A Guide to Socially Responsible Investing


Socially Responsible Investing (“SRI”) is investing, not only to maximize investor return, but to promote social good in the process.


As a former financial advisor for a large broker dealer, I specialized in financial planning for non-profit organizations who wanted to invest in investment products that reflected their respective social values.

To my surprise, my firm had very little information available on socially responsible investing and the only piece of literature available was a list of 25-30 mutual fund companies that had one or more products under the larger umbrella of “socially responsible investing” without any other information.

It soon became clear to me that the amount of information available out there was limited. There seems to be a misconception (and it’s a persistent one) that you give up investment performance if you invest in SRI when, actually, the opposite is true. Typically, companies whose corporate policies support equality, environment and sound management practices, perform better financially as well.

As soon as this truth is widely recognized, larger institutions will start allocating more time, money and energy towards enhancing SRI research and creating more SRI products.


Socially responsible investing got its start in the mid/late 1700’s during the slave trade when investors were encouraged not to participate in the practice and was later associated with religious institutions that recommended investors avoid “sinful” companies that produced guns, liquor or tobacco.

In the 1960’s socially responsible investing evolved to take on greater social concerns of women’s equality, civil rights and labor equality, and in the 1970’s added environmental issues and global social concerns, such as apartheid in South Africa.

Since the 1990’s SRI has increasingly encompassed the broader arena of positive investments in the environment, social justice and corporate governance (commonly referred to as”ESG”, although I’ll be using the SRI label because it is still the term most widely recognized as of this writing.)


According to a recent study published by the Social Investment Forum, SRI continues to grow at a healthy pace. In the beginning of 2010, SRI assets reached over $3 trillion, which was an increase of more than 380 percent from $639 billion in 1995, the date of the first report issued by Social Investment Forum’s covering these statistics.

Since 2005, SRI assets have increased 34% while traditionally managed assets have increased only 3%. And from 2007 to the beginning of 2010 (during the recession), the increase in traditional, professionally managed assets was less than 1% compared to an increase of 13% in SRI assets. Today, about 1 in every 8 dollars is invested in some form of socially responsible investment.

The Social Investment Forum attributes most of this growth to client demand and to a lesser extent legislation and regulation.


There are essentially three SRI investment strategies:

Positive/Negative Screening:

Positive screening involves actively seeking out companies that are doing good. It allows an investor to select companies whose corporate practices are aligned with their values. For example, if an investor is particularly concerned about the protecting the environment, they might choose to invest in a solar energy company.

Many people think that investing in companies that are promoting social or environmental causes means you have to sacrifice performance but actually the opposite appears to be true. Marc J. Lane, the author of Profitable Socially Responsible Investing found that companies who scored the highest for social and environmental issues actually performed better financially. In fact, according to Lane, the stocks of those companies outperformed the Russell 3000 Index by more than 2.5% over the course of the eight year study he performed.

Negative screening is just what the name suggests-weeding out companies whose corporate practices or products or services are not aligned with social good. For most SRI investors this traditionally included tobacco, gun, alcohol, gambling and defense contractors. But it’s also been expanded to include companies whose management has failed to promote employee equality, diversity or environmental or corporate responsibility.

Sharholder Activism

Shareholder activism involves trying to influence change in corporate HULT PRIVATE CAPITAL practices or policies by talking directly to management or by filing shareholder resolutions that are then voted on by the shareholders of the company. When the idea of shareholder activism was first introduced, the number of resolutions filed by shareholders was less than 20 annually. From 2008 to 2010, the Social Investment Forum reports that over 200 institutions filed shareholder proposals and many of the proposals are being adopted.

Community Investing

Community investing involves the direct investment of capital to underserved members of communities through local community banks/lenders (also called collectively, “Community Development Financial Institutions” or “CDFIs”). These lenders provide access to credit, equity and capital that these individuals or businesses would otherwise never have access to if they were to apply for loans through traditional commercial banks. Community investing can also be accomplished through venture capital funding.

By investing directly in a community, an investor is more likely to have a greater impact on social good. While buying stocks of companies may or may not promote social good, money invested in a CDFI or venture capital fund is put to work directly and right away to promote underserved communities.



There are now over 250 mutual funds that are specifically designed to align investments with certain social values. Some mutual fund companies are exclusively focused in SRI, such as Calvert, Domini, PAX World, Ariel, Sentinel, Winslow, among others, while more mainstream mutual fund companies like Vanguard, Neuberger Berman, Gabelli, Legg Mason, and Dreyfus, to name a few, have one or more investment products that address certain social concerns, but SRI is not their primary focus.

While mutual funds provide a valid way to invest in a diverse group of companies that represent specific social values, they have certain limitations that you should consider before you invest.

First, mutual funds, generally, tend to be expensive. Many mutual fund companies charge ongoing fees in addition to fees to purchase or sell shares.

Second, mutual funds are a passive way to invest in SRI with no control over company selection. If you take a closer look at some of the holdings of the mutual fund companies that profess to invest in socially responsible companies, you may be surprised to find companies that are not really aligned with SRI values.

And finally, many mutual funds just can’t beat a simple, static product that tracks an index, like exchange-traded funds (ETFs). One of the first SRI indexes, the FTSE KLD 400 that began in 1990, has continued to perform competitively -with returns of 9.51% from inception through December 31, 2009, compared with 8.66% for the S&P 500 over that same period. For a fraction of the cost of investing in a mutual fund, you can simply buy shares of an ETF that tracks the FTSE KLD 400 and do just as well if not better.

There are now approximately 26 ETFs to choose from and even though they only account for about 1 percent of the total assets invested in SRI, their assets have grown 225% since 2007, the fastest of any registered investment product.


Perhaps a more direct way to invest in a socially responsible invest directly in the stocks or bonds of solid, financially-sound companies that appeal to your values.

There is a misconception that when you invest in shares of individual companies you are increasing your risk because you are reducing the number of companies you are investing in, concentrating risk to a few investments. This is only true if you don’t do your research and invest in companies that are not financially, socially and ethically sound.

To begin your search, several publications release annual lists of the top SRI companies. If you simply don’t have time or want to do the research, ETFs are a great option or you can subscribe to New Paradigm Wealth bi-monthly newsletter that offers investment ideas, trends and notable companies to watch.


Alternative investments include hedge funds, venture capital funds, private equity funds, property funds and other unregistered limited partnerships or limited liability companies that are typically available only to accredited and high net worth investors. In other words, these are the investments that usually have high minimum initial investment requirement of $50,000 or more that are only available to a wealthy few.

These are not necessarily for everyone but unlike mutual funds, hedge funds employ managers that have the flexibility to buy and sell using investment techniques and strategies that are generally unavailable or even prohibited by mutual fund companies because of regulatory constraints

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