What is Socially Responsible Investing?

What is Socially Responsible Investing?
Eileen St. Pierre, The Everyday Financial Planner

Recently, I was thinking about a former client of mine, a deeply religious and very intelligent young mother of two with plans to start a home-based business. She and her husband wanted to start contributing to his workplace retirement plan but she was uncomfortable investing in some of the companies in the available funds due to her religious beliefs. My client is not alone. She is one of many socially responsible investors. There are a wide variety of financial products now available for these investors. Many retirement plan providers offer social choice funds as part of their menu of products.

What is Socially Responsible Investing?

Socially responsible investing (SRI) is any investment strategy which considers both financial return and social good to bring about social change. If you feel strongly about an issue, such as not investing in a company that produces machine guns or exploits child labor, then you can find investment companies that offer products for you. These companies consider investing in, or screening out, firms based on different factors such as:

Money and growth

  • Environmental –  use of green technologies, amount of pollution emitted, use of toxic materials
  • Social – human rights record, labor relations, level of community development, diversity issues
  • Corporate Governance – level of corporate transparency, executive pay issues
  • Products – avoid companies that make alcohol, tobacco, weapons, and gambling products; testing on animals
  • Other – treatment of shareholders, safety issues

The investment company, not you, makes the decision to include or exclude a particular firm.

It used to be easy for these investment companies to screen out firms. Now that firms have become so diverse and international, it gets a bit trickier.

  • A good example is Apple. It’s hard to not put Apple, a huge global company with such strong past performance, into a portfolio. But the company has been accused of using child labor in some of its factories. How much slack does the investment company give Apple?
  • A utility company may be on the forefront of developing cleaner, renewable fuel technology. But it may also operate coal-burning power plants. Do you include this firm in your portfolio? The investment company may decide to exclude it but you might be ok with keeping it in. Are you missing out on better investment returns by excluding it?

You need to do your homework.

If your retirement plan offers a social choice fund, look at the firms in the fund before deciding to contribute. Look at the fund’s fee structure. How much more do you need to pay in order to have a clean conscience? In my client’s case, her husband’s workplace plan did not offer a social choice fund. Here’s what she decided to do:

  • Get a list of firms included in the retirement plan’s funds by looking at the prospectus.
  • Do her own research and decide which firms she wanted to invest in.
  • Open an IRA and purchase individual stocks.

I told my client to check to see if she could add a social choice fund that she was comfortable with in her IRA. It was also important that she understood the importance of being diversified – spread her contributions out across different industries. She and her husband would not be able to contribute as much to an IRA ($5,500/yr each) than to her husband’s workplace plan ($18,000/yr). It may take her a while to buy enough individual stocks to be fully diversified. She was ok with that.

For more information on SRI and a list of SRI funds, go to SocialFunds or the Forum for Sustainable and Responsible Investing. I would also recommend you go to Morningstar and type in the fund’s ticker symbol to get a free, objective analysis.