(Photo above Ed Wettig)
Socially responsible investing, sometimes known as sustainable or ethical investing, is distinguished not by investing in a specific industry but by selecting investments according to a set of social, ethical, or religious priorities and guidelines.
For example, a fund might avoid investing in particular companies, industries, or countries whose products, services, policies, or practices are at odds with the fund’s social priorities. Examples of companies that often are excluded from socially conscious funds include those in the tobacco and gambling industries, those with significant interests in countries with repressive or racist governments, or those that contribute to environmental pollution.
A fund also might actively seek as investment targets companies or industries that are perceived as supporting certain beliefs about religion, social justice, or ethical business practices.
Over the last two years, socially responsible investing has grown by more than 22 percent to $3.74 trillion in total managed assets, suggesting that investors are investing with their hearts, as well as their head. In fact, about $1 of every $9 under professional management in the U.S. can be classified as an SR investment.
How to invest
Should you wish to pursue this type of investing, there are several options to consider. Traditionally, mutual funds have been the most common way to invest in socially responsible companies. Fund companies such as Parnassus, GuideStone Funds and Calvert are some of the largest. Exchange Traded Funds (ETF’s) have recently come out in the SR format. Both Powershares and iShares have several options.
What about performance?
Since investing in socially responsible investments requires a great deal of “targeted screening” of companies to include in a fund, sometimes the financial strength or other traditional stock valuation metrics are secondary. The three general methods of stock screening of a SR fund include: negative screening- which screens out companies within a particular sector like tobacco; positive screening- which seeks to include companies that are involved in a particular activity, say, “green living” such as wind or solar power; and finally a restricted screen- which would allow a large diversified company whose activity in a less than desirable activity is so small relative to the rest of the company’s activities, that the company would be allowed in the fund.
There are a number of socially responsible indexes- typically defined by geographic location. The North American SRI index returned 9.31 percent in 2014 compared to 13.6 percent for the S&P 500 index. Over 5 years, the NA SRI had an annualized return of 10.25 percent versus 15.45 percent for the S&P 500.
Conclusion
If you feel strongly about the societal benefit or harm your investment might help support, a socially conscious fund can be both personally and financially rewarding. However, each fund has a unique set of investment guidelines, and anyone considering an investment in one should understand that specific fund’s priorities and investing strategy to ensure that its goals match their own. Also, recognize that the fund may rule out many companies that have strong upside potential but whose activities don’t fit the fund’s agenda. That might or might not limit potential returns compared to funds with fewer restrictions. Though past performance is no guarantee of future results, reviewing data on the fund’s track record can help you understand whether your principles may affect the return you can expect.
Provided by Ed Wettig, CFP, Wettig Capital Management which offers investment management, financial planning and retirement income strategies. Securities and investment advisory services offered through Royal Alliance Associates, Inc. Member FINRA/SIPC and a Registered Investment Advisor. Wettig Capital Management is independent of Royal Alliance Associates, Inc. and not registered as a broker/dealer or investment advisor.
