The ins and outs of social and moral investments

Published 12:01 am Thursday, June 2, 2011

Your social and moral beliefs are central to who you are as a person. But are they, and should they be, central to who you are as an investor?

Socially responsible investing and morally responsible investing are investment strategies that seek to maximize social good along with financial gain. In general, socially responsible investors favor corporate practices that promote environmental responsibility, consumer protection and human rights. Some also avoid businesses associated with certain activities and commodities, such as alcohol, tobacco, gambling, weapons or abortion.

Socially responsible investing is not a new principle; its history dates back to 19th century American Quakers who, opposed to war and slavery, chose not to include weapons manufacturers and slavery supporters in their portfolios. But until fairly recently, SRI existed at the fringe of the investment community. Now it has entered the mainstream, with investors pouring assets into funds representing a diverse range of political, social and spiritual values.

By a recent count, there were 130 SRI funds, with combined assets of almost $50 billion, according to fund-tracker Morningstar. Those numbers represent a quantum leap from 10 years ago, when Morningstar found just 39 SRI funds holding a combined $5.4 billion of assets.

But even with this growth, the number of SRI funds to choose from is far smaller than the number of ordinary funds. Focusing entirely on SRI funds can severely limit your portfolio options and will likely yield a significantly smaller return.

Using nonfinancial criteria to guide investment decisions doesn’t always have fortuitous results. According to David Kathman, a mutual fund analyst at Morningstar, SRI funds haven’t shown any clear performance trends, but the social screens used in portfolio selection do have an effect.

“A lot of funds avoid companies that deal in alcohol, tobacco, or gambling,” Kathman says. “Others target companies with a strong environmental track record, which can mean an emphasis on technology rather than on industrial manufacturing. Many of those funds were punished when the technology sector fell apart, and now they’re largely missing out on a bull market in industrial stocks, fueled by economic growth in India and China.”

In light of both the smaller pool of SRI funds to choose from, and the underperformance of some SRIs in the market today, the key to effective socially responsible investing is balance — and that means finding the appropriate mix of investments that are socially responsible and financially sound.

Erin Eddins is a chartered financial consultant, a member of the Financial Planning Association and is a Certified Financial Planner professional. She has more than 20 years of experience working with individuals and families to develop financial plans and implement investment portfolios to help clients secure their financial futures. Reach her at erin.eddins@standard.com or 425-212-5986.