Socially responsible investing

There was a time not too long ago when investors were limited in their ability to invest with their hearts – to build a portfolio that reflected their personal, social or political beliefs. Those who looked into socially responsible investing (SRI) often discovered it meant sacrificing returns for social goals; many SRI funds had difficulty keeping up with the returns generated by other funds because, by their nature, there was a smaller pool of companies they could invest in compared with non-SRI funds.

According to the Social Investment Forum, there were 55 socially screened mutual fund products in the U.S. with assets of $12 billion in 1995; in 2007 the number had grown to 260 with $201.8 billion in assets. This expansion reflects a greater diversification and signals a new potential investment option for anyone who wanted to make socially responsible investments in the past but was put off by poor performance. Whereas socially responsible investors used to know their funds would be performing at the bottom 10 to 20 percent in their category, some companies have gotten exceedingly savvy at picking solid performers, resulting in certain SRI funds placing in the top 10 to 20 percent today.

The increasing popularity of this type of investing and the improved quality of SRI managers has made it easier for investors to balance financial goals with social objectives.

SRI recognizes investor influence on more than a company’s bottom line. By blending corporate responsibility with societal concerns, investors can direct their dollars toward funds that invest in companies that, for example, encourage sustainable energy or help struggling communities.

The most popular approach to socially responsible investing is called “screening,” in which potential investments are “screened in” or “screened out” based on their services or products. Some funds, for instance, are designed to include companies with environmentally sound practices while others exclude those involved in weapons production.

SRI also allows investors to influence the behavior of their portfolio companies direct contact with management and the ability to sponsor shareholder resolutions on labor practices or corporate governance. Investors are also able to influence companies to invest in underserved communities, helping businesses and services that can raise standards of living.