Socially responsible investing

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“Even the decision to invest in one place rather than another...is always a moral and cultural choice.” -- Pope John Paul II, Centesimus Annus, N. 36



Introduction[edit]

When you put your money in the bank, it does not sit in a vault – it is invested in companies, many of which may be counter to your moral or ethical beliefs. Socially Responsible Investing (SRI) can overcome this problem and has the potential for green investors to influence society in beneficial ways, helping to improve the prospect for a humane, just and peaceful social order. There are four main categories of SRI, which can be utilized by lower, upper and middle class investors for competitive rates of return on their savings[1].

Avoidance Screening[edit]

Avoidance Screening entails ensuring you do not invest money in corporations whose practices are counter to your moral or ethical values. For example, investors might avoid tobacco companies (responsible for 400,000+ deaths each year in the U.S alone), land mine producers (land mines maim or kill approximately 26,000 civilians every year, including 8,000 to 10,000 children), weapons of mass destruction manufacturers, or companies that are implicated in using slave labor. If you already own mutual funds or stocks in companies that do not agree with your ethical values - you may want to consider divesting.

This approach is also known as light green (e.g. light green funds or a light green screen).

Affirmative Screening[edit]

Affirmative Screening identifies investments based on positive practices. For example, those interested in environmental stewardship might invest in the Eco-deposits program of Shorebank Pacific, which lends money to small businesses and homeowners to strengthen environmental conservation-based practices. They could also invest in mutual funds that target environmentally benign firms like Green Century or Portofolio 21 This is a mutual fund that invests specifically in corporations that design “ecologically superior products,” use renewable energy, and consistently improve their production efforts so that they reduce environmental impact.

This approach is also known as dark green.

Finally, you can invest directly in stock of companies you would like to support such as photovoltaic manufactures and hydrogen fuel cell companies.

Community Investing[edit]

Community Investing involves directing your assets toward a particular locale by way of a community lending institution. Examples include purchasing certificates of deposit and opening savings/checking accounts at community development banks (e.g. Community Capital Bank) or community development credit unions (e.g. the Self Help Credit Union). There is a movement in the U.S. to encourage people to move their money out of bigger banks and into smaller, community-oriented financial institutions that generally avoided the reckless investments and schemes that helped cause the financial crisis. This work is centered at Move Your Money.

A particularly exciting example returning high “social dividends” is microcredit. Microcredit banking offers business training, peer support, and small loans (even only a few dollars) to the world’s poorest people. Overwhelming evidence from the Grameen Bank and many others show microcredit creates personal and economic success for the poor and their communities. It gives people the little initial assistance necessary for them to pull themselves out of poverty. One way you can get involved in microcredit immediately is to invest in Kiva.org. Kiva is the world's first person-to-person micro-lending website, empowering individuals to lend directly to unique entrepreneurs in the developing world.You will not earn a return on Kiva financially but you can do a lot of good with your money. Energy in Common (EIC) provides microloans through a methodology similar to Kiva, however EIC specifically focuses on funding renewable energy technologies.
A newer microloan website called Microplace is an Ebay affiliate. It allows you to make direct loans to individuals or groups to help with development while earning a modest return on your money. Wokai.org operates in a model similar to Kiva with a special focus in rural China, one of the countries Kiva does not operate. Zidisha.org and MyC4 are other options to lend to African entrepeneurs while earning a bid on interest rate.

This is another example of peer to peer lending: Zopa is the world's first social finance company with a way for people to lend and borrow directly with each other online as part of our continuing mission to give people around the world the power to help themselves financially at the same time that they help others.

Shareholder Activism[edit]

Shareholder ActivismW encompasses several tactics: dialog with management of a company, shareholder resolutions and divestment. For example, the Aquinas Fund, a group of mutual funds that draws from the U.S. Catholic Bishops social teaching, has influenced six major drug companies’ decisions to decline producing unsafe abortion drugs.

A recent twist to shareholder activism is to use the market to both profit from and punish "bad" companies using Karma Banque. Wealthy British scion Zak Goldsmith and investment activist Max Keiser want to take down Coca-Cola Co., and they have added some new spice to the age-old tactic of boycotting: They have opened a hedge fund designed to profit from any decline in the soft drink conglomerate's stock price. Karma Banque (KbQ) is at the center of a new activist movement which combines the civil disobedience of Gandhi with the financial savvy of George Soros to help change the economic landscape. KbQ endorses boycotts of companies to drive their stock price down. At the same time they short sell the companies stock. Short sellingW is an investment strategy that allows you to make money when a stock goes down in price. You can of course do this yourself for any company and KbQ's information is free and open to the public.

Recent Trends[edit]

The popularity of SRI is increasing steadily. The aggregate SRI assets under management in the U.S. have grown steadily in recent years. According to the Social Investment Forum, at the end of 2007, $2.7 trillion in assets use one or more of the three strategies that commonly define SRI: social screening, shareholder advocacy and community investing. That $2.7 trillion is about 11% of all U.S.assets under professional management — nearly one out of every nine dollars. [2] Essentially SRI is becoming mainstream.

Difficulties[edit]

  • Finding ethical investments can take extensive research. For this reason:
    • Ethical investment funds are in a better position to do so. Whether they do so properly varies between funds, and public scrutiny of their decisions is valuable.
    • Indices also can provide a guide, though their analysis is also open to question.[3]
  • Restricting investment opportunities makes a balanced portfolio more challenging. To be truly socially responsible, it is necessary to seriously face questions of fossil fuel investment, for example. A choice must be made between these approaches:
    • Remove the entire segment of investment from the portfolio, favoring (for example) renewable energies; or
    • Acknowledge that fossil fuel use will not disappear immediately, and invest in the least damaging as a transitional form. This recognizes that there are very large differences in carbon impact between activities within the same sector, from natural gas (lowest climate change impact) (citation needed) to petroleum and coal (much higher), through to shale oil (far more damaging).
    • "Reward" certain fossil fuel companies that engage in relatively green behavior. In this case researchers and investors must be extremely wary of greenwash, and consider how serious and significant the behavior actually is.

Resources[edit]

References[edit]

  1. In fact there is substantial evidence that socially screened investments may outperform their non-screened counterparts. Shank, Todd M., Daryl K. Manullang, and Ronald Paul Hill. “Is it Better to be Naughty or Nice?” The Journal of Investing. Fall 2005: 82 – 87 -- cites a study that compared portfolios comprised of top socially responsible funds and top vice funds. Analysis of alpha regression models found that in the short-term, differences between the two portfolios’ performance was negligible. Only the SRI funds had any significant positive risk-adjusted performance. For the five and ten year period, only the SRI portfolio had positive and significant alpha value, suggesting that the market valued the features of the companies in the SRI portfolio. For the same periods, the vice portfolio showed no significant excess return. These findings indicate that the market valued the features of the SRI portfolio over the longer time horizons, while not valuing the vice funds for any period, and it was the SRI portfolio that had superior risk-adjusted performance.
  2. Report: Socially Responsible Investing Assets In U.S Surged 18 Percent From 2005 To 2007, Outpacing Broader Managed Assets [1]
  3. The sham of "socially responsible investing",J. Henderson, Mises Economics Blog, April 11, 2007. The article points to the SRI preference for BP over Exxon, and Reebok and Timberland over Nike, and argues that it is not the case that the SRI favorite is more ethical, and that the analysis used is shallow (e.g. Nike being allowed back into KLD's SRI index "on the basis of some favorable news clippings KLD found").

Interwiki links[edit]