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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 with practices in line with environmentalism, consumer protection, quality, and diversity. Some (but not all) also avoid businesses involved in alcohol, tobacco, gambling, weapons and the military industry, and/or abortion.

Contents

[edit] 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 slave trade–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 Methodism. Wesley's sermon "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, which can harm the health of workers. Some of the most well known applications of socially responsible investing were religiously motivated. “Investors would avoid “sinful” companies. These companies dealt with or were associated with products, such as, guns, liquor, and tobacco. This type of investment screening became known as white investing.”[1]

Economic development projects started or managed by Dr. Martin Luther King, like the Montgomery Bus Boycott and the Operation Breadbasket Project in Chicago, established the model for future socially responsible investing efforts. In that project King combined ongoing dialog with boycotts and direct action targeting specific corporations. The modern socially-responsible investing movement began during the Vietnam War[2][3]. 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[4], 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, trade unions deployed multiemployer pension fund monies for targeted investments. The United Mine Workers fund invested in medical facilities, for example, and the International Ladies' Garment Workers' Union (ILGWU) and International Brotherhood of Electrical Workers (IBEW) financed union-built housing projects.[5] 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.[6]

From the 1970s to the early 1990s, large institutions avoided investment in South Africa under apartheid. International opposition to apartheid strengthened after the 1960 Sharpeville massacre. 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 in South Africa. Reports documenting the application of the Sullivan Principles discovered that U.S. 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.

Since the late 1990s, socially responsible investing has become increasingly defined as a means to promote environmentally sustainable development.[7] Issues such as climate change, which may pose a threat to investment portfolios or offer lucrative investment opportunities in biofuels and other renewables, are helping to make the environment a more prominennt consideration for investors. Unlike traditional forms of responsible investment, business case rather than ethical motivations are driving this market for socially responsible investing.[8]


[edit] 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. The 2007 Report indicates that USD 2.7 Trillion are invested in screened portfolios.

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.[9]

[edit] Investment Companies

Long before the market started to boom in recent years, socially consciousentreperneurs

[edit] Government-controlled funds

Government-controlled funds such as pension funds are often very large players in the investment field, and are being pressured by the citizenry and by activist groups to adopt investment policies which encourage ethical corporate behaviour, respect the rights of workers, take environmental concerns into account, and generally avoid violations of human rights. One outstanding endorsement of such policies is the Norwegian Government Pension Fund, which is mandated to avoid "investments which constitute an unacceptable risk that the Fund may contribute to unethical acts or omissions, such as violations of fundamental humanitarian principles, serious violations of human rights, gross corruption or severe environmental damages." [10]

Many local council pension funds are currently under pressure to disinvest from the arms company BAE Systems, thanks to a campaign run by [[1]] (CAAT) [11]. Liverpool council has passed a successful resolution to disinvest from the company, [12] however a similar attempt by the Scottish Green Party in Edinburgh was blocked by the Liberal Democrats [13]

[edit] 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. According to the Social Investment Forum, socially responsible mutual funds have grown from $12 billion in 1995 to $179 billion, far outpacing the overall growth of mutual funds in the U.S.[14]

[edit] 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.

[edit] 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[15]]

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.

[edit] Community investing

Community investing, a sub-sect of Socially Responsible Investing, allows for investment directly into community based organizations. Community investing institutions use investor capital to finance or guarantee loans to individuals and organizations that have historically been denied access to capital by traditional financial institutions. These loans are used for housing, small business creation, and education or personal development in the U.S., or are made available to local financial institutions abroad to finance international community development. The community investing institution typically provides training and other types of support and expertise to ensure the success of the loan and its returns for investors.[16]

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.

[edit] 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. In a recent 8 year period, the Domini 400 Social Index – a benchmark that measures the impact of social screening on financial performance – returned 18.54% vs. 16.95% for the S&P 500.[17]

Divesting is the act of removing stocks from a portfolio based on mainly ethical, non-financial objections to 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. Recent movements have also been reported of "investor relations activism", in which investor relations firms assist groups of shareholder activists in an organized push for change within a corporation; this is done typically by leveraging their enhanced knowledge of the corporation, its management (often via direct relationships), and the securities laws as a whole.[citation needed]

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.

[edit] Satire and pro-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]

“Is it Better to be Naughty or Nice,” by Shank cites a study that compared portfolios comprised of top socially responsible funds and top vice funds. Analysis of alpha regression models found that in the short-term, differences between the two portfolios’ performance was negligible. Only the SRI funds had any significant positive risk-adjusted performance. For the five and ten year period, only the SRI portfolio had positive and significant alpha value, suggesting that the market valued the features of the companies in the SRI portfolio. For the same periods, the vice portfolio showed no significant excess return. These findings indicate that the market valued the features of the SRI portfolio over the longer time horizons, while not valuing the vice funds for any period, and it was the SRI portfolio that had superior risk-adjusted performance.[18]


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]

[edit] SRI by territories

UK, France, Italy, Sweden and Belgium have 63.7% of the world's SRI funds.

[edit] See also

[edit] References

  1. ^ Farmen, Tom E.S and Nico Van Der Wijst. “A Cautionary Note on the Pricing of Ethics.” The Journal of Investing. Fall 2005: 53.
  2. ^ The Evolution of Socially Responsible Investing. Retrieved on Oct 30, 2006.
  3. ^ The Investment FAQ - Strategy - Socially Responsible Investing. Retrieved on Oct 30, 2006.
  4. ^ Students for Bhopal Student Power Crushes Dow
  5. ^ Gray, Hillel. New Directions in the Investment and Control of Pension Funds. DC: Investor Responsibility Research Center, 1983. p.36-37
  6. ^ Gray 1983, p.34
  7. ^ Richardson, Benjamin J., Socially Responsible Investment Law: Regulating the Unseen Polluters (Oxford University Press, 2008).
  8. ^ Richardson, Benjamin J., Socially Responsible Investment Law: Regulating the Unseen Polluters (Oxford University Press, 2008).
  9. ^ According to figures published by Celent 13 March 2007.
  10. ^ Ethical Guidelines for the Government Pension Fund - Global. Retrieved on Sep 19, 2007.
  11. ^ CAAT Campaigns - Clean Investment launch 2007
  12. ^ Ethical Investment Blog: Liverpool Council Disinvests from BAE
  13. ^ Edinburgh and Midlothian Greens » Blog Archive » Greens continue fight for ethical pensions – Lib Dem councillors under fire for ignoring party policy
  14. ^ Young, Lauren. “A Social Fund’s Strategic Shift.” Business Week Online. May 2006. 14
  15. ^ Interfaith Center on Corporate Responsibility
  16. ^ Social Investment Forum: Community Investing
  17. ^ Harrington, Cynthia. “Socially Responsible Investing.” Journal of Accountancy. January 2003: 1 – 11
  18. ^ Shank, Todd M., Daryl K. Manullang, and Ronald Paul Hill. “Is it Better to be Naughty or Nice?” The Journal of Investing. Fall 2005: 82 – 87

[edit] External links


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