Investing for good and for profit

Socially Responsible Investing (SRI) has become increasing relevant as the earth goes through dramatic changes that include global warming, the war on terror and a widening disparity between rich and poor. Some call SRI ethical investing, but whatever the name, it has clear that many shareholders want the companies they’ve invested in to care about the world and act as good stewards with the assets they own. Now, it has become possible to do good deeds while doing good business.

What makes a socially responsible investment?

When looking for SRIs, you need to perform either a negative or positive screen to find your sample list of companies. A negative screen eliminates companies that have bad products, practices or services and generally are a negative influence on the world. Positive screens select companies that are contributing to society in some tangible way. This type of screen has become increasingly popular with investors who have chosen to support companies that stand for something good, rather than not doing anything bad. It’s a clear distinction.

The difficult part of this screening process is the detailed research you need to do to determine if these companies are socially responsible, based on the criteria of the screen itself. It’s a complicated process. As a result, most investors tend to invest in mutual funds that do this for them. At last count there were close to 200 funds using one or more social criteria to choose their investments.

In addition to positive and negative screens, some mutual funds are socially responsible by influencing the companies they own through shareholder activism. It can be as simple as requesting that the board has enough independent directors to keep an eye on shareholder concerns. Given the number of large fraud cases and CEO compensation issues that have arisen, it has become critical to corporate governance that average shareholders are represented.

A third form of SRI is community investing, also referred to as microfinance. This form of investment is providing low-interest loans to poor communities around the world with the hope that they will help those less privileged pull themselves out of poverty, providing a better standard of living for their families. For social activists, it has become the clear favorite in terms of socially responsible investing.

It’s safe to say that all three forms of SRI have grown in popularity in recent years. Life on this planet has become more crowded, more polluted, more dangerous and more expensive. Investors are shouting with their dollars and the message is clear. We all can do a better job being socially responsible.