Traditionally, a portfolio’s performance has been judged by two variables: risk and return. Through this scope, it is an investment manager’s responsibility to construct a portfolio that generates the highest return while maintaining a tolerable risk level. One faulty assumption imbedded in this two-variable philosophy is that the investor has no interest in the social costs incurred through the creation of this portfolio. For a variety of reasons, whether environmental, religious or political, investors arein fact concerned with how their money is generating its return. From this social awareness has emerged the money management strategy known as socially responsible investing, or SRI.
SRI assets rose more than 258 [percent] from $639 billion in 1995 to $2.29 trillion in 2005, while the broader universe of assets under professional management increased less than 249 [percent] from $7 trillion to $24.4 trillion over the same period,” according to a recent survey of the industry by the Social Investment Forum. Today, nearly one out of every 10 dollars under professional management is held by an SRI fund.
SRI managers use three fundamental approaches to invest in a more sustainable and humane society:
Screening is the practice of filtering possible investments through evaluation of a company’s compatibility with criteria used by a specific fund. Some funds focus on environmental issues and others on labor conditions, while many use a wider scope and require a general history of corporate social responsibility. It is still the job of the manager to achieve desired returns while managing risk, but some promising investments will surely be omitted if they can’t meet the relevant standards.
Shareholder Advocacy takes a proactive line of attack to responsible investing. In contradiction to screening strategies, those practicing shareholder activism often invest in unethical companies, hoping to bring about positive change through shareholder resolutions. This process can raise awareness on specific issues and create dialogue with management that otherwise would be nonexistent.
Community Investing is an effort to direct capital into neighborhoods often overlooked by traditional financial services. This approach focuses on issues such as affordable housing, small business creation and development of community facilities. For individual investors, holding cash with financial institutions dedicated to community development--such as credit unions, local savings and loans and development loan funds--can provide competitive returns while helping support economic growth in areas shunned by capitalism. For institutional investors, participation could come in the form of venture capital funding or ownership of real estate, such as low income housing. More information on community investing options can be found at www.communityinvest.org .
What about performance? Do those involved in socially responsible invest...
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