What is Social Investment and How Does It Apply To You

By Mike

social investmentIn this first of our new “Investment Thursdays”, I decided to tackle a subject important to me.

One of the major trends in the past decade or so has been individuals stepping up to do their part in improving the world. The green movement has been the most visible as groups and individuals around the world have put up efforts to give out information about the harm being done to their environment. The power, of course, resides in the masses. For one person to start recycling their paper or building heir own compost bin has little impact but when millions around the globe do their part, the impact becomes a game changer.

The green movement has gained momentum and importance in recent years as corporations become more socially aware and adopt pro-environment policies.  Initially, I was far from convinced but now believe that these actions will make a major difference in the lives of our children and grandchildren. Is the fight over? Far from it. But we do have the beginnings of a great start.

I think the next big step will be for individuals and corporations to be socially responsible in their investments. The same rules apply as it will be difficult for one investor to make a significant difference but as more investors join the movement; a major difference in our world awaits.

So what is socially responsible investing?

There are many different ways to define the concept.  Generally, it means investors either avoid investing in corporations with “doubtful” practices/products or for them to encourage good behaviors. Generally, the former is more important. Traditionally, this meant avoiding companies that provide “sin services” such as tobacco, alcohol, military pursuits, gambling, adult entertainment, etc. Several fund managers and independent organizations perform screening to help detect which corporations should be avoided and move their money towards more social investments.

Socially responsible investing (SRI) assets grew 639% between 1995 ($639 billion) and 2008 ($2.71 trillion)

I do believe that over time the criteria will become more complex as many other issues have gained attention. For example, Claymore has an ETF that promises to avoid any company that has dealings in Darfur. Others could want to avoid companies that use factories in poor countries (sweat shops) or that deal with the North Korean government for example.

How much will it cost me?

Honestly, when I first heard about this, I assumed that making socially responsible choices might be good for my conscience but might cost my portfolio.  Actually; many recent studies have shown that “socially responsible” portfolios perform well over time.

I even expect such funds to perform better over the long haul for two main reasons:

1- As a company gets flagged for irresponsible behavior, chances are that they will also generate lesser profit. This would not apply for all companies but for example when Nike got huge backlash for its treatment of children in Asian factories, it did have an impact on its sales and profit therby reducing the return of its stock.

2- Over time, as social investing gains popularity, I expect assets to flow more towards “responsible” companies resulting in better returns.

The best time to start is yesterday

Every time the New Year comes around, millions make new resolutions.  You can almost tell the same day who will end up sticking to their new promises and who will last only a few months, a few weeks or even just a few days. I think one of the keys is to take action immediately. It does not have to be a complete change of your portfolio. In my opinion, here are a few steps that you can follow to make your portfolio more socially responsible:

1- Determine the large concepts you will follow (are you avoiding specific companies or buying companies you believe in)
2- Determine a few “core values”, either industries you want to avoid (sin, etc), or those you’d like to support
3- Generally, you will not have enough time to look through individual companies so the best way to proceed is find an organization or fund that has the same core beliefs that you do, and invest through that channel.
4- As with any strategy, the trick is then to monitor and review your goals every year or so, to see if you’d like to add, change or delete some of the criteria you were using.

Will you be able to change the world instantly? Of course not. But with action and through talking about your investing principles, you can make a difference and the world can become a better place…

6 Responses (including trackbacks) to “What is Social Investment and How Does It Apply To You”

  1. OneDay Says:

    Really interesting!!! It’s a growing trend for investors, however I didn’t think that competitive… I encourage corporations to improve their practices on environmental, social and governance issues. Socially responsible investing is a good business and a way to create changes. However small or large, I know that ‘ethical’ investments are having a positive impact upon the world in which we live!

  2. Frank Says:

    Ethical funds usually carry a greater amount of volatility and a higher risk profile when compared to conventional funds. Absolutely vital to making a sound investment, proceed in your due diligence.

  3. James Says:

    Have you heard about catholic funds? These kind of funds’ investment policies draw heavily on the teachings of the Catholic Church when making investment decisions. What I found is that for example, the “dignity and primacy of the human person” can figure highly on the list of criteria, and will focus on the way firms treat their employees, including compensation structures, executive pay, working conditions, and independence of directors.

  4. FB @ FabulouslyBroke.com Says:

    I couldn’t agree more.

    But I want to caution that it shouldn’t stop there in your investing portfolio.

    Instead of just buying into the right, green & ethical stocks, you should also reflect that in your personal life (which I find, some people preach a good game, but shockingly DO NOT walk the walk!)

    In my personal life, I also support purchases such as items made with greener fabrics, recycled jewelery, or companies who promote green initiatives and actually take action.