Socially Responsible Investing

Integrating your personal values and societal concerns with your investment decisions is called socially responsible investing. As we all know, it has been a booming trend over the past few years. In fact, there's even an ETF dedicated to the movement and websites that focus on avoiding certain type of investments based on a theme (like Terror Free Investing for one). As you may also expect, there are mutual funds that also are structured to capitalize on this movement. Yet, it may surprise you that this is not a new trend. In fact, socially responsible investing was known to exist well over 300 years ago due to Quakers prohibition on slave trading. Frankly it probably has been around for much longer than that in some form or another.

While it has been my view for a long time that you should base your investment decisions first and foremost on their potential to do well, the older I become along with even more frustration concerning the way politicians on both sides of the aisle are running our country, I have to admit that I have finally started to tilt toward companies that represent my values more than others especially within my long-term buy-and-hold investments. I say this with a full understanding and respect for those who advocate against socially responsible investing.

Critics of the socially responsible investing movement make the valid point that the best way to change and influence corporate America is to have an ownership/voting stake in those companies that are socially irresponsible in order to change them. However, unless you have a major ownership stake, your influence and shareholder vote doesn't matter that much. Likewise, critics also make the argument that a company's stock can't be substantially hurt because you or I refuse to own it due to its social practices. Perhaps if groups of investors join together to avoid buying certain types of stocks en masse, including institutional investors, but the market is and will always be controlled by greed first and foremost. At the end of the day, the market is about making money not about how these companies make their profits.

Ultimately, it comes down to making an investment decision based on principle. For some, this may be far more important than the bottom line.

With that said, the challenge for investors who want to engage in socially responsible investing is to first define what makes for a socially responsible corporation. As you might expect, that's a very subjective opinion. For example, some may say that those companies that make weapons for example are not socially responsible because they make weapons (however, what is wrong with defending our country?), but others don't share that point of view and view weapon makers as evil and socially irresponsible. The key, like always, is to understand the companies you invest in, especially if it is a long-term situation if you're inclined to mix your values and concerns with your investment decisions.

I bring this topic up due to several email exchanges I've had with members who prefer to invest in socially responsible companies and who spend lots of time looking for investments that match their principles. Based on those conversations, this group is very frustrated. In fact, last week's link to Calvert was to help those who seek at least one such tool. But, frustration is high among socially motivated investors because to investigate a company's activities can often be even more difficult and time consuming than analyzing its balance sheet. After all, companies do not issue press releases when they engage in toxic dumping or support worldwide terrorism. And, since the media is owned by corporate America, finding this information is often akin to finding a needle in a haystack.

When asked how I personally approach social investing, my suggestion is to simply tilt your portfolio away from stocks that are likely to engage in areas which are prone to social criticism and/or areas where your principles conflict and work from there. For example, I know many you may have problems with stocks involved with adult entertainment, alcohol, firearms, gambling, tobacco, weapons, problems with labor relations, environmental hazards, so-called bioengineering, corporations involved with Burma, etc. I know this because at times if I indicate a positive disposition toward stocks that fit these categories, I receive criticism for it because of their business practices. Avoiding companies that reside in industries and businesses that are involved in these may offer at least a starting point to work from. In addition, you can also use funds that focus on sin stocks useful as well as negative screeners. One of the more well-known is the Vice Fund.

Frankly, there's a business opportunity for someone to really provide unbiased research to individual investors along these lines. But, alas, I don't think we'll likely see one anytime soon due to the immense number of criticisms and subjective nature of any ranking system would provide. At the same point, when many of us feel that our country is moving in the wrong direction, increase interest toward socially responsible investing will continue for the foreseeable future and with the enormous amount of competition in mutual funds and ETFs, we can expect to see more socially focused investment products in the coming years. Like everything else, some of these products will be good, while others will utilize the warm and fuzzy feelings these vehicles provide to charge investors large fees and commissions. Like always, it is caveat emptor for the small investor.

Rest assure, I'll be investigating options for those of who this area is of interest and will share my findings as my research continues. Likewise, if you think you've discovered a good way to play this trend, I'd very much like to hear your suggestions and I'll pass them along in future posts.