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by Steve Schueth
"Social investing" describes the integration of personal values and societal concerns into investment decision making. To socially aware investors, the concept of investing for the future almost always has a double meaning. Investment strategies are designed to achieve personal financial goals, such as retirement, while also working to encourage and support the creation of a new tomorrow - a better world to retire into. Some call it a double bottom line approach to investing.
Social investors - from the smallest individual investors to the largest institutions - seek competitive returns from investment programs that also align with their values. They are most satisfied with investments that reach beyond purely financial goals to address a need to make a difference. They are most comfortable with investments that reflect their highest aspirations for the world they would like to pass on to future generations.
Many foundations, religious organizations and other non-profits are beginning to embrace a similar "mission-based" investment process. Viewing investments in light of the organizations mission (values) often requires modifying existing investment programs to bring them into alignment with the organizations purpose. There is often a high level of cognitive dissonance between certain elements of the organizations mission, such as fighting environmental degradation, and large investments in some of the worst polluting companies on the planet.
Three Key Strategies
Social investors employ three basic strategies aimed at the dual objective of making money and making a difference:
SCREENING is the practice of including or excluding securities from portfolios based on social and/or environmental criteria. Generally, social investors seek to own profitable companies which make positive contributions to society. They require investment managers to overlay a qualitative analysis of corporate policies, practices and attitudes on the traditional quantitative determination of profit potential. This double bottom line analysis process results in buy lists which often include enterprises with outstanding employer-employee relations, and excellent environmental practices; companies which make and sell safe and useful products, and demonstrate respect for human rights around the world. Companies whose products and business practices are harmful or violate their values systems are often left out.
Social investors know there are no perfect companies. The qualitative research and evaluation process known as SCREENING generally seeks to identify the best managed companies in various industries. The result is the creation of investment portfolios that meet investors social criteria, and produce the returns needed to achieve their financial goals. Screening decisions are rarely black and white - always gray. Tough choices, informed by careful research, are part of the process.
SHAREHOLDER ACTIVISM (or Advocacy) describes the actions many socially aware investors take in their role as owners of corporate America. These efforts include dialoguing with companies on issues of concern, and submitting and voting proxy resolutions. Advocacy efforts are aimed at positively influencing corporate behavior. Social investors often work cooperatively to steer management on a course that it is believed will improve financial performance over time and enhance the well being of all the companys stakeholders - customers, employees, vendors, and communities, as well as stockholders.
The stakeholder concept of management is an integral part of the way social investors view companies. They seek to identify company management that seriously considers the impact of important decisions on all stakeholders, not just shareholders (primary beneficiaries of profits). Management that creatively balances the best interests of all stakeholders is seen as more enlightened, exhibiting the progressive attitudes of business leaders of the future, and likely to outperform their competitors over time.
COMMUNITY-BASED investing provides capital to people in low income communities who have difficulty accessing it through conventional channels. Many social investors earmark a percentage of their investment dollars to Community Development Financial Institutions (CDFIs) with missions focused on providing low income housing and small business development financing in disadvantaged communities. Community development banks and credit unions attract market rate deposits, which are then loaned out to finance local projects such as affordable housing. Community development loan funds and micro-enterprise development funds seek investments at below market rates and use the capital to enable people to improve their standard of living, develop their own small businesses, and create jobs for themselves and their neighbors.
How much Money Is Invested in a Socially Responsible Manner?
In November 1997, the Social Investment Forum published its most recent Report on Responsible Investing Trends in the United States which identified $1.185 trillion in managed portfolios utilizing at least one social investment strategy. That was nearly one in ten dollars under professional management in the United States in 1997. From the report:
$529 billion is invested in socially SCREENED portfolios, over 90 percent of which is managed using three or more sets of social criteria;
$652 billion is controlled by investors who are engaged in SHAREHOLDER ADVOCACY- having either sponsored shareholder resolutions or voted their proxies on the basis of formal policies embodying social responsibility goals during the previous three years; and
$4 billion is involved in COMMUNITY-BASED investment programs nation-wide.
Is the Social Investment Field Growing?
The social investment field is growing rapidly by nearly every measure. Total dollars under management in socially responsible portfolios grew from $40 billion in 1984 to $639 billion in 1995, to nearly $1.2 trillion in 1997. The number of mutual funds incorporating social screens grew from four in 1984 to 45 in 1995, to 144 in 1997. Investors have a wide variety of choices in socially screened mutual funds today - equity funds of various styles, bond funds, index funds and money market funds. The number of institutions involved in shareholder advocacy efforts and the number of investors channeling money into community-based investment programs have all increased dramatically in recent years.
The Performance Myth: Do Social Investors Sacrifice Returns?
Returns of socially responsible investments are competitive and socially aware investors can do very well employing a double bottom line approach to investing. A solid and growing body of empirical evidence has conclusively dispelled the myth of underperformance. Examples:
John B. Guerard, Jr., Director of Quantitative Research for Vantage Global Advisors and winner of the 1996 Moskowitz Prize for research, concluded in his prize-winning paper that there was no statistically significant difference between the performance of an unmanaged screened universe of 950 common stocks and an unscreened universe of 1,300 stocks for the period 1987-1996. Is There a Cost to Being Socially Responsible in Investing: It Costs Nothing to be Good? The Journal of Investing, winter 1997.
Lou DAntonio, Tommi Johnson and Bruce Hutton, professors at the University of Denver, conducted research addressing the issue of asset allocation using a portfolio of bonds from firms represented in the Domini 400 compared against the Lehman Brothers Corporate Bond Index. They found no significant differences in portfolio performance. Expanding Socially Screened Portfolios: An Attribution Analysis of Bond Portfolios, The Journal of Investing, Winter 1997.
J.D. Diltz concluded that there was no statistically significant difference in returns for 14 socially screened stock portfolios vs. 14 unscreened stock portfolios generated from a universe of 159 securities during the 1989-1991 period. Does Social Screening Affect Portfolio Performance, Journal of Investing, Spring 1995, 64-69; The Private Cost of Socially Responsible Investing, Applied Economics, 1995, 69-77.
The Domini Social Index (DSI), a capitalization weighted market index of 400 common stocks screened according to broad social and environmental criteria, has outperformed the S&P 500 stock index on a total return basis since it went live on May 1, 1990. Total returns through September 30, 1998:
|1 year (rolling 12 months)||12.54%||9.15%|
|3 year average annual||24.76%||22.64%|
|5 year average annual||20.97%||19.91%|
|Cumulative return since inception (May 1, 1990)||333.03%||283.77%|
>> The Domini Social Equity Fund, a passively managed mutual fund based on the Domini Index, earned a 5-Star (highest) rating from Morningstar Inc. for risk adjusted performance over three and five years.
The Citizens Index (CI) is a market-weighted portfolio of common stocks representing ownership in 300 of the most socially responsible companies in the U.S. Total return for the Citizens Index has outpaced that of the S&P 500 since its December 31, 1994 inception by a wide margin. Total returns for the Citizens Index through September 30, 1998:
|1 year (rolling 12 months)||16.23%||9.15%|
|3 year average annual||27.18%||22.64%|
|Cumulative return since inception (Dec. 31, 1994)||176.26%||139.23%|
>> The Citizens Index Fund, a passively managed mutual fund based on the Citizens Index, has earned a 5-Star (highest) rating from Morningstar Inc. for risk adjusted performance over three years.
The giant TIAA-CREF (Teachers Insurance and Annuity Association-College Retirement Equities Fund, $232 billion) launched a Social Choice Account on April 1, 1990. The CREF Social Choice Account, an actively managed balanced mutual fund investing in both stocks and bonds, is now the largest single socially screened portfolio in the United States with $2.9 billion in assets. The equity (stock) portion of Social Choice (SC-Eq) has generally outperformed the S&P 500. Total returns through September 30, 1998:
|1 year (rolling 12 months)||7.35%||9.15%|
|3 year average annual||22.46%||22.64%|
|5 year average annual||18.94%||19.91%|
|Cumulative return since inception (April 1, 1990)||290.18%||274.05%|
>> The Social Choice Account, an actively managed balance fund investing in both stocks and bonds, has returned 9.17%, 16.83% and 14.00% annually over the one, three and five year time periods ending September 30, 1998. Social Choice has been awarded a 4-Star rating from Morningstar Inc. for risk adjusted performance over both three and five years.
Note: When analyzing the performance of both socially screened and conventionally managed portfolios, it is important to compare "apples to apples." The academic studies cited above compare similar portfolios. The Domini and Citizens Indexes are unmanaged diversified lists of common stocks, capitalization weighted, and used as broad measures of the performance of diversified portfolios of the most socially responsible companies. The S&P 500 Index is an unmanaged list of common stocks, capitalization weighted, and typically used as a measure of the performance of the stock market in general. Performance of all three indexes assumes the reinvestment of dividends and excludes brokerage commissions and other costs. Performance comparisons between the three indexes are quite appropriate. While an investment cannot be made directly into an index, investors can invest in mutual funds that are designed to track the above mentioned indexes, such as the Domini Social Equity Fund and the Citizens Index Fund. Performance of the overall Social Choice Account is most appropriately compared with other balanced funds. Investors should remember that past performance is no indication of future results and that the performance of these indexes and all mutual funds will include periods of fluctuating values.
How Does Social Investing Work to Create a Better Future?
SCREENING allows investors to align their values with their personal financial goals while earning competitive returns. SHAREHOLDER ADVOCACY allows investors to communicate directly with management and boards of directors about desired changes in corporate policy and practice. COMMUNITY-BASED investing allows investors to put money to work in local communities, where capital is not readily available, to create jobs, affordable housing and environmentally friendly products and services.
Many social investors are proud of their efforts to create a better future for the native population of South Africa. They point to the dismantling of the legislated system of racism in South Africa as one of their greatest successes. In response to the call of black leaders in the early 1980s, social investors took a bold leadership role in the movement to boycott and divest of companies doing business in that country, thus helping to bring enormous economic pressure to bear on the situation.
Over the past decade, the social investment community has worked diligently to bring attention to environmental issues negatively affecting companies and communities. The CERES Coalition (Coalition for Environmentally Responsible Economies) grew out of the Social Investment Forum and has developed a set of broad principles to guide corporate environmental impacts and full-disclosure reporting. With a heightened awareness of environmental issues on the part of investors and consumers, many companies have created senior positions responsible for environmental management. Most importantly, many of these companies have discovered ways of doing business that significantly reduce their impact on the environment while saving money. More and more often, everyone wins!
Another, more specific example of encouraging more responsible corporate behavior comes from todays news. Giant athletic shoe manufacturer, Nike, is under intense pressure from consumers, investors and human rights groups to ensure that overseas factory workers are provided healthy working conditions and earn descent wages. That pressure has resulted in Nike developing a comprehensive Code of Conduct for overseas vendors and creating a group inside the company whose job it is to ensure foreign vendors comply with the Code. The company has recently outlawed hiring workers in overseas shoe manufacturing plants under the age of 18 and expanded programs offering free education.
For most, social investing is about achieving ones financial goals while catalyzing positive changes in corporate behavior aimed at improving quality of life. Thus they use their power as investors and consumers to help with the creation of a more just, sustainable, and healthy society. Almost without exception, multi-pronged strategies are required to achieve meaningful social change goals. These strategies include screening, shareholder advocacy, lawsuits, embarrassing public relations, boycotts, and local efforts aimed at educating an otherwise uninformed public.
Social Investing: A Brief History
The origins of "ethical" investing date back many hundreds of years. In early biblical times, Jewish laws laid down many directives on how to invest ethically. In the mid 1700s, the founder of Methodism, John Wesley, emphasized the fact that the use of money was the second most important subject of New Testament teachings. Many religious investors whose traditions embrace peace and nonviolence avoid investing in enterprises that profit from products designed to kill fellow human beings; and many avoid "sin" stocks - those companies in the alcohol, tobacco and gaming industries.
The modern roots of social investing, however, can be traced to the impassioned political climate of the 1960s. During that decade, a series of themes from civil rights, to concerns about the cold war and equality for women served to escalate sensitivities to issues of social responsibility. The movement broadened to include management and labor issues, and anti-nuclear sentiment. The ranks of socially concerned investors grew dramatically through the years focused on eliminating apartheid in South Africa.
In the late 1980s and throughout the1990s, the Bhopal, Chernobyl, and Exxon Valdez incidents, along with vast amounts of new information about global warming, ozone depletion and the concomitant risks to all life on the planet, have brought the seriousness of environmental issues to the forefront of social investors minds. Most recently, issues of human rights and healthy working conditions in factories around the world producing goods for U.S. consumption have become rallying points for investors with a double bottom line orientation.
Wave of the Future: Voting with Your Dollars
Social investing is beginning to have a tremendous impact on how people think and act. It is beginning to affect many of the decisions we make as parents, as citizens, as consumers and as investors. Social investing is one of the most powerful emerging trends in society today. Actually its more than a trend, its a wave which may one day deposit us on the shore of a better, brighter tomorrow.
The practical benefits of voting with your dollars as consumers and investors is quietly working its way into common practice. Today, people are better educated, and information is more readily available than ever before. They are realizing that money is power, and that each purchase and investment decision we make is an exercise of power. Many have come to understand that in the end, where we put our money - how we use our resources - will tell the tale of where our values and priorities lie.
Its no secret that this generation of investors priorities are increasingly focused on "quality of life" - now, for our retirement years, for our children, and for our childrens children And its becoming increasingly clear to all that business is the most powerful force impacting quality of life in our society, subsuming the influence of both church and state. Investors are realizing that they can make a difference - that they can use their power as consumers and investors to influence corporate behavior and encourage positive change in society.
Social investors are quite simply, men and women who care. They are a fast-growing segment of the investing public who applaud and reward management for responsible corporate practices, and put pressure on firms that refuse to take responsibility for their destructive impact on society. As dollars are pooled around social investment strategies, these individual and institutional investors encourage more responsible corporate citizenship and positive social change through traditional marketplace mechanisms.
Steve Schueth is Chair and President,
Social Investment Forum,
consultant and resource to the social investment industry