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Socially Responsible Mutual Funds

2017-04-21 18:18 | Network |

Some people believe that unscrupulous means are sometimes necessary for making gains in a portfolio. However, it is possible to profit while using an ethical investment strategy – and you don't need to join Greenpeace in order to do it. Here we'll take a look at socially responsible investing (SRI) and how you can use socially responsible mutual funds to activate this strategy in your portfolio. (Is it possible to be environmentally friendly and still make money? Read our Green Investing Feature for both sides of the issue.)

What is socially responsible investing?

A socially responsible investing strategy is one that views successful investment returns and responsible corporate behavior as going hand in hand. SRI investors believe that by combining certain social criteria with rigorous investment standards, they can identify securities that will earn competitive returns and help build a better world.

SRI analysts gather information on industry and company practices and review these in the context of a country's political, economic and social environment.

Generally, these seven areas are the focus of socially responsible investors:

Corporate governance and ethics

Workplace practices

Environmental concerns

Product safety and impact

Human rights

Community relations

Indigenous peoples' rights

It should be noted that socially responsible investing is essentially interested in promoting the adherence to the positive aspects of these areas with publicly-held companies. However, SRI also gets a lot of attention for industries and companies that it opposes as "bad" for society. The latter would include, among others, businesses involved in gambling, tobacco, weapons and alcohol. These so-called "sinful" investment categories are often eliminated through SRI screening.

What are socially responsible mutual funds?

Socially responsible mutual funds hold securities in companies that adhere to social, moral, religious or environmental beliefs. To ensure the stocks chosen have values that coincide with the fund's beliefs, companies undergo a careful screening process. A socially responsible mutual fund will only hold securities in companies that adhere to high standards of good corporate citizenship.

Because people hold such a wide variety of values and beliefs, fund managers have quite a challenge in determining the stocks that reflect the optimal combination of values for attracting investors. The specific criteria used when screening for stocks all depend on the values and goals of the fund.

For example, funds with a strong sensitivity toward issues of environmental concern will specifically pick stocks in companies that go beyond fulfilling minimal environmental requirements. (For more insight, read Go Green With Socially Fundamental/12385.html">Responsible Investing.)

Many socially responsible mutual funds will also partition a portion of their portfolios for community investments. A common misconception is that these investments are donations. This is not the case. These investments allow investors to give to a community in need while making a return on their investment. Many community investments are put toward community development banks in developing countries or in lower-income areas in the U. S. for affordable housing and venture capital.

Ownership is Taken Seriously

Shareholder activism is one of the most important issues for socially responsible funds. SRI funds use their ownership rights to influence management through policy change suggestions. This advocacy is achieved through attending shareholder meetings, filing proposals, writing letters to management and exercising voting rights.

Because it is difficult for fund shareholders to exercise their votes, voting is achieved by proxy; fund shareholders assign management to vote on their behalf. Most socially responsible mutual funds have a strict policy to maintain transparency in their decisions and disclose all proxy voting policies and procedures to their shareholders.

Proof that individuals can make a difference is illustrated by the proposal the Securities and Exchange Commission (SEC) passed in January 2003, which states that all mutual fund companies must disclose proxy voting policies and procedures and the actual votes to their shareholders. The SEC's decision was brought about by the thousands of proposal requests sent to them by socially responsible investors.

Does good triumph over all?

As an investor, you cannot be completely philanthropic and expect nothing in return for your investment other than that pure feeling of having invested in a company that reflects your own values. So how does the performance of socially responsible mutual funds measure up to that of a regular portfolio? On average, its performance has been close to that of regular mutual funds. There are several indexes that track the performance of stocks considered to be socially responsible investments. According to KLD Indexes, the total returns for the MSCI KLD 400 Social Index (initially called the Domini Social 400 Index) between 1990 (its inception) and May 2015 was 10.46%. Over the same period, the S&P 500 returned 9.93%. The socially-responsible index has outperformed the broader index for over 25 years now.

The Price of Doing Good
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