more information about the screening process, click over to Screening Sustainable Investments.
To invest in pre-screened companies contained in mutual funds is a relatively passive way of investing: you vote with your dollars based on past practices and policies of a company. If you approve of its policies and actions, you invest; if not, you don’t, or you withdraw your investment.
Sometimes investors choose to be actively engaged in the decision-making process of a certain company. As an investor, or shareholder, this means:
- Taking part in direct contact with the company or
- Filing resolutions at shareholder meetings to address policies or actions that are inconsistent with socially responsible behavior. Such policies can include everything from problematic labor practices to effects on climate change, community impact, corporate governance issues, or discriminatory actions
The Securities and Exchange Commission (SEC) requires that a shareholder must hold a minimum of $2,000 for one year to be eligible to file a resolution for proxy vote. The intent is to pro-actively encourage change in the corporation’s policies and actions by bringing pressure—and usually media attention—on the company management, while ensuring that stockholders’ interests (and investments) are being managed responsibly and profitably.
Community investment is one of the best ways for investors to actually see their money put to work. It is currently the fastest growing and largest segment of socially responsible investing. Through community investing, capital is made available to many small, local organizations that traditionally cannot obtain funding or financing through regular banking and financial institutions. Community investment can help provide funds for various projects including:
- small businesses
- low-income entrepreneurs
- child care
- health care services for underprivileged community members
Sometimes these funds go to organizations in other countries to help promote global health and sustainability through guaranteed loan programs.
When you invest money with a community investment bank or other financial institution, instead of buying stock in a company, your money is used to directly fund community projects. Your dollars may help fund an environmental restoration project, support a low-income housing project, or generate a micro-loan to an Afghan woman to start a small business, such as raising chickens for eggs to sell.
The best way to get involved in community investing is to ask a broker to help you find a financial institution or fund that will invest your money in the areas that match your personal interests and goals. There are thousands of places where you can put your money to good use. The questions to ask yourself before you talk to a broker are:
- How much do I have to invest?
- What issue or area am I most interested in—is it affordable housing or water reclamation efforts?
- Do I want my money to work locally or do I want to put it to work globally?
Community investing is probably the most personally satisfying way to make your money earn more money. It’s likely that the return on your investment may not be as much as some high performing stocks, but even those stocks can see the bottom drop out and with extensive losses. Investing is always a risk. But if what you’re looking for is a way to use your money that will bring clear and visible results to people and communities while securing some income for yourself, community investment may be just the ticket for you.
Just How Risky is SRI?
Obviously, any investment entails some risk and it is always wise to research any and all companies that you intend to invest in, whether through mutual funds or some other financial vehicle. Ask for the company prospectus to learn about its financial health and spend some time searching the internet for news stories about the company’s activities to get a sense of how it interacts with the community at-large.
In general, the research shows that socially responsible investing is much more than just a feel-good, money-losing proposition. The Moskowitz Research Program, affiliated with UC Berkley’s Haas School of Business, is solely dedicated to the "study and development of quantitative metrics for the non-financial aspects of business performance." It offers an extensive database of SRI research results. Additionally, investors can compare the performance of specific indexes, such as the traditional Standard and Poor’s 500 to an SRI index like the Domini 400. Since the Domini’s inception in 1990, it has continuously performed competitively with the S & P.
Likewise, the Social Investment Forum says that clearly SRI has become mainstream. Not only has the prevalence of such investments expanded exponentially, but they have also proven to be just as productive as any other funds. Added to this is the fact that traditional investors, such as institutions, pension funds, foundations, and university endowments—all of which are required by law to "seek competitive returns for the portfolios they manage"—are increasingly invested in SRI.
So, how green is your money? It’s pretty clear that Wall Street sees the socially responsible dollar as solid gold.