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Want to Be a Socially Responsible Investor? Here's How. (Part 1)

The idea of using your hard-earned money to make an ethical statement might seem like a novel concept, but it’s an investment strategy being employed by a growing number of individuals. Today’s “socially responsible” investors carefully screen companies and mutual funds to ensure that they invest only in companies whose business practices match the investor’s personal values.

This approach is gaining momentum. According to a report issued by the nonprofit Social Investment Forum, $1 out of every $8 invested by professional fund managers today is involved in socially responsible investing (source: Social Investment Forum news release, November 2001). Here’s a closer look at the strategy and how you might integrate it into your overall financial planning:

How Does It Work?

Socially responsible investing is simply supporting – or refusing to support – specific companies on the basis of your personal values and beliefs. The modern socially responsible investing movement traces its roots back to the 1960s, when investors were concerned primarily with such issues as civil rights, the environment and military action.

Today, socially responsible investors often consider a much broader range of issues and use several different strategies to reach their goals:

• Social screening involves purchasing stock in companies that match the socially responsible criteria the investor has established. This investment strategy can also focus on excluding specific companies or mutual funds that don’t meet standards.

• Community investing involves investing in assets that support or play a role in an individual’s local region or community. For example, you might buy stock in a company that is a major employer in your neighborhood. Or you might invest in a money market fund or foundation that directs capital to low-income neighborhoods in your city.

• Shareholder activism involves using your influence as a shareholder to try to change the practices of a publicly held company. For example, in 1999, shareholder activism played a key role in convincing Home Depot to phase out the sale of wood products made from timber in old-growth forests.

Won’t This Limit My Options?

Being a socially responsible investor doesn’t necessarily mean limiting your investments to a few companies. As you might expect, individual investors often have differing views on the definition of “socially responsible.” Some socially responsible investors, for example, only avoid companies involved with tobacco sales, while others prefer to invest in companies that have demonstrated a strong commitment to philanthropy.

Although you might think that limiting your investment choices to a specific range of companies and assets could negatively affect your potential returns, recent survey results seem to indicate otherwise. According to the Social Investment Forum, assets in socially screened investment portfolios under professional management grew by 36 percent from 1999 to 2001, surpassing the $2 trillion mark for the first time (source: Social Investment Forum news release, November 2001).

Next week’s Advice@American Express column will complete this subject with Want to Be a Socially Responsible Investor? Here’s How. (Part 2)

August 29, 2002

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