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Socially Responsible Investing

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The majority of investors design their portfolios based on data points such as dividend yield, potential for capital appreciation, country of domicile, industry, and risk.  Most rarely consider the social or community impact of companies in which they make investments.  In recent years, however, investments focused on building portfolios of “social responsible” companies have exploded in number.  Socially responsible investing (SRI) is best described as “an investment discipline that considers environmental, social, and corporate governance criteria to generate long-term competitive financial returns and positive social impact.”[i]  SRI investment providers, such as mutual fund or ETF companies, often prohibit investment in stocks or bonds from companies who do not meet their standards or produce products that fit in the following areas:

  • Alcohol, tobacco, or gambling
  • Environmental
  • Defense or weapons
  • Human rights issues, labor relations, or employment equality
  • Community investment

Investors and fund managers can place emphasis on SRI in a variety of ways:

  • Negative Screening or Divestment:  Investors design a program that meets their social or ethical criteria and screen any securities that do not meet their standards.  Securities that are currently owned but do not pass the screens are sold from the portfolio.
  • Positive Screening: Rather than screening out, investors purchase securities in companies who demonstrate the specific qualities that the investor is attempting to encourage.  In theory, if enough investors invest in the company for social or environmental reasons, the company will perform well and be rewarded for the qualities the investors value and encouraged to continue the favorable management decisions.
  • Shareholder Activism: Investors participating in shareholder activism endeavor to influence the activities of company management by communicating with the company about issues of importance to the investor or investor group.  In recent displays of activism, investor organizations have submitted proxy resolutions, attempted to be elected to boards of directors, and communicated with media outlets to gain attention.  Recent examples of companies impacted by shareholder activism include Disney, Chrysler, and Time Warner.
  • Impact Investing: Investors provide capital directly to institutions or companies they view as socially, economically, or corporately responsible in hopes of growing or strengthening the business or the industry.  Investment can take the form of equity investment, loans, or lines of credit.

For the majority of investors, the simplest way to incorporate into their portfolio a focus on socially responsible investing is to choose from the hundreds of mutual funds and exchange-traded-funds (ETFs) that mandate investments only in companies who meet strict screens.  If you’re evaluating your investment proposal in light of social responsible investing issues, we invite you to speak with us.  As independent advisors, we can help design a portfolio that meets both your financial needs and your ethical or moral standards.

[i] 2012 Socially Responsible Investing Report, TIAA-CREF

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