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More Than Just Returns
In his excellent book on investor psychology and behavior, "What Investors Really Want," Meir Statman argues that investors invest for several reasons. In Statman's view, investors are motivated by a combination of gains, status, and the desire to avoid losses. In many instances, the pursuit of investment returns is undermined or impacted by other investor behaviors such as social status. Statman argues that socially responsible investing (SIR) is a legitimate strategy, but investors need to understand that they may have to make trade offs in terms of gains or risks. SRI is not for the faint of heart or lazy - you will need to conduct research in order to select the right investments and understand the standards commonly used in the industry.
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Basic Facts and Background
The Forum for Sustainable and Responsible Investment estimates that about 12% of the U.S. investment marketplace ($2 trillion out of $25.2 trillion) can be found in socially responsible vehicles, mutual funds and other assets. Not all of these assets are directly available to the average investor - university pension funds, for example, often follow ethical guidelines in their endowment investments but these investment operations are not open to the public. In 2010, the Forum identified 250 mutual funds that met their standards; up from less than 100 in the mid-1990s. The growing popularity of this type of investment is closely related to increasing consumer activism, shareholder activism and efforts to lobby corporations to improve their corporate social responsibility.
There are several competing definitions and criteria that are used to define socially responsible investing. Some early investors simply wished to avoid tobacco firms and any company that produced weapons or goods for the military. More recently, there have been mutual funds and exchange traded funds (ETFs) that focus on "green energy" and other comparably specialized industries designed to minimize environmental damage. Finally, there are broad-based socially responsible investment funds that evaluate investments based on a range of factors including labor practices, environmental policies, ethical international operations and industry. Depending on their priorities and interests, different types of stocks and assets will be included and excluded.
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What About Performance?
The early years of socially responsible investing often encountered criticism that it delivered investment returns below the general stock market. As the industry developed further, academics have had the opportunity to evaluate the performance of these funds more deeply. While the results are mixed, there have been a number of studies that have concluded that socially responsible funds deliver comparable performance to the general market. According to the Forum's Mutual Fund Charts (see References below), there are at least nine mutual funds that have delivered 6% or higher returns over the past ten years. The Forum tracks both stock and bond based mutual funds in its database.
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Choosing A Socially Responsible Investment
Though this article cannot recommend specific stocks or securities, consider these guidelines as you review a potential investment. Once you have worked through the points in this section, bring your notes to your financial advisor and discuss your options. If you do not have an advisor, use your notes to critically read investment materials from mutual fund companies and other investment providers.
- Portfolio Weight: What proportion of your portfolio do you want to place into these kind of investments? From a risk management perspective, it may make sense to retain some holdings in a broad based bond index fund or a fund that invests in the S&P 500.
- Ethical Focus: This may be a difficult exercise but ask yourself about your ethical priorities. For example, are you more concerned with climate change, fair trade or labor standards? Alternately, you can invest in funds that take a generalist approach.
- Management Fees: Almost by definition, running an effective socially responsible mutual fund or other investment product requires a higher level of management (also known as a management expense ratio) oversight and attention than a passive index-based fund. Understanding the impact of fees on your investment is a cornerstone of successful investment, especially in environments with low returns.
- History: It is a truism in the investment history that past returns are no guarantee of future returns, but investment history still remains one of the most worthwhile indicators to check for a particular investment. If you are investing directly in a stock, research how long they have been pursuing socially responsible policies; not every "sustainable" or "green" corporate policy is created equal.
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Statman, Meir. What Investors Really Want. McGraw Hill, 2011.
The Forum For Sustainable and Responsible Investment, Socially Responsible Investing Facts, http://ussif.org/resources/sriguide/srifacts.cfm
Socially Responsible Mutual Fund Charts: Financial Performance, http://ussif.org/resources/mfpc/
Studies of Socially Responsible Investing, http://www.sristudies.org/