This socially responsible investing overview article analyzes the basics of SRI, SRI investment returns, the importance of corporate social responsibility, SRI investment performance for the SRI indexes. By understanding the performance of socially responsible stocks, individual socially responsible stock, the socially responsible investor can derive the profits of socially conscious investing, either through individually socially responsible investments, or by engaging with socially responsible investment funds and socially responsible funds. In addition, the article also discusses the sustainable investing strategy in investing with ethics, green investing, values investing, and socially responsible investments.
Although socially responsible investing has gained prevalence in the last several decades, many socially responsible investors are still under the impression that to invest in social good, they must forgo certain levels of portfolio performance. However, with the evidence mounting that socially responsible investment funds closely match, if not outperform, their market counterparts, many socially responsible investors are capitalizing their profits – and their contribution to social good.
Long-term vs. short-term corporate focus
Socially responsible investing (SRI) takes the long term vs. short term investment debate to a socially conscious investing level. In contrast to many corporations who exploit natural resources and human labor for short-term profits, a socially responsible stock operates under long-term natural sustainability, lending itself well to green investing. For example, the oil magnates such as Exxon-Mobile and Chevron have experienced exponential growth in the last several years. However, where will these companies be in 10 or 20 years – when the oil rigs are pumped dry and consumers have switched over to hydrogen-fuel cars? In stark contrast, green investing emphasizes the long-term sustainability of corporate social responsibility on the environment, community, and economic well-being.
What are some popular socially responsible stocks?
Recently, the top ten socially responsible stocks in the Domini Social Equity Fund (FUND: DSEFX) are: Microsoft, Johnson & Johnson, American International Group, Intel, Procter & Gamble, JPMorgan Chase, Cisco Systems, Wells Fargo, Amgen, and PepsiCo.
Overarching SRI principles
The broad investment principles of socially responsible investing are conceptualized based upon varying methods of social investing analysis. The implementation of social investing in Europe is generally different than in the United States, but the underlying fundamentals are based upon using a set of core beliefs. Depending upon the socially responsible investments portfolio or socially responsible funds, the SRI analysis may be based on one or several of the following criteria:
ustainability Practices : This socially conscious investing viewpoint analyzes whether a company’s business practices are sustainable in the long term. If the business operations negatively impact the environment, economy, communities, or human welfare, then it is not considered sustainable investing for long term profitability. Corporate Governance : This socially responsible investing component analyzes the company’s policies on employee, community, investors, stakeholder, and environment relations. Social investment’s corporate governance analysis is a separate process from the company’s financial outlook. Religious Beliefs : Considered the original father of socially conscious investing, religious beliefs have screened many portfolios. For example, a Catholic screened socially responsible investing portfolio may divest companies that produce contraceptives. Both Christian and Muslim screened socially responsible funds are prevalent, imparting strong religious beliefs onto the social investing analysis of opportunities. Public Policy : Geared for socially responsible stock portfolios that include international holdings, the public policy filter analyzes foreign governments’ actions, either on an individual country case-by-case basis, or based upon an international mandate, such as a ban by the UN or NATO.
Socially responsible investment funds’ performance
Beyond the desire to contribute to social good, socially responsible investors are seeking SRI investment performance. Values investing demonstrate that socially conscious investing can be done quite profitably. In fact, in some market conditions, socially responsible funds outperform their market counterparts.
The Domini 400 Social Index (DS 400), the socially responsible investing industry benchmark, has outperformed the S&P 500 since its inception in 1990. According to KLD Indexes, as of November 30, 2007, the DS 400 has enjoyed 11.75% annualized returns, leading ahead of the S&P 500’s 11.21%. The DS 400 screens its index for socially responsible stocks based upon environmental, governance, and social filters, and within its index, there are 250 S&P 500 represented companies, 100 companies not on the S&P 500, and another 50 socially responsible stocks that have demonstrated significant strength in social investing filters.
With the sustained long-term SRI investment returns in the socially responsible investment funds, such as the DS 400, socially conscious investing can match or outperform its market counterparts – dispelling the myth that a socially responsible investor must sacrifice performance for social consciousness.
The risk exposure of socially responsible stocks
However, when comparing SRI indexes against market benchmarks, the question begets: does the performance of socially responsible investment funds come at a higher portfolio risk than its market counterparts?
Considering the rigorous screens of socially responsible investing portfolios, the socially responsible stocks are naturally geared towards companies with smaller market caps. Theoretically, the lower market caps contribute to a higher volatility and beta for the overall socially conscious investing portfolio. For example, the Domini 400 has a weighted average market cap of 83% of the S&P 500.
Beta Coefficient: measurement of an investment’s volatility against the market
However, instead of reducing the overall beta, the socially responsible investments screens minimize the individualized corporate risk. By evaluating a socially
responsible stock based upon its governance, sustainability and relationship with stakeholders, social screens reduce the economic risk of the individual corporate
holding. For example, by not choosing to invest in tobacco, socially responsible
investors shield their portfolios from the negative performance factors of lawsuits.
Or, by selecting companies that have good relations with their employees, the
negative financial reprimands of strikes are curtailed from the socially responsible investment portfolio.
Risk and volatility are not necessarily synonymous in the world of financial portfolios. Whereas beta may be a good indicator to evaluate the short-term probability that a negative event may occur, this does not specifically analyze the individualized corporate risks. Though socially conscious investing portfolios may have higher betas, the risk of the socially responsible stocks in the portfolios experiencing financial degradation is more limited than the market benchmarks.
Alpha: risk-adjusted measurement of an investment’s excess return over “risk-free” instruments
One of the most compelling factors of socially conscious investing is that despite its demonstrated increased returns, the risk does not necessarily increase. Social
investing may be one of the few exceptions to the risk-to-reward ratio. In fact, the performance of the socially responsible funds may not be fully indicative of its true earnings, once the lowered individualized corporate risk is weighted. After adjusting
for both short-term and long-term risk, social investing’s alpha may be stronger than
the numbers indicate.
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