Socially responsible investing

Socially responsible investing describes an investment strategy which combines the intentions to maximize both financial return and social good. In general, socially responsible investors favor corporate practices which are environmentally responsible, support workplace diversity, and increase product safety and quality.

History

The beginning of socially responsible investing could be attributed to many people and many places. Many believe social investing began with the Religious Society of Friends (Quakers). In 1758, the Quaker Philadelphia Yearly Meeting prohibited members from participating in the business of buying or selling humans. Religious institutions have been at the forefront of social investing ever since. One of the most articulate early adopters of SRI was John Wesley (1703-1791), one of the founders of the Methodist Church. A sermon of his, entitled “The Use of Money,” outlined his basic tenets of social investing – i.e. not to harm your neighbor through your business practices and to avoid industries like tanning and chemical production that pollute rivers and streams.

Modern SRI movement began during the Vietnam War , . Many people living during the era remember a picture in June of 1972 of a naked nine year-old girl, Phan Thị Kim Phúc, running towards a photographer screaming, her back burning from the napalm dropped on her village. That photograph channelled outrage against Dow Chemical, the manufacturer of napalm, and prompted protests across the country against Dow Chemical and other companies profiting from the Vietnam War. In the late 1970s, SRI activism turned its attention to nuclear power and automobile emissions control.

During the 1950s and 1960s, labor unions deployed multiemployer pension fund monies for targeted investments. The United Mine Workers fund invested in medical facilities, for example, and the ILGWU and IBEW financed union-built housing projects. Labor unions also sought to leverage pension stocks for shareholder activism on proxy fights and shareholder resolutions. In 1978, SRI efforts by pension funds was spurred by The North will Rise Again: Pensions, Politics, and Power in the 1980s and the subsequent organizing efforts of authors Jeremy Rifkin and Randy Barber. By 1980, presidential candidates Jimmy Carter, Ronald Reagan and Jerry Brown advocated some type of social orientation for pension investments.

From the 70's to the early 90's, large institutions avoided investment in companies that were related to the government and apartheid policies of South Africa . After the Sharpeville Massacre in 1960, international opposition to apartheid strengthened. In 1976 the United Nations imposed a mandatory arms embargo against South Africa. In 1971, Reverend Leon Sullivan (at the time a board member for General Motors) drafted a code of conduct for practicing business in South Africa which became known as the “Sullivan Principles.” These principles sought to document the practices of American companies within South Africa . Reports documenting the application of the Sullivan Principles discovered that US companies were not attempting to lessen discrimination within South Africa. Because of these reports and mounting political pressure; cities, states, colleges, faith-based groups and pension funds throughout the United States began divesting (or removing their investments) from companies operating in South Africa. The subsequent negative flow of investment dollars eventually forced a group of businesses, representing 75% of South African employers, to draft a charter calling for an end to apartheid. While the SRI efforts alone didn't bring an end to apartheid, it did focus persuasive international pressure on the South African business community. [1]

Modern applications

Socially responsible investing (SRI) is a booming market in both the US and Europe. SRI in the United States remained robust during 2001 and 2002, even as the rest of the investment world was stagnant. Assets in socially screened portfolios climbed to $2.15 trillion in 2003, an increase over the $2.01 trillion counted in 2001. Screened portfolios grew 7 percent from 2001, while the broader universe of all professionally managed portfolios fell 4 percent during the same period, according to the Social Investment Forum’s 2003 Report on Socially Responsible Investing Trends in the United States.

Screened portfolios, with $2.15 trillion in assets, represent the largest amount of assets in SRI. Community investing and shareholder advocacy contribute additional assets, resulting in a total of $2.18 trillion in professionally managed assets for all SRI.

Research estimates by financial consultancy Celent predict that the SRI market in the US will reach $3 trillion by 2011. The European SRI market grew from €1 trillion in 2005 to €1.6 trillion in 2007.

Mutual funds

Socially responsible mutual funds counted by the 2003 Trends Report increased in number to 200 in 2003, up from 181 in 2001, 168 in 1999, and 139 in 1997. Assets in socially screened mutual funds identified by the Trends Report grew by 19 percent, to $162 billion, up from $136 billion in 2001. More than half (51 percent) of this growth is attributed to both newly identified and newly created funds, and 49 percent represents growth in existing assets. In terms of attracting investor assets, socially screened mutual funds grew on a net basis in 2002 while the rest of the mutual fund industry contracted. According to Lipper, socially responsible mutual funds saw net inflows of $1.5 billion during 2002. Over the same time, U.S. diversified equity funds posted outflows of nearly $10.5 billion.

Separately managed accounts

Of the $2.15 trillion in socially screened portfolios, $1.99 trillion are found in separate accounts (portfolios privately managed for individuals and institutions) with the remaining $162 billion residing in mutual funds. Assets in socially screened separate accounts grew by seven percent since the “2001 Report.” Screened private portfolios climbed to $1.99 trillion in 2003, as compared with $1.87 trillion in 2001, $1.34 trillion in 1999, and just $433 billion in 1997.

Shareholder advocacy

Between 2001 and 2003, shareholder advocacy activity increased by 15 percent, growing from 269 social and crossover resolutions (which combined aspects of both “social” and traditional corporate governance issues) filed in 2001 to 310 in 2003. Likewise, the average percentage of votes received on these resolutions increased from 8.7 percent in 2001 to 11.4 percent in 2003. Of the total $2.15 trillion in all socially screened portfolios, $441 billion are in portfolios controlled by investors who are also involved in shareholder advocacy on various social issues.

Shareholder resolutions are filed by a wide variety of institutional investors, including public pension funds, faith-based investors, socially responsible mutual funds, and labor unions. In 2004, faith-based organizations filed 129 resolutions, while socially responsible funds filed 56 resolutions]

Regulations governing shareholder resolutions vary from country to country. In the United States they are determined by the Securities and Exchange Commission, which also requires mutual funds to disclose how they voted on behalf of their investors[2]. U.S. shareholders have organized various groups to facilitate jointly filing resolutions. These include the Council of Institutional Investors, the Interfaith Center on Corporate Responsibility, and the Social Investment Forum.

Community investing

Community investing climbed 84 percent between 2001 and 2003. Assets held and invested locally by community development financial institutions (CDFIs) based in the United States totaled $14 billion in 2003, up from $7.6 billion in 2001.

Investing strategies

Social investors use four basic strategies to maximize financial return and attempt to maximize social good.

Screening excludes certain securities from investment consideration based on social and/or environmental criteria. For example, many socially responsible investors screen out tobacco company investments. This is an example of a social screen at work.

Divesting is the act of removing stocks from a portfolio based on mainly ethical, non-financial reasons. An investor divests upon realizing that, at some point, “the cup of endurance runs over, and (is)..no longer willing to be plunged into an abyss of despair” over certain business activities of a corporation. Recently, CalSTRS (California State Teachers' Retirement System) announced the removal of more than $237 million in tobacco holdings from its investment, portfolio after 6 months of financial analysis and deliberations.

Shareholder activism efforts attempt to positively influence corporate behavior. These efforts include initiating conversations with corporate management on issues of concern, and submitting and voting proxy resolutions. These activities are undertaken with the belief that social investors, working cooperatively, can steer management on a course that will improve financial performance over time and enhance the well being of the stockholders, customers, employees, vendors, and communities.

Positive investing involves making investments in activities and companies believed to have a high and positive social impact. Positive investing activities tend to target underserved communities. These efforts may support activities designed to provide mortgage and small business credit to minority and low-income communities.

Satire and market response

At least one mutual fund, the Vice Fund (VICEX), was created specifically to contrast with the trend in socially responsible investing. [3] VICEX specializes in investing in the defense, alcohol, tobacco, and gambling industries, and has greatly outperformed both the S&P 500 and most socially responsible mutual funds. [4]

In addition, the Free Enterprise Action Fund files shareholder resolutions which oppose the general trend of socially responsible investing, for example by asking GE to "justify lobbying for global warming regulation." [5]

See also

• Corporate social responsibility
• Interfaith Center on Corporate Responsibility
• Mutual fund
• Social responsibility
• Business ethics

External links

• Q&A with Thomas Van Dyck, Socially Responsible Investment Consultant
• EIRIS Ethical Investment Research Services
• Responsible Investment Working Group
• US Social Investment Forum
• Socially Responsible Investing Mutual Fund Screen
• UK Social Investment Forum
• European Social Investment Forum
• Social Funds
• SRI Notes
• Investing for Change (Seattle Weekly) by Jeff Reifman
• Moskowitz Prize - Quantitative Research in the field of Socially Responsible Investing
• The Panelist