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Socially Responsible Investing

     Socially Responsible Investing (SRI) is a general term used to describe investments that reflect good values, morals, and ethics. In addition to earning competitive rates of return on their money, those who invest in a socially responsible manner attempt to improve the world by investing in companies that function in an ethical manner. SRI is frequently described as the attempt to "do good while doing well."

     In recent years, funds invested according to some kind of socially responsible screen have grown dramatically. According to the 1999 Report on Socially Responsible Investing Trends in the United States, socially responsible investing topped $2 trillion in the United States in 1999. One out of every eight dollars under professional management in the United States today is part of a socially responsible portfolio.

     Prior to 1993, avoidance of companies dealing in South Africa represented the driving force behind socially responsible investing. That criteria disappeared when Nelson Mandela rose to power. SRI criteria include positive screens (for considering companies that focus on doing good), as well as negative screens (for eliminating companies that are considered harmful). Common screens used by socially responsible investors include

     Numerous researchers and journalists have studied SRI funds and commented on their performance. In a frequently referenced study that appeared in the November-December 1993 issue of the Financial Analysts Journal, Sally Hamilton, Hoje Jo, and Meir Statman analyzed 17 socially responsible mutual funds that had been established in 1985 or earlier. The authors concluded that the performance of these funds was not statistically different from conventional funds and that "Investors can expect to lose nothing by investing in socially responsible mutual funds; social responsibility factors have no effect on expected stock returns or companies' cost of capital."

     Morningstar has also commented on the performance of SRI mutual funds and has a series of articles on the subject. See Morningstar's Socially Responsible Investing. James Glassman has also written on the topic in the Washington Post (Ethical Stocks Don't Have to be Downers - 4/23/95).

     Another well-written article on the topic was titled "Is There a Cost to Being Socially Responsible in Investing" by John B. Guerard, Jr. The article was the winner of the Moskowitz Prize in 1996. The Social Investment Forum introduced the award to encourage and recognize outstanding research on socially responsible investing. The 1997 winner was a paper titled Finding the Link Between Stakeholder Relations and Quality of Management.

     The Domini Social Equity Fund is particularly interesting and widely followed because it is perhaps the most comparable fund to the S&P 500 (the fund has been running neck-and-neck with the benchmark since the Domini fund was introduced in 1991). The fund attempts to match the total return of the Domini 400 Social Index (DSI), an index of 400 companies that pass multiple broad-based social or ethical screens. The fund selects what it considers the top half of companies by investing in 250 of the S&P 500 stocks plus 150 others. See also Forget the S&P Index Funds; Check Out the Domini Social Index by Dale Kurschner (Business Ethics Magazine: November/December 1995).

     Some model portfolios of socially responsible investing screens have shown promising results. For instance, stocks that have won the Malcolm Baldrige National Quality Award have significantly outperformed. According to Worth Magazine (May 1998) six winning companies outperformed the S&P by 248 percentage points between 1988 and 1997. The award goes to companies that meet exceptional standards in seven categories including leadership and strategic planning. See also Good Money's Socially & Environmentally Screened Stock Averages.

     There a number of other excellent resources online for investors interested in learning about and/or researching socially responsible investments.

See also Charity

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