What is Socially Responsible Investing (SRI)?

Cartoon reprinted by permission. Visit Troubletown.com for more funny political cartoons.

Incidentally, despite what the cartoon says, responsible investments don’t have worse returns than unethical ones. Even if they did, many of us would prefer to sacrifice a small amount of return for the ability to sleep at night.

That’s the main reason to choose socially responsible stocks, to avoid profiting from evil. It’s not because we’re trying to keep our money from going to bad companies, because when you buy stock you’re usually not buying directly from the company — you’re buying from other investors. Investors like us just keep exchanging the stock amongst ourselves, and the company doesn’t see any of the money. (Except when the company issues new stock, which is rare.) The reason we don’t buy mainstream stocks is because our profit would be like blood money.

There’s another reason to boycott the stock of bad companies: if enough people don’t buy the stock, then the stock price will go down. That might not translate into lost money for the company, but it means that it’s harder for them to do things such as borrow money. And since corporate executives receive much of their compensation in the form of stock, when the stock price goes down, it’s the rich corporate officers — who are directing the company’s bad activities — who take the hit. When they take such a hit, they have a strong incentive to stop offending investors with their questionable business practices.

So what criteria do we use to distinguish a good company from a bad company? Many people classify companies into categories such as these:

1. Companies whose very product or service is questionable (e.g. weapons manufacturers and tobacco companies).
2. Companies whose product or service is benign, but who have poor records in areas such as the environment, minority advancement, community involvement, or charitable contributions.
3. Companies whose product or service is laudable, but have poor records in the areas mentioned above.
4. Companies whose product or service is benign and have acceptable records on social responsibility..
5. Companies whose product or service is laudable and have acceptable records on social responsibility.

On the other hand, some say that no large company is completely clean — some are just less bad than others. For example, the largest plastics recycler in the world is also the largest producer of virgin plastic. And why producing bicycles is a laudable goal, critics allege that a major bicycle manufacturer uses sweatshop labor to produce its bikes.

There are still yet other complications: Over the years the small eco/responsible companies I list on this site invariably seem to get bought out by a larger company, or themselves grow bigger and then attract multinational investors, or go out of business. As an example of the second case, natural foods maker Hain Foods merged with tea maker Celestial Seasonings a while back and then continued to swallow up dozens of small natural foods makers around the country, and is now a big enough player that their biggest investor is Wellington Management, whose primary investors include Exxon Mobil, Pfizer, Alcoa, Gillette, Pepsi, McDonald’s, and Wal-Mart! Who would have guessed?

Everyone draws the line in different places. Some people will invest in anything, some will invest in only certain companies which they feel are acceptable, and some people want nothing to do with corporate investing at all. This site is for those in that middle category, who want to invest but are choosy about which companies they’ll invest in.

Can you make money with socially-responsible stocks?

Yes. A common misconception (and one perpetuated by the cartoon above) is that SR stocks underperform regular stocks. In fact, many socially-responsible funds outperform the general market. ( source )

The reason is simple: While bad practices increase profits in one area, they cause losses in other areas. For example, companies can make extra profit by exploiting workers, customers, or the environment, but they’re also more likely to be sued or fined for those same bad practices. Also, companies that treat their employees poorly have less productive employees and thus earn less profit. Research by Professor Alex Edmans of Wharton shows that very thing. As he writes:

There is a strong positive relationship between employee satisfaction and shareholder returns. Firms with high satisfaction outperform peers by 3-4%/year, even when controlling for risk, industries, characteristics and outliers. This contradicts the traditional view that a dollar paid to workers is a dollar lost from shareholders, and that firms maximize shareholder value by working their employees as hard as possible, and paying them as little as possible. By contrast, it shows that SRI screens based on employee welfare can improve returns, whereas the traditional view is that SRI investors have to sacrifice financial returns to achieve their social goals. ( more. )

The companies with the highest ratings in corporate governance outperformed the S&P 500 by 16% over the past five years. ( GMI ) As Yahoo Finance said, The GMI ratings incorporate hundreds of data points across six broad categories including, board accountability, financial disclosure and internal controls, executive compensation, shareholder rights, ownership base and takeover provisions and social responsibility. The majority of corporate governance red flags for US companies came from the executive compensation category.

What’s the difference between Socially Responsible Investing (SRI) and Socially Responsible Stocks?

To understand this we need to first understand about investing and stocks in general.

Investing simply means putting your money somewhere in hopes of getting more money back. Examples include:

• Putting your money in a savings account and earning interest
• Buying a house and then having it appreciate in value
• Buying stocks and selling them when the price goes up

Investing in stocks is called investing in the market. short for the stock market. There are two ways to invest in the market:

• Individual Stocks. You open an account with a broker and then buy and sell individual stocks yourself. Most people don’t do this because they think it takes too much time, or they’re not confident about their ability to pick good stocks.
• Mutual Funds. Or you can buy shares in a mutual fund and let someone else do the work in picking the stocks. A mutual fund purchases large amounts of stock in lots of companies, perhaps hundreds of them. When you buy into a mutual fund you own a tiny chunk of that fund, along with all the other investors. That way you don’t have to worry about what stocks to pick and when to buy and sell; the mutual fund manager handles that for you.

So to do SRI you have two choices: buy individual stocks from companies that do good, or buy into a socially-responsible mutual fund which screens the companies whose stock they buy on a list of socially-responsible criteria.

This website covers the former, reviewing dozens of companies for those who want to buy individual stocks. We list some SR mutual funds below for those who want to buy into a mutual fund instead.

How common is SRI?

SRI isn’t some fringe idea practiced only by rich hippies. One out of eight dollars under professional management in the U.S. is involved in SRI, and Americans have over $2 trillion in SR investments. ( source ) Even the Motley Fool approves of SRI.