Socially Responsible Investing for the Long Term

by Ken Rosenberg, CFP™

The past few years have hammered home the importance of corporate integrity, as inves-tors watched former Wall Street darlings collapse in the aftermath of corporate scandal. In fact, a majority of investors now be-lieve that companies that operate with higher levels of social responsibility carry less risk (55%) and deliver better returns (52%).1 And 71% of investors contend that knowing that companies are rated higher in terms of their social performance would make them more likely to invest in such companies.

But how do you go about in-vesting in companies with higher levels of integrity? An investment strategy called socially responsible investing (SRI) pro-vides an option. SRI is based on the principle of investing in wellmanaged companies that act responsibly towards shareholders, communities, employees, consumers, and the environment.

Socially Responsible Investing

So, what exactly is SRI? SRI is an investment strategy that integrates social or environmental criteria into financial analysis. Although the term has a contemporary ring to it, socially responsible investing is hardly new. SRI was first formally practiced by religious investors who, nearly 100 years ago, avoided companies involved in tobacco, alcohol, and gambling. During the 1980s, there was a resurgence of interest in SRI as investors shunned companies operating in apartheid South Africa.

Now many investors are con-cerned about a broader range of issues, including environmental protection, workers’ rights, product safety, and business eth-ics. In fact, SRI represents nearly one out of every 10 dollars under professional management (or $2.29 trillion), up 258% from 1995 ($639 billion).

How SRI Works

Of course, most investment managers look for companies with strong balance sheets, sound management, and viable products. But socially responsible investments add another layer of analysis on top of traditional financial analysis that seeks to identify companies that meet specific social and environmental criteria. Many social investors believe that this social research process can identify companies with lower risk and better quality management, thus helping to contribute to better longterm financial performance.

In addition, many socially responsible investors also actively use their position as owners to push companies to improve. For example, Calvert, one of the nation’s largest families of SRI funds, often works with companies to encourage them to address issues of social and environmental concern. In 2007, Calvert has filed or cofiled 36 shareholder resolutions on a variety of issues. Shareholder resolutions are formal requests that can come to a vote in front of all shareholders asking companies to take specific actions, such as working to diversify their boards, enhancing their corporate governance practices, and improving their environmental policies. Everyday shareholders can have an impact by simply voting in support of such social resolutions, much like you might cast a political vote.

Lastly, many social investors direct some of their assets to promote community investment projects in the U.S. and around the world. In addition to earning competitive returns, these assets contribute to ending poverty by increasing affordable housing, community development, access to capital, and more.
Millions of Americans are looking to integrate their financial goals with their concerns about the environment, safe products, fair labor practices, and other qualityoflife issues. SRI offers investors the opportunity to build sound portfolios for their financial futures, while helping to build a better future for the world.

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