Socially Responsible Investing for Idiots

If I have to be an idiot, at the least I’m a green idiot. I believe in clean air, corporate responsibility, community activism, licorice, pizza and Thai food. And healthy living, freedom, and of course freedom raisins.

Shiny happy raisins

I love trees, sky, and ah, the OXYGEN! But I’m worried about the dismal state of health care, education funding, the ozone hole, the Medicare donut hole, and your little dog too! Did you know the North Pole is melting? That really scares me. Plus I need to cut down on my Chunky Monkey intake.

In everything I do, in every move I make, it seems that I’m part of the worldwide web of production and consumption. So I pertly place my recyclables in the blue bin, our family uses reusable grocery bags, and I vote. What more can a light-switch thumping, gasoline-pumping 21st century fox do?

C’mon, baby, light my SRI fire…

It was only a couple of years ago a friend remarked to me that real estate was the only investment that made any sense, as if his seat on the Ferris Wheel of investments, propelled by an invincible source, would forever be going up, up, UP! Instead, what happened was “up, up and away.”

The first Ferris wheel, from 1893 World Columbian Exposition in Chicago

The desire for a sure thing is hard to resist. Albert Einstein, succumbing to pressure to support the idea of a static universe, in his 1917 paper added an adjustment number called the “cosmological constant” to his equation for general relativity. In 1931 he publicly renounced this static cosmology and endorsed the Big Bang expanding universe model, ditching the cosmological constant and returning to his original equation. He later called his bowing to peer pressure the greatest blunder of his entire life. You can read about the adventure in author Simon Singh’s “Big Bang – The Origin of the Universe.”

Many philanthropic foundations have long drawn a wall between their socially conscious mission statements that drive grant making, and the investment holdings of their endowment. There is a truism that investing for social benefit results in lower returns. But just as scientific peer consensus eventually embraced the Big Bang theory, so has the thinking of philanthropic foundations changed. The reasons are twofold: A recognition that corporate responsibility and societal concerns are valid parts of investment decisions, (1) and a growing number of academic studies have demonstrated that socially responsible investment (SRI) mutual funds perform competitively with non-SRI funds over time. (2)

For example, according to University of Maastricht and Erasmus University Rotterdam economists in their prize-winning paper, “we find little evidence of significant differences in risk-adjusted returns between ethical and conventional funds for the 1990-2001 period.” (3)

Foundation investment choices seem to be increasingly guided by effect upon society as a whole, not just financial gain, according to a recent Los Angeles Times article. (4) Fresh thinking in the nation’s largest foundations may be driving the impetus ever faster: The .5-billion William and Flora Hewlett Foundation (Menlo Park), the .1-billion John D. and Catherine T. MacArthur Foundation (Chicago), the .8-billion W.K. Kellogg Foundation (Battle Creek, Michigan) all have made recent changes to improve the social effect of their investments. (5)

SRI assets are also growing faster than assets as a whole: according to the non-profit Social Investment Forum’s 2005 biennial report, SRI assets rose more than 258 percent from 9 billion in 1995 to .29 trillion in 2005. Over those ten years, SRI assets grew four percent faster than the entire universe of managed assets in the United States. (6)

Some have already been on the SRI track: the nation’s second largest foundation, the Ford Foundation, along with others such as the F.B. Herron Foundation, the Jessie Smith Noyes Foundation and the Nathan Cumings Foundation, have for a long time aligned their charitable and investment practices.

What is Socially Responsible Investing?
Socially Responsible Investing (SRI) is a broad-based approach to investing that now encompasses an estimated .3 trillion out of trillion in the U.S. investment marketplace today. (7) The release of the United Nations Principles for Responsible Investment–subscribed to by some of the world’s largest institutional investors, asset managers, and related organizations representing over trillion in assets as of mid- 2007–underscores the widespread acceptance of the principle that investors cannot, in the long run, achieve their goals by investing in corporations that externalize their costs onto society. (8)

How do I research SRI funds?
A good place to start is the Social Investment Forum (http://www.socialinvest.org). Look at the resource list at the end of this article too.

How do I start investing?
If you participate in an employer-sponsored retirement plan, there may be SRI funds already available to you. If you manage your own IRA or other plan, look into what’s available. But don’t just go adding a fund without considering the entire makeup of your portfolio.

The key to earning decent long-term returns and limiting overall risk is to have a proper asset allocation, meaning you don’t have all your eggs in one basket. For do-it-yourself-ers, check out the government’s website about asset allocation (http://tinyurl.com/2825hw), or purchase “All About Asset Allocation” by Richard A. Ferri (.57 at Amazon), a great introduction to the topic. Your personal financial advisor or company where you have your investment or retirement accounts can assistance.

How do I know which funds will produce the highest returns?
You don’t, you can’t, and you won’t, so just forget about it because past performance doesn’t predict future results. The day-to-day ups and downs of the market receive the media attention, but the daily, quarterly, or even yearly returns are largely irrelevant in constructing an individual’s portfolio whose objectives are long-range. What you want to look for are funds that perform well over the long run within their particular sector, as compared to the appropriate benchmark indices. Various areas of the economy are always moving up and down and sideways, and so far no one has ever been able to know ahead of time what the pattern will be. Asset allocation, I’ll say again, may be the key to long-term success in building a financially secure future. Not panicking assistances too!

What makes an SRI fund different?
If a prospective company is a fit according to a fund’s stated objectives, research is performed to determine whether or not it’s a good idea to buy stock at the current offering price. It boils down to the question “Within the guidelines of the stated objectives of the fund, will this purchase assistance to achieve the highest possible return for the fund’s shareholders?”

The three core socially responsible investing strategies are screening, shareholder advocacy, and community investing. Screening means a fund will include or exclude companies based upon criteria such as alcohol, tobacco, animal testing, and human rights, among others. These screens can be positive (e.g., including companies that treat employees well) or negative (e.g., excluding companies who do business with disturbed musicians).

Keep in mind that, as with all mutual funds, SRI funds have no guarantees of future return.

In any case, you’d better take this lad’s offering of raisins!

If you use electricity, drive a car, and participate in many other activities of daily living, in a very true sense you are already investing in the companies that allow and encourage your consumption. In other words, you are part of the “market” whether or not you actually own stocks or mutual funds. Socially responsible investing can be a way to make your USD work toward something in which you believe, and support those companies you believe have a vision in line with your own.

Resources and suggested reading

1.    “The Mission in the Marketplace: How Responsible Investing Can Strengthen the Fiduciary Oversight of Foundation Endowments and Enhance Philanthropic Missions.” Social Investment Forum Foundation’s resource guide for foundations to manage risk and leverage their investment assets more fully with their core philanthropic purpose, while creating lasting value. http://tinyurl.com/35t49h
2.    “10 best” list of companies. Corporate Responsibility Officer magazine rates the citizenship disclosures, policies and performance of large-cap, public companies in the following industries: Auto & Vehicles, Paper, Technology Hardware, Technology Software, Transport, and Travel & Lodging industries, Chemical, Energy, Financial, Media and Utilities industries. http://www.thecro.com/node/580
3.    Social Science Research Network. http://www.ssrn.com/
4.    United Nations’ “The Principles for Responsible Investment.” An investor initiative in partnership with UNEP Finance Initiative and the UN Global Compact. http://www.unpri.org/
5.    The Social Investment Forum; national membership association dedicated to advancing the concept, practice, and growth of socially and environmentally responsible investing. http://www.socialinvest.org/
6.    Social Investment Forum’s 2005 biennial report. http://tinyurl.com/258794
7.    Sristudies.org, a resource for quantitative aspects of socially responsible investing. Includes an annotated bibliography of studies of socially responsible investing. A project of the Moskowitz Research Program, which is affiliated with the Center for Responsible Business at the Haas School of Business, University of California, Berkeley.
8.    Socially Responsible Mutual Fund Charts of Financial Performance. http://www.socialinvest.org/resources/mfpc/
9.    SocialFunds.com, an advertising-driven website with information on SRI mutual funds, community investments, corporate research, shareowner actions, and daily social investment news.
10.    “Handbook on Responsible Investment Across Asset Classes.” For asset allocation junkies, individuals and institutional investors the Boston College Center for Corporate Citizenship created this work. http://tinyurl.com/2ffqbu

Footnotes

1. The Maturing of Socially Responsible Investment: A Review of the Developing Link with Corporate Social Responsibility by Russell Sparkes and Christopher J. Cowton. Journal of Business Ethics, Volume 52, Number 1 / June, 2004.
2. SriStudies.org
3. International Evidence on Ethical Mutual Fund Performance and Investment Style, paper by Rob Bauer, Kees Koedijk, Rogér Otten. Limburg Institute of Financial Economics, November 2002. (socialinvest.org/resources/research)
4. Foundations align investments with their charitable goals by Charles Piller, Los Angeles Times, December 29, 2007. Section C, p 1.
5. Ibid.
6. 2005 Report on Socially Responsible Investing Trends in the United States. Social Investment Forum. (www.socialinvest.org)
7. Socially Responsible Investing Facts. Social Investment Forum. www.socialinvest.org
8. PRI Report On Progress 2007. PRI (Principles for Responsible Investment), United Nations. (www.unpri.org)

Image credits

Sun-Maid/George Bush composite image
• First Sun-Maid packaging to feature a likeness of Lorraine Collett as the “Sun-Maid Girl,” 1916. Designer unknown, incorporates painting by Fanny Scafford. Public domain in the United States.
• Photograph of Bush speaking. Brazil, November 6, 2005. Agência Brasil, a public Brazilian news agency, produced photograph. Published under the Creative Commons License Attribution 2.5 Brazil.

Fox/Morrison composite image
• Foxes by Franz Marc, 1913. The Yorck Project: 10.000 Meisterwerke der Malerei. DVD-ROM, 2002. ISBN 3936122202. Distributed by DIRECTMEDIA Publishing GmbH. Public Domain.
• Jim Morrison portrait, 2007, by Amadeu.taradell. Released by author into public domain.

Ferris Wheel/Superman composite image
• The first Ferris wheel from the 1893 World Columbian Exposition in Chicago. The New York Times photo archive. Public Domain.
• Screenshot of 1941 cartoon Superman. Fleischer Studios. This work is in the public domain because it was published in the United States between 1923 and 1963 with a copyright notice, and its copyright was not renewed.

Musician holding Valentine’s Day raisins composite image
•    Photo of musician Jeff Hawley, 2007. Manager, Marketing Content Pro Audio and Combo Division, Yamaha Corporation of America. Courtesy of Mr. Hawley.
•    Photo, August 3, 2005 by Mazbln. Halberstadt, Klosterkirche St. Burchardi, Ort des John-Cage-Projektes “As slow as possible.” Permission is granted to copy, distribute and/or modify this document under the terms of the GNU Free Documentation License, Version 1.2 or any later version published by the Free Software Foundation.
•    Original painting of Lorraine Collett by Fanny Scafford, 1915, later used on Sun-Maid raisin packaging. Public domain in the United States.

This column is meant to provide general information, and should not be construed as providing investment, legal, or tax advice. There is no guarantee as to the accuracy or completeness of the information in this article. There are no guarantees of future return for any fund, nor an endorsement of any investment product. Mutual funds are sold by prospectus only. For complete information on mutual funds including sales charges and expenses, call your financial professional for a prospectus. Please read the prospectus carefully before investing. Links are provided herein as a courtesy, and no guarantees are made as to the accuracy of the content on the referenced websites.

Sí, Money! – Vol. 2, No. 1 February 2008 – http://simoney.us

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Michael Grodsky, AIF® -
About the Author:

Michael Grodsky (AquariusFinancial.com) is a fee-based financial planner in Los Angeles, California. He serves artists and non-profit organizations, assistanceing them to align their investments with their values. He can be reached at 323-293-6800, michael@aquariusfinancial.com

Registered Representative offering securities and investment advisory services through Independent Financial Group, LLC, a registered broker-dealer

and investment advisor, member FINRA/SIPC. Registered to sell securities in the state of California. Aquarius Financial and IFG are not affiliated. Office of Supervisory Jurisdiction: 4518 Winnetka Avenue, Woodland Hills, CA 91364

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