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SOCIALLY RESPONSIBLE INVESTING

Socially responsible investors have proved conventional wisdom wrong: not only do business and social values mix, they can also be a winning combination. In the past two years, many socially responsible corporations and mutual funds have been among the best stock market performers and with good reason. Enlightened policies and practices pay off. Besides gaining the loyalty of employees and consumers, corporations that consider the social and environmental repercussions of how they do business are less likely to be embroiled in costly lawsuits that erode profits.

Even hard-nosed Wall Street pros who once dismissed socially responsible investors (SRI) as starry-eyed idealists have changed their tune as growing numbers of clients demand that their investments reflect their personal beliefs. The result is that socially responsible portfolios have more than tripled since 1995. Today more than $1.85 trillion of assets--or one dollar out of every 10 under management in the U.S.-- is estimated to be invested in socially responsible portfolios.

Like all investors, socially responsible investors want to earn a good return on their money, and they use the standard Wall Street yardsticks to evaluate a companyís prospects: profits, level of debt, quality of management, growth potential, economic conditions, stock price, etc. But socially responsible investors do not stop there. They employ a second bottom-line measure to companies: social screens. Screens can be used to screen out companies that produce products investors deem harmful (tobacco, alcohol, nuclear weapons and firearms are common choices) as well as companies that conduct business in ways that are harmful to the physical and social environment (pollute soil, air, and water, discriminates against women and minorities, and the like). Screens can also be used to screen in companies that have good practices and policies (produce safe and useful products, promote diversity and good employee relations, protect the environment, have superior social records). In short, socially responsible investors regard investing as economic democracy. By voting with their dollars, they reward companies that do good and withhold money from companies that are indifferent to the well-being of their employees, consumers, or the communities in which they do business.

The Internet has revolutionized investing in the stock market, and information that once was the province of full-service brokers only is now available to anyone who has access to the web. Once investors decide on their investment goals (growth, income, preservation of capital), they can gather considerable information about individual stocks and mutual funds online. Currently, an estimated 185 socially responsible mutual funds provide socially conscious investors with a wide range of choices. They can select among funds that employ different screens and management styles (aggressive, conservative) as well as those that invest in large, midcap, and small companies or focus on domestic or international stocks. Screening tools like www.quicken.com allows them to scan information about individual stocks, while www.finance.yahoo.com displays compilations of brokers reports and www.morningstar.net helps them analyze mutual funds in depth. Socially responsible investors who have substantial sums of money--$100,000 or more-- to invest and who are not interested in researching individual stocks and mutual funds themselves may prefer to hire a money manager who specializes in working with socially responsible investors, or at least one who is willing to screen companies according to criteria established by clients.

An ongoing debate among socially responsible investors is whether to invest only in good companies or to deliberately choose poor companies with the intention of pressuring them to change their policies. That question leads to other key questions: What is the definition of a good or bad company? How good is good? And where does the investor draw the line? The reality is that no company is all good and certainly none is all bad or it would no longer be in business. One company may produce an outstanding product but pollute the soil surrounding its factory. Another may have a racially and ethnically diverse workforce but its top management is composed only of white males. These contradictions suggest no easy answers to ethical dilemmas. The best investors can do is set their own standards based on their investment goals and what is most important to them to support or avoid.

Once individuals become shareholders in a company, however, they can exercise their muscle. Shareholders are owners of the company and, as in any other owner/management relationships, management must be accountable to the owners. Shareholders have several options available to them that fall under the umbrella of shareholder advocacy. Whether investors have 10 shares in a company or 10,000 shares, they all receive proxies in the mail that allow them to vote on corporation officers and changes in corporate policies. Many investors ignore proxies, either not bothering to fill them out or routinely voting yes on all items. Investors who do that miss opportunities to make their voices heard. Many voices, of course, speak more loudly than one voice, and there in lies the power of socially responsible mutual funds. The managers of socially responsible funds make it their business to know the candidates and the issues and to cast votes that reflect the views of their own shareholders.

Shareholders have another way to influence corporate policy: filing shareholder resolutions. The snag for individual investors is that the SEC (Security and Exchange Commission) restricts participation in shareholder resolutions to shareholders who have held a minimum of $1000 in stock for more than one year, a ruling that eliminates a lot of small shareholders. By investing in a socially responsible mutual fund, however, small investors can bypass that restriction and vote as a block. As with proxies, when shareholders band together management is more likely to pay attention to their complaints. And when several socially responsible mutual funds combine forces in filing resolution, they speak with even more authority.

To illustrate how shareholder activism works, letís take the example of The Womenís Equity Mutual Fund, a fund that promotes the advancement of women in the workplace along with family-friendly corporate policies. One of the yardsticks it uses to evaluate companies is the number of women in top management positions. Because of pressure from socially responsible investors, today more and more corporations voluntarily release employment statistics. Some, however, refuse to do so. In those cases, The Womenís Equity Mutual Fund files shareholder resolutions to request that companies release the information to the public. To increase its clout, the Fund often files its ballot under the name of its sub-advisor, the United States Trust Company of Boston, one of the oldest and largest managers of socially responsible portfolios. While some companies have complied with its requests to release employment statistics, others have ignored the shareholder resolutions that failed to get a large percentage of the vote. Gathering enough votes to pass shareholder resolutions is no easy matter and, recently, the SEC has proposed new rules that will make it even more difficult for shareholders to introduce resolutions.

Undaunted by the proposed SEC rules or the resistance of some companies, Linda Pei, the president of The Womenís Equity Mutual Fund, says these actions take time. "We donít give up when a resolution doesnít pass. Rather, we intensify our efforts to engage the companies in discussion and to persuade them that diversity on their boards and in senior management benefits their companies and society. Most companies care about their public image and that, we believe, is our ace in the hole."

When all else fails, shareholders have another means at their disposal to influence the behavior of corporations: bad publicity. Publicizing carefully researched reports about harmful products, environmental pollution, and discriminatory employee practices can embarrass a company and harm its reputation, especially when the publicity results in organized boycotts of its products. By the same token, shareholders can also strengthen a companyís reputation by releasing information about its excellent products and practices.

Although the concept of linking investments and values can be traced back to the 1700s when religious investors refused to invest in companies that manufactured or sold alcohol and tobacco, socially responsible investing is still in its infancy. It got a boost in the 1960s with the campaign to divest companies from the portfolios of many universities, pension funds, and churches, to protest against apartheid that did business in South Africa. The war in Vietnam also aroused another flurry of interest in socially responsible investing when anti-war activists urged investors to avoid companies that produced military weapons. But despite those efforts, by the early 1980s only a handful of social funds had been established. It wasnít until the early 1990s that the interest in socially responsible investing exploded, so that today it is commonplace for mainstream mutual fund companies and major brokerage houses to provide screens for clients.

Socially responsible investing still has its critics on both ends of the political spectrum. Some conservatives hold that screens restrict investors opportunities to make money and burden companies with extra expenses, while others on the left charge socially responsible investors with selling out to capitalism. Even some supporters ask whether socially responsible investing has really accomplished anything that matters. Over the past decade, shareholder activism has certainly brought about numerous small and significant changes, although nothing to equal the movementís crowning glory--its role in bringing an end to apartheid in South Africa. It is too early to tell whether socially responsible investing will revolutionize corporate America. It has already changed how tens of thousands of investors think about investing--and that in itself is revolutionary.

Written by: Deanne Stone


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