02 Apr

Socially Responsible Investing: Investing in More Than Just Money

April 02, 2008

You may not always consider what your investments and values have in common.

Why not?

It is possible to a lign your investment strategy to increase financial return and social good. This is called “socially responsible investing” (SRI) and it looks at the “bigger picture” when building a portfolio.

Instead of just identifying profitability, socially responsible investors look for companies that bolster environmental responsibility, diversity in the workplace, product safety, and quality. Likewise, a socially responsible investor may opt to avoid investing in businesses that are involved in alcohol, tobacco, gambling, weapons and other military industries, pornography, and/or pro-choice.

SRI is far from a radical idea. According to a 2005 report by the Washington-based Social Investment Forum, $2.29 trillion is invested in SRI strategies.  This is 9.4% of the $24.4 trillion total assets under its management. Morningstar calculated that assets in the 20 green mutual funds and exchange traded funds (ETF) it tracks had hit $9.5 billion by June 2007.

Making Green by Being Green?

The big question is whether it’s possible to build an entirely green portfolio. It is no easy task and there are tradeoffs.

The biggest compromise is whether or not you are willing to give up the total return on your investments to get to a green portfolio. You may want to be green but also meet your financial goals. Remember that being green may mean excluding large chunks of the market.  Furthermore, what may be “bright green” to one investor may be murkier to another.  For some, SRI may mean not having alcohol, tobacco, gambling, or weapons in a portfolio. For others, it means just investing in green industries such as cleaner power.

In fact, how energy fits into SRI is debatable. For a large majority of environmentally-concerned investors, owning shares in gas and oil production, exploration, or service companies is forbidden – however, the investment returns that these companies have had in the past few years have been significant.

Think about nuclear energy.  To many investors it is harmful because of the radioactive waste produced as a by-product.  To other “green” investors, it may be acceptable as a viable, cleaner-burning alternative to fossil fuels. Ethanol can be taken in the same context.  Then there’s wind power – it does not pollute but can be a noisy eyesore and have an impact on local birdlife.

To some, a company’s carbon emissions (contributing to global warming) are enough to remove it from consideration – even though what the company produces doesn’t disturb the green mentality.

The more purist the green investor, the harder it is to craft a diversified portfolio that meets his or her financial and social objective. These portfolios may be highly concentrated and therefore affected when that sector really lags behind the rest of the market.

Thou Shall Not…

Investing in accordance with religious beliefs is also difficult.  For example, certain protestant religions do not believe in tobacco, alcohol, gambling, or weapons but think contraception is okay.  In contrast, the Catholic religion does not have issue with tobacco, alcohol, gambling, or weapons (except weapons of mass destruction) but does prefer to exclude contraception and abortion.  Thus, it is clear that the definition of a sin stock varies significantly by religion and investor.

Finding your Place

Everyone has their own values and knows what’s important to them. Identifying your concerns and if (and to what level) you’re willing to compromise is vital to building an SRI portfolio.

For some, a middle ground would be: instead of screening out “bad” stocks, seek companies that follow environmentally sound companies, regardless of the industry they’re in. Today, investors can access a more targeted approach to SRI (because Wall Street is listening) by buying into specific subsectors (like alternative energy and clean water) through a few mutual funds and ETFs.

When building a green portfolio for his or her client, a good financial advisor should spend the time to determine exactly what he or she “means” by green, sustainable, or environmentally sensitive investing. Remember, these phrases can have different definitions to different individuals. By knowing your concerns, an advisor can build a portfolio that’s an acceptable solution for you.

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