This socially responsible article analyzes the three layers of SRI screens, and how each of these social investing screens impacts the choices of sustainable investing, socially responsible investments, socially responsible stocks, and green investments. In addition, the relationship between corporate social responsibility and how socially responsible investment funds and SRI mutual funds screen is discussed.
The foundation of socially responsible investing rests upon the screens set forth to filter socially responsible stocks. However, there exists a fine balance in selecting the appropriate screens that will allow you to invest consciously, but also profitably within acceptable risk parameters. Because social investing screens decrease the size of available investment options, it is important to ensure that your risk-to-reward ratio preferences are balanced appropriately.
Negative screening: broadest options for social investing
The broadest and most prevalent social investing filter is “negative screening.” By creating a list of unacceptable products, services, or corporate governance practices, negative screening omits companies or industries from the portfolio. For example, the most common industries that do not pass SRI negative screening are tobacco, alcohol, mining, forestry, and weapons.
Negative screening tends to be the most rigid standard, as the remaining two levels of screening can be open to case-by-case subjectivity. For example, in 2005, the SRI mutual fund PAX World Funds divested 375,000 Starbucks shares because of the company's release of a Starbucks branded alcoholic beverage. Despite Starbucks' exemplary employee relations, advocacy of free trade, and farming sustainability, their alcohol partnership failed to pass through PAX's negative socially responsible stocks screen.
Positive screening: selective standards
On the other hand, “positive screening” in sustainable investing looks for socially responsible stocks that have sustainable, environmentally and socially beneficial operations. Thus, industries such as high-technology, education, renewable energy, and biotech may be included. Within positive screening, this social investing filter may also review their corporate social responsibility governance policies, seeking those socially responsible stocks that are beneficial above and beyond their standard business – such as community contribution, educational support, recycling programs, and empowering employee benefits.
Utilizing positive screening for socially responsible investments is not necessarily easy, as there can be several subjective measures that are difficult to quantify. Whereas negative screening clearly eliminates certain types of categories, positive screening requires an analysis of a significant amount of “soft data” to find the best socially responsible stocks. In fact, the rigorous research and analysis required in positive screening is one of the reasons socially responsible investment funds tend to have higher expense ratios than their unscreened counterparts.
Industry best screening: leadership rewards
The finest filter for social investing is the “industry best” screen – and this may include industries that are not necessarily “green” investments. Including both the “clean” and “dirty” industries, the sector best social investing screen looks for companies that take positive environmental and human initiatives in their industry. This screen's strategy is to give other companies within the industry incentive to improve their operations. For example, even through forestry is considered a “dirty” industry, this filter may select the “best” company in this industry if it practices tremendous replanting initiatives, community contributions, and exemplary employee relations practices. Thus, if this company is gaining financial recognition from social investments, then other industry members may be encouraged to follow suit.
This type of social investing screening strategy can give your portfolio an extra level of risk protection. By utilizing the best of sector screen, you can invest in sectors that tend to be inflation and recession resistant – which diversifies your socially responsible investments portfolio.
Screening your portfolio
For your portfolio concerns, these screens are certainly not exclusive strategies. They can be used together synergistically, as well as individually.
Determining screens for your socially responsible investments
- Simply screening for the “negative” companies gives you the widest remaining range of social investment options.
- “Positive” screening may not necessarily be the easiest strategy, but ensures that your socially responsible investment dollars benefit a socially responsible stock that is striving for social and environmental betterment.
- Incorporating “industry best” can give your portfolio additional diversification by investing in industries that may be inflation resistant, but this strategy also requires research and analysis of subjective measures.
Selecting the level of social investing screens utilized depends upon your diversification needs, as well as the amount of time and research you have available. However, even if you simply practice “negative” screening, your portfolio makes a contribution to advancement by not supporting industries that deteriorate social good.
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