Socially Responsible Investing
Greentips: December 2004
Many people do their part for the environment by driving a fuel-efficient car, buying organic foods, or using energy-efficient appliances. You can also promote environmental values through socially responsible investing (SRI), also known as “green” investing. SRI gives corporations an incentive to improve their environmental stewardship and can also provide investors with a more secure financial future—a “double bottom line.”
Though socially responsible stocks have a reputation for poor performance, recent data from Lipper, a fund tracking and research firm, show that returns from SRI funds are now competitive with—and, in some cases, have even outperformed—the overall stock market.
Here are a few things to keep in mind when you’re preparing to become a socially responsible investor:
Mutual Funds
Mutual funds pool the money of multiple shareholders and invest it in the stocks of corporations that meet certain criteria; investors then share the fund’s gains and losses. In the case of green investing, the companies chosen to make up the fund have been screened according to environmental, social, and/or political criteria.
The success of mutual funds is measured against an index—a collection of stocks meant to represent the overall stock market or a specific segment of the market (SRI in this case). Mutual funds known as index funds simply attempt to duplicate the performance of a particular index; the Calvert Social Index, for example, is a socially responsible index fund.
Screening Criteria
When selecting a socially responsible mutual fund, it is important to know the business sectors in which the fund invests and the method it uses to screen corporations. Negative screens, for example, exclude companies that behave in an unacceptable manner or develop products that investors do not wish to support, such as tobacco, casinos, alcohol, weapons, or nuclear energy. Positive screens give recognition to companies that engage in issues such as conservation, civil rights, labor relations, or animal rights.
One fund might choose to invest in renewable energy corporations exclusively, while another might invest in any company except those that produce weapons. The Pax World Balanced Fund uses both positive and negative screens to invest in businesses that provide life-supporting goods and services such as health care, pollution control, and education.
Comparing Funds
Several websites can help you compare mutual funds and choose which ones are right for you. Calvert’s “Know What You Own” service lets you run the holdings of various funds through the screens used by its Calvert Social Index. The nonprofit Social Investment Forum lets you compare the screens used by different funds and presents the distinctions in an easy-to-follow chart.
Please note: The fund names and services mentioned in this article are used for identification purposes only and do not imply endorsement. UCS is not responsible for any investments made as a result of the information provided in this article.
