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Socially responsible investing



Community investing, a sub-sect of Socially Responsible Investing, allows for investment directly into community based organizations. Community investing institutions use investor capital to finance or guarantee loans to individuals and organizations that have historically been denied access to capital by traditional financial institutions. These loans are used for housing, small business creation, and education or personal development in the U.S., or are made available to local financial institutions abroad to finance international community development. The community investing institution typically provides training and other types of support and expertise to ensure the success of the loan and its returns for investors.[16]

Community investing climbed 84 percent between 2001 and 2003. Assets held and invested locally by community development financial institutions (CDFIs) based in the United States totaled $14 billion in 2003, up from $7.6 billion in 2001.

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Investing strategies

Social investors use four basic strategies to maximize financial return and attempt to maximize social good.

Screening excludes certain securities from investment consideration based on social and/or environmental criteria. For example, many socially responsible investors screen out tobacco company investments. This is an example of a social screen at work. In a recent 8 year period, the Domini 400 Social Index – a benchmark that measures the impact of social screening on financial performance – returned 18.54% vs. 16.95% for the S&P 500.[17]

Divesting is the act of removing stocks from a portfolio based on mainly ethical, non-financial objections to certain business activities of a corporation. Recently, CalSTRS (California State Teachers' Retirement System) announced the removal of more than $237 million in tobacco holdings from its investment portfolio after 6 months of financial analysis and deliberations.

Shareholder activism efforts attempt to positively influence corporate behavior. These efforts include initiating conversations with corporate management on issues of concern, and submitting and voting proxy resolutions. These activities are undertaken with the belief that social investors, working cooperatively, can steer management on a course that will improve financial performance over time and enhance the well being of the stockholders, customers, employees, vendors, and communities. Recent movements have also been reported of "investor relations activism", in which investor relations firms assist groups of shareholder activists in an organized push for change within a corporation; this is done typically by leveraging their enhanced knowledge of the corporation, its management (often via direct relationships), and the securities laws as a whole.[citation needed]

Positive investing involves making investments in activities and companies believed to have a high and positive social impact. Positive investing activities tend to target underserved communities. These efforts may support activities designed to provide mortgage and small business credit to minority and low-income communities.

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Satire and pro-market response

At least one mutual fund, the Vice Fund (VICEX), was created specifically to contrast with the trend in socially responsible investing. [3] VICEX specializes in investing in the defense, alcohol, tobacco, and gambling industries, and has greatly outperformed both the S&P 500 and most socially responsible mutual funds. [4]

“Is it Better to be Naughty or Nice,” by Shank cites a study that compared portfolios comprised of top socially responsible funds and top vice funds. Analysis of alpha regression models found that in the short-term, differences between the two portfolios’ performance was negligible. Only the SRI funds had any significant positive risk-adjusted performance. For the five and ten year period, only the SRI portfolio had positive and significant alpha value, suggesting that the market valued the features of the companies in the SRI portfolio. For the same periods, the vice portfolio showed no significant excess return. These findings indicate that the market valued the features of the SRI portfolio over the longer time horizons, while not valuing the vice funds for any period, and it was the SRI portfolio that had superior risk-adjusted performance.[18]


In addition, the Free Enterprise Action Fund files shareholder resolutions which oppose the general trend of socially responsible investing, for example by asking GE to "justify lobbying for global warming regulation." [5]

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SRI by territories

UK, France, Italy, Sweden and Belgium have 63.7% of the world's SRI funds.

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See also

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References

  1. ^ Farmen, Tom E.S and Nico Van Der Wijst. “A Cautionary Note on the Pricing of Ethics.” The Journal of Investing. Fall 2005: 53.
  2. ^ The Evolution of Socially Responsible Investing. Retrieved on Oct 30, 2006.
  3. ^ The Investment FAQ - Strategy - Socially Responsible Investing. Retrieved on Oct 30, 2006.
  4. ^ Students for Bhopal Student Power Crushes Dow
  5. ^ Gray, Hillel. New Directions in the Investment and Control of Pension Funds. DC: Investor Responsibility Research Center, 1983. p.36-37
  6. ^ Gray 1983, p.34
  7. ^ Richardson, Benjamin J., Socially Responsible Investment Law: Regulating the Unseen Polluters (Oxford University Press, 2008).
  8. ^ Richardson, Benjamin J., Socially Responsible Investment Law: Regulating the Unseen Polluters (Oxford University Press, 2008).
  9. ^ According to figures published by Celent 13 March 2007.
  10. ^ Ethical Guidelines for the Government Pension Fund - Global. Retrieved on Sep 19, 2007.
  11. ^ CAAT Campaigns - Clean Investment launch 2007
  12. ^ Ethical Investment Blog: Liverpool Council Disinvests from BAE
  13. ^ Edinburgh and Midlothian Greens » Blog Archive » Greens continue fight for ethical pensions – Lib Dem councillors under fire for ignoring party policy
  14. ^ Young, Lauren. “A Social Fund’s Strategic Shift.” Business Week Online. May 2006. 14
  15. ^ Interfaith Center on Corporate Responsibility
  16. ^ Social Investment Forum: Community Investing
  17. ^ Harrington, Cynthia. “Socially Responsible Investing.” Journal of Accountancy. January 2003: 1 – 11
  18. ^ Shank, Todd M., Daryl K. Manullang, and Ronald Paul Hill. “Is it Better to be Naughty or Nice?” The Journal of Investing. Fall 2005: 82 – 87

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External links


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