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Socially-Conscious Investing: Putting Your Money Where Your Values Are

by Brett Keener
When you invest in stocks or equity mutual funds, you participate in the ownership of major companies. Perhaps your primary goal is to earn a return on your money. But for a growing number of investors, owning socially-responsible companies with strong ethics also is important. Fortunately, these investors have an array of attractive choices for pursuing “socially-conscious” strategies.

This article identifies several ways in which you can put your money where your ethics are, along with ideas for evaluating socially-conscious investment choices.

Socially-Conscious Basics

The terms “socially-conscious” and “socially-responsible” are used interchangeably to describe certain companies and investment funds that participate in their common stocks. These companies are committed to making healthy products that are good for the environment and don’t promote bad habits, war or violence. Also, they pursue enlightened ethical policies toward their workers and communities.

According to the Social Investment Forum, the most common “screens” used to select socially-conscious companies are: tobacco, the environment, human rights, employment and equality issues, gambling, alcohol and weapons. Of the 500 large companies included in the Standard & Poor’s 500 Index, about half (250) have passed the screens used to select the leading benchmark of socially-conscious investing: The Domini 400 Social Index. This index also includes about 150 other stocks that are not S&P 500 components.

The main benefit of owning screened stocks is peace-of-mind, knowing that your capital is not being used by corporations to provide products or services that you consider unethical. In the past, it has often been felt that socially-conscious investors sacrificed a small amount of return, because “sin products” can be very profitable. However, long-term results of the Domini 400 have shown that this thinking is not always true. According to KLD Research & Analytics, the Domini 400 achieved an annualized return of 12.2% for the ten year period that ended on 1/31/05. Over the same period, the S&P 500 Index returned 11.5%. An index is a portfolio of specific securities, the performance of which is often used as a benchmark in judging the relative performance of certain asset classes. Indexes are unmanaged portfolios and investors cannot invest directly in an index. Past performance is no guarantee of future results.

Three Ways to Participate
Investors have three basic choices for participating in socially-conscious strategies:

  • Mutual funds - The most convenient choice includes many socially-conscious mutual funds. By one count there are more than 150 such funds available, holding a combined $150 billion in assets. Some socially-conscious funds focus mainly on large U.S. companies while others also include smaller and foreign companies. A financial professional can help you identify a diversified, professionally managed fund that meets your criteria.

  • Individual stocks - One limitation of mutual funds is that you can’t apply your own personal ethics to screening criteria. For example, some investors want to avoid companies that treat animals unfairly in food processing or laboratory testing. However, the majority of socially-conscious mutual funds do not screen for animal rights. If you want to build your own stock portfolio among companies that you personally consider ethical, a good place to start is with a database of the 400 companies in the Domini 400 Social Index, maintained by Domini Social Investments at: www.domini.com. By clicking on a company name in this database, you can learn its strengths and weaknesses under a variety of screening criteria.

  • Separate accounts - These accounts consist of professionally managed personal portfolios selected by investment advisers. In many cases, you can suggest to your adviser the social screens you would like to apply - such as no weapons-makers or tobacco/alcohol companies. The advantage is being able to participate in the strategies of top advisers while applying personal ethics. The disadvantage is that many separate accounts require minimum investments of $50,000 or more.

Investors Voices Can Make a Difference

Many socially-conscious people believe that they can make the world a better place through their personal actions. If you know a company makes harmful products according to your values, you might not buy its products. Taking the same idea a step further, some investors refuse to participate in certain stocks. In both cases, they believe they are sending a message to the company’s management that says: “Do the right things, and I’ll support you.”

Based on history, there is no doubt that these messages have clout. One of the first screens applied in the early 1990s weeded out companies investing in South Africa’s apartheid system. Economic sanctions and protests were a powerful force in causing apartheid’s demise, and now South African participation is no longer a screening criteria.

The question of whether or not socially-conscious investing provides above-average financial returns is subject to debate. But it is very clear that this has become a viable way to invest with a variety of choices available. Since the social screens and strategies of investment choices vary, the guidance of a financial professional can be useful in selecting among them.

Registered Representative of Park Avenue Securities LLC (PAS). Securities products and services offered through PAS. Financial Representative, The Guardian Life Insurance Company of America (Guardian), New York, NY. PAS is an indirect, wholly owned subsidiary of Guardian. Certified Financial Services, LLC is not an affiliate or subsidiary of PAS or Guardian.
PAS is a member NASD, SIPC.
Brett Keener is a financial representative at Certified Financial Services, LLC in Paramus, NJ. Mr. Keener helps clients in their personal, estate, and business planning. He is a graduate of the College of William and Mary.