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Introduction to Socially Responsible Investing

A growing number of people are investing their money in the future. Not just their own future, their retirement or their dream house, but in the future of their community, their environment, their world. These people are at the heart of socially responsible investing, one of the most optimistic emerging trends in the financial world. Socially responsible investing integrates financial goals with positive personal values to give investors a voice in shaping the future of our society.

The beauty of socially responsible investment is that everyone's vision of a brighter future is not the same. Some investors are more concerned about environmental problems, some feel strongly about how companies treat their employees, while others worry about the societal effects of certain products, such as tobacco, weapons, or alcohol. There are as many angles to socially responsible investing as there are investors, representing a mosaic of social concerns. But all of these angles share in common each respective individual's or institution's highest aspirations for the world.

What surprises many investors is that you can do well, while doing good. Most investors assume that there is a financial cost to combining societal and financial goals, what's known as a "double bottom line." But the outstanding performance of socially responsible indexes and mutual funds, as well as several recent studies, support the notion that investing with your values does not necessarily compromise your financial gains. On the contrary, some financial analysts suggest that companies that pay close attention to social and environmental risks and opportunities will be more competitive in the long run.

History

The origins of socially responsible investing are ancient, but it has only come full stride in the last 20 years. In biblical times, Jewish laws laid down directives on how to invest according to ethical values. In the U.S., Quakers practiced socially responsible investing as early as the 16th century, based on their beliefs in human equality and nonviolence. More recently, the social climate of the 1960s raised concerns among some investors about civil rights, the environment, and militarism. But the turning point for socially responsible investors came during the campaign to eliminate the institutionalized racial discrimination of Apartheid in South Africa.

Today there are a plethora of environmental and social concerns for socially responsible investors to rally around. Incidents like the Exxon Valdez oil spill or the Bhopal Union Carbide plant disaster, along with repeated warnings about toxic waste, global warming, and other environmental threats, continue to reinforce the seriousness of environmental concerns for responsible investors. Pressing social issues such as diversity in the workplace, employee issues, human rights in oversees factories, and socially destructive products such as tobacco, now provide fertile ground for investors to base their choices on.

Current Status

Although a relatively small portion of total investments, socially responsible investing continues to grow and become more mainstream and influential. Total investments using at least one social investment strategy have grown from $40 billion in 1984 to $639 billion in 1995, to over $2 trillion today, according to a 1999 report by the Social Investment Forum (SIF). Social investments now account for about 13 percent of the estimated $16.3 trillion under professional management in the U.S., according to the SIF report.

The number of socially responsible mutual funds using one or more social criteria has grown to nearly 200 funds - and include equity, balanced, international, bond, index, and money market funds. Hundreds of institutions and mutual fund companies have used the power of their ownership positions in publicly held companies to sponsor shareholder resolutions or vote their proxies on corporate social responsibility issues.

There are still millions of investors who are not including social and environmental concerns in their investment decisions. Just what are they missing?

Examples

There are three primary strategies for investors to follow their social and environmental values. The first is the practice of screening, or choosing securities based on social or environmental criteria. Screening typically involves excluding certain companies for products or practices that are considered negative, called avoidance or "negative screening." A growing movement toward "positive screening" involves selecting companies based on their positive contributions to society or the environment. Because the process of screening requires extensive research into company policies and practices, most socially oriented investors rely on mutual funds to manage their screened investments.

Socially responsible mutual funds address a range of issues, from environmental impacts to animal rights, from tobacco manufacturing to employee relations. There are screened mutual funds to match any investor's values, but it is important to bear in mind that no company is perfect. A company that manufactures weapons might be a great advocate of employee empowerment. Another company that makes chairs from recycled materials might also produce toxic wastes in the process. Socially and environmentally screened mutual funds are likewise not black and white, as they include companies with various strengths and weaknesses based on the fund's qualitative criteria.

The second strategy for socially responsible investors is shareholder activism. Shareholders own a piece of the companies they invest in, and with that ownership comes both rights and responsibilities. A growing number of social investors are using their roles as corporate owners to advocate their issues of concern, whether it is deforestation or employee wages.

Shareholders with social or environmental concerns can express themselves through dialogue with company management, shareholder resolutions, or divestment. These approaches represent three levels of engagement, but they share the common goal of making company management aware of how their practices effect all stakeholders, including customers, employees, vendors, and communities, as well as stockholders.

Community investing is the third option open to socially responsible investors. These investments provide low interest rate loans to people in low-income communities, from villages in developing countries to neighborhoods in your own city, who would otherwise have difficulty gaining access to loan capital. Community development banks and credit unions offer loans that finance affordable housing, small business loans, and other local projects. Community development loan funds are non-profit institutions that offer financing for similar projects in low- or moderate-income communities.

Community investing provides an effective way for socially-oriented investors to put money into grass roots development - and provides steady income for a well-diversified portfolio. But more importantly, it is the most direct route for investors to gain "social" returns. The emergent benefits at the community level in many cases outweigh diminished financial returns, making community investing one of the most satisfying and promising venues for socially responsible investors in the future.

Social investing comes naturally with the realization of the influence corporations have on our quality of life, and on the world's future. People disillusioned with the inertia of modern government would do well to consider the impact they could have if they invested according to their highest expectations for the future. It's no coincidence that a growing number of socially responsible investors are influencing corporate behavior to encourage positive change in society.

Socially Responsible Investing is the act of making investment decisions to achieve social as well as a financial return. Together a social and financial return are often described as a "double bottom line." The three main strategies of socially responsible investing (SRI) include screening, community investing, and shareholder activism.

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