–a trend pioneered by women–proves that making
money and doing good can result in a very handsome payoff.
When Toni Weir heard about socially responsible investing some 15 years ago, the idea of investing her dollars according to her values felt right to the then-San Diego-based freelance copy editor. So when Weir, now retired and living in Bend, Oregon, sat down with her financial planner to decide how to invest her retirement dollars, she had a ready response when her planner said, “Tell me what you don’t like and we won’t invest in it.”
“I’m very antitobacco, very much so,” Weir recalls saying. “I’m pro-environment and antinuclear—all the good things.”
Weir and present-day socially responsible investors have kindred spirits in Quakers, Methodists, and other American colonialists who refused to make investments that benefited the slave trade. Indeed, socially responsible investing, or SRI, goes back centuries, but the modern-day marriage of morals and money began grabbing major headlines and Wall Street attention in the 1980s—when American shareholders forced companies to divest from South Africa to
protest apartheid.
SRI today is hot, and its appeal is growing as Weir and other baby boomers look for ways to, as she says, “do the right thing” with their investment dollars. Investors are pouring more money than ever before into mutual funds that ban investments in companies that generate revenue from areas such as tobacco, pornography, and alcohol. SRI-related assets in mutual funds and other investments soared to $2.29 trillion in 2005 from $639 billion in 1995, according to the Washington, D.C.-based trade group Social Investment Forum. Many of these mutual funds have produced solid performance, validating SRI as a viable investment strategy.
Some investment professionals, using anecdotal evidence, say social investing holds a natural appeal for women, who incidentally >> represent some of the leading lights in the field. “We care more about children and the next generation,” explains Lina Pei, president of San Francisco-based FEMMX Financial, and manager of the Women’s Equity fund. “We care about what happens to the environment.” At the head of the class stands Amy Domini, who runs the New York-based Domini Social Investments and is called the “first lady of social investing”—for her early advocacy of SRI in the 1980s, and for helping to create, in 1990, the first index of companies with good environmental and workplace policies, called the KLD Domini 400 (with the slogan “no booze, no bets, no butts”). Another notable is Barbara Krumsiek, who heads the Calvert Group, which manages more than $13 billion in SRI assets.
“Women care about more things than just getting the biggest return,” adds Sharon Rich, owner of Womoney, a financial planning company in Belmont, Massachusetts.
Most investors participate in SRI through mutual funds. The number of socially screened funds jumped to 201 in 2005 from 55 just 12 years ago, according to the Social Investment Forum. A majority of them weed out tobacco, pornography, and companies with shoddy workplace practices. But some are single-issue funds that focus on one area, such as the environment—the Sierra Club is a well-known green fund, for example—or religion, represented by offerings such as The Catholic Equity Fund, which excludes companies that make contraceptives.
Whatever their stripe, most SRI funds provide what all investors seek: good returns. The Domini 400 has generated a total return of 122% over the past 10 years through November 30, slightly above the Standard & Poor’s 500 Index’s gain of about 117%, according to KLD Research & Analytics, which runs the index. In other words, an investor with $10,000 in the SRI index would have $22,219 today.
Weir’s own portfolio of stock-and-bond mutual funds has returned between 8% and 9% over the last four years. “That’s damn good,” she says, adding half-facetiously, “If they didn’t work, I was going back to liquor and tobacco.”
But SRI professionals believe they will keep Weir and others in the fold for a while, noting that companies with good environmental, workplace, and accounting practices tend to be less exposed to legal tangles that could dent a balance sheet and hurt stock performance.
Socially responsible investors aren’t passive do-gooders, looking simply to avoid so-called problem areas. They’re actively seeking companies that do good—such as PepsiCo, which last year promoted a woman to the top corporate post of chief executive officer—and increasingly using their clout as shareholders (activist investors recently convinced industrial giant Tyco International to curb
toxic emissions).
Community investment, where loans and other capital are directed to communities that are typically neglected by traditional financial services, through local financial agencies like community development banks and credit unions here and abroad, is also a hot topic in SRI circles. Assets in U.S.-based community investment institutions grew to almost $20 billion in 2005, from $4 billion in 1995, says the Social Investment Forum. Community investment notes offer a fixed rate of return over certain periods, say one year, similar to certificate of deposit (CDs). But unlike CDs, they aren’t government-guaranteed, and their returns might be lower. An investor can expect 2% to 2.5% return on a one-year investment note, compared with a 4% to 5% return from a CD, points out Lisa A. K. Kirchenbauer, CFP® who buys community notes for clients of her Arlington, Virginia company, Kirchenbauer Financial Management & Consulting. “You don’t buy a community investment note to make a lot of money,” she acknowledges. “But you know it is having a positive impact.”
To reap the dividends from coupling your conscience to your dollars, you must do your homework. Know your financial goals, and the returns you need to accomplish them. What’s your risk tolerance? When do you plan to retire? “As with other investing,” adds Judith L. Seid, CFP® Weir’s advisor and founder of Blue Summit Financial, Inc., a San Diego-based company, “you need to do the basic groundwork and have a good financial plan.”
You must also be aware of SRI’s drawbacks. For one, social investors looking to invest in international or smaller companies will find few funds to sift through. Also, SRI funds have what investment pros call a “sector bias,” which causes them to underperform during certain periods. SRI funds tend to invest in media, consumer products, and high-tech companies, which are likely to have progressive polices on the workplace and environment, rather than so-called “smokestack” industries like mining and energy. But the energy and commodities industries have been the best-performing sectors over the past year.
Consequently, many SRI mutual funds, shunning those sectors, have produced middling returns over the past year—prompting investors to pull money out. In 2006 alone, investors pulled $750 million out of SRI funds, according to industry-research firm Financial Research Corporation.
It’s also important for investors to look under the hood of mutual funds to determine that the companies and industries the funds are invested in gibe with their definition of social investing. Some, for example, might be surprised to see a company like Nike, whose recent history is pockmarked with dubious third-world workplace practices, in a SRI fund such as Women’s Equity. But Pei counters that the sporting-goods giant has vastly improved its practices, becoming a model corporate citizen in that regard.
In addition, check fund websites for complete listings of holdings and investment criteria. Other sites with reliable mutual fund data include Socialinvest.org and Morningstar.com.
On the whole, SRI fans say investors will like what they find. Good performance, growing investment options, and impressive management companies such as Calvert and Domini make social investing a worthwhile investment strategy that soothes the soul, fattens the pocketbook, and deserves, say fans, a wider spotlight. “Social investing is a lot more popular than it used to be,” observes Toni Weir, “but not as popular as it should be.”
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