Socially Responsible Investing

By: National Endowment for Financial Education | Source: National Endowment for Financial Education  | February 13, 2007

Every investor wants to own investments that perform well. A growing number also want investments that they feel contribute positively to the world—or at least don’t affect it negatively. If you’re one of these investors, you may want to look into socially responsible investing (SRI). SRI considers potential investments from both personal values and financial perspectives.

A Long History

Socially responsible investing in the United States dates back to the 1750s when Philadelphia Quakers prohibited members from buying or selling human beings. SRI became popular in the 1970s to show disapproval of pollution and South African apartheid. Today, over $2 trillion is invested in investments that are marketed as socially responsible, ranging from savings accounts and mutual funds to individual stocks and bonds.

Finding Socially Responsible Investments

Screening is a popular way to find socially responsible investments. With this strategy, you decide what practices and performance you want—or don’t want, from companies in which you invest. You might want to screen investments for:

• Animal testing
• Environmental practices
• Human rights
• Labor relations
• Nuclear power
• Product and worker safety
• Workplace diversity
• Industry focus, such as gambling, mining, or weapons systems
• Product focus, such as alcohol or tobacco

Two other SRI strategies are gaining favor with investors:

• Community investment focuses on securities of companies that are working to create positive change in underserved communities, e.g., through affordable housing or low-interest inner-city business loans.
• Shareholder advocacy seeks to influence companies from within by becoming stockholders and beginning a dialogue with management or proposing changes to company policies.

Performance Record

Can you as an investor do well financially and do good? Yes, depending, of course, on the investments you select and economic trends. Some socially responsible investments perform well and others do poorly. Some investors believe that by avoiding companies with questionable practices, they can avoid losing money. The reasoning is that a company that pollutes the air or water can be hit with large fines. And those fines can impact the bottom line and drive down the stock price.

The key, as in all investments, is to do your research. While your heart can play an important role in where you invest, use your head, too, before making any investment decision.

How to get Started

If you want to make socially responsible investments, where do you start? If you buy individual stocks or bonds, you can learn about companies and issuers in prospectuses or on the Internet.

SRI funds list their screens, so you can consider ones that match your personal values. Be sure to read mutual fund prospectuses carefully, and understand all risks and fees, before you invest. You can also check out the Social Investment Forum.

This column is meant to provide general financial information; it is not meant to substitute for, or to supersede, professional or legal advice.

Note: The content areas in this material are believed to be current as of this printing, but over time, legislative and regulatory changes, as well as new developments, may date this material.

©2007 National Endowment for Financial Education. All rights reserved.