Seattle-based financial planner Eric A. Smith first plunged into the stock market at age 13, pouring his bar mitzvah money into shares of Mattel Inc. At the time, he also received some shares in a defense contractor. Unlike his stake in the toy manufacturer, however, his investment into that company troubled him a bit.
“I felt a little bit funny about owning that,” Smith recalled, noting that he later sold off the shares of both companies to go to college.
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Today, Smith shuns such companies. As an investor, he has been directing money to companies that he believes to be socially responsible since 1982. In his business life, he specializes in helping clients find ways to meet their financial goals while doing good at the same time. He is a part of a growing movement toward socially responsible investing that many say is beginning to gain respect in mainstream financial circles.
“Not only are more investors becoming open to the idea, (but) more investment managers have come ‘out of the closet,’ so to speak, admitting that they’ve been doing this for some time,” Smith said. “It used to be ridiculed.”
But it’s hard to ridicule a $1.185 trillion industry. That’s how much investment money was being used to bring about social change as of 1997, according to the Social Investment Forum, a Washington, D.C. nonprofit membership organization. That is up from $639 billion in 1995 and $65 billion in 1985, according to the forum.
Socially responsible investing has ancient roots, but the modern wave took hold in the United States in the 1970s and 1980s, as investors began divesting themselves of their stake in companies that supported South Africa’s Apartheid regime. Now, investors tailor their investments to meet their personal goals and beliefs. Sweatshops, pollution, alcohol, and tobacco are issues investors commonly adopt.
Socially responsible investing takes three forms. An investor may:
Screen his or her portfolio to avoid investing in companies with objectionable practices;
introduce a shareholder resolution to force a company to change its policies;
or invest directly into the community, accepting a lower return in exchange for the satisfaction that the money is creating jobs or affordable housing.
Many mutual funds now screen their investments. Each, however, has different criteria, depending on the issues that are most important to its investors. Some funds screen out Disney, for example, while other funds screen it in – for completely different reasons, according to the investment forum.
And since large corporations are often involved in myriad operations, investors must be willing to accept that no company will live up all of their ideals.
“There’s a lot of different companies that present a bit of a conundrum in the social investment world,” said Dan McKenna, the portfolio manager for Principle Profits Asset Management Inc. of Amherst, Mass., a firm that helps investors develop socially conscious portfolios.
“It’s a process of analysis; it’s not trying to find the perfect white knight, because there are none,” he said.
Juliette Bennett, development manager for the Council on Economic Principles, a New York-based research organization which rates companies on their records for issues such as charitable giving, community outreach, and hiring women and minorities, noted that all good companies try to attain good records on social issues. But she added that, “It’s hard to find a company without a skeleton.”
Still, many find it possible to meet their objectives by investing in screened funds. One of the largest families of such funds is the Calvert Group Ltd., based in Bethesda, Md., which offers more than 30 screened mutual funds, including equity, balanced, and fixed income products. It has $6 billion in assets. And generally speaking, investors have enough options among socially responsible funds to meet any financial goal, according to Alisa Gravitz, vice president of the investment forum.
“You can find top performers in every class,” she said.
That point is something that those who promote the concept stress. The myth that has dogged the industry, they say, is that socially responsible investors sacrifice returns in exchange for their activism. But Gravitz and others insist that that is not so.
For example, they note that the Domini Social Index, a capitalization-weighted index of 400 screened stocks that was designed to be comparable to the Standard & Poor 500, an index of un-screened stocks, has performed quite well. The Domini index has beaten the S&P 500 over the past few years, returning 12.54 percent for the 12 months ending Sept. 30, 1998, compared to 9.15 percent for the S&P 500. On a five-year average, the DSI index returned 20.97 percent, compared to the S&P’s 19.91 percent, according to the forum.
Meanwhile, Morningstar Inc., a Chicago company which tracks mutual funds, released a statement on July 22 that said that socially responsible mutual funds are twice as likely to receive the company’s top, five-star rating than non-screened funds.
But while experts say it is quite possible to get good returns from screened funds, they warn against reading too much into the statistics. For example, Emily Hall, an equity fund analyst for Morningstar, said at least part of the reason for the success of some large-cap screened funds is that they have been positioned in the right part of the market. And anyone considering a screened fund should scrutinize it in much the same way that he or she would examine other funds, she said. Investors should consider its record, whether it is actively or passively managed, how long its manager has been there, and how expensive it is.
“A lot of socially responsible funds are more expensive than regular funds, but that doesn’t mean you should be paying obscene (amounts),” Hall said.
But those in the business of socially responsible investing dispute that screened funds are more expensive, saying that comparisons of large non-screened funds to small, screened funds have made of inaccurate analyses in the past.
“If you take into account the size of the fund, and compare socially responsible funds with non socially responsible funds of like size, you find almost no difference in expense ratios,” Smith, the Seattle Certified Financial Planner, said.
But while screening is an important aspect of the industry, its fastest growing area is ‘shareholder advocacy,’ the use of resolutions to influence corporate behavior, Smith said.
In fact, the mere threat of a resolution is often enough to achieve the desired goal, Smith and others said. Before introducing a resolution, investors typically approach the board of directors in an attempt to negotiate an agreement. By bargaining, some two- thirds of resolutions are withdrawn because the board or the chief executive has agreed to make changes in company policies, Smith said.
In fact, some investors direct a portion of their portfolios to companies they don’t like, hoping to alter its practices through shareholder activism, said McKenna, of Principle Profits Asset Management.
“It’s seemingly somewhat adversarial, but in practicality it has led to many dialogues that have (led) to the desired behavior change,” McKenna said. “That’s a powerful tool.”
Still, investors must be as diligent in their planning with socially responsible investments as with any other investment, experts say.
“You always have to be a smart investor,” Gravitz said. “You have to know what your financial goals are, you have to know how much risk you can take, and then put together a portfolio that’s appropriate for you.”
