The Needs of the Age
Socially Responsible Investing

Baha'u'llah wrote, "Be anxiously concerned with the needs of the age ye live in, and center your deliberations on its exigencies and requirements." One way some people choose to be concerned with the needs of the age and plan successfully for long term financial health is through socially responsible investing (SRI). The FUNDamentals Team did some research, asked around, and found some information to help you "center your deliberations...."

Socially responsible investing began as a way to avoid investing in what were termed "sin stocks", companies that dealt in such things as alcohol, tobacco, gambling, or even weapons makers. Decisions on which companies to invest in were based on what was called "negative screening", meaning they avoided investing in companies that produced such things. Generally and historically, this kind of screening has resulted in mutual funds that tend to lag behind some of the major investing benchmarks (like the S&P 500) because the available pool of companies that can be invested in can be somewhat limited. For example, through negative screening of "sin stocks", some investment firms had to stop investing in Starbucks after the company licensed its name to a coffee liqueur.* Recently, however, there has been a move towards what's called "positive screening", meaning searching out and investing in companies to encourage certain kinds of trends, products or processes.

Three of the key elements that comprise much of positive screening involve environmental, social, or governance issues (ESG) issues.  Socially responsible investment managers thus consider such things as how a company addresses environmental concerns, the diversity of the board of directors, or whether the company is a positive force in the community. The thinking here is that companies that aim to run sustainably, whether from an environmental or a governance standpoint, will fare better in the long term and over time generate more wealth, and do it responsibly.

If you think SRI might be for you here are some things to consider:

• Performance -  This may seem like a no-brainer, but with any potential investment it's important to know how well the investment has performed over a period of time and how it is rated. As mentioned above, historically SRI has tended to under perform industry averages but with new ways of thinking about SRI that trend seems to be changing, with investments meeting or exceeding industry averages.
• Fees - Socially responsible investments are sometimes offered by smaller investment managers, meaning that you may have to pay more fees, such as the 12(b)1 fee, which is a fee you pay to help the firm market their investments. Also, many, but not all, of these investments are actively managed, meaning you'll have to pay a service fee for the person who manages the fund and decides which companies to invest in. This is in contrast to an index fund, which is not actively managed and is tied to a range of companies (e.g., the S&P 500 index fund is tied to the 500 largest companies on Wall Street), and which have lower service fees because there is no one who actively manages the fund and researches when and where to invest. But no matter where you decide to invest, fees are an important thing to take into account.
• Portfolio - There is no standard for a 'socially responsible' investment. One investment manager might weed out investments in weapons manufacturers, while another may focus on ESG issues and invest in a company that might also manufacture or sell alcohol. The key is to do a little homework to see what you're investing in and, essentially, what you're supporting with your money which, as we've seen in a previous article, is a sacred thing.

In the world of investing SRI is still somewhat new and developments are constantly being made. As with any investment it involves thinking about what your goals are, whether spiritual, material, environmental, or social, and how you can use your material resources to meet those goals. We'd love to hear how it goes.

Wall Street Journal, November 4, 2007