Socially responsible, sustainable, ethical, or green investment... Whichever term you prefer, many investors are clearly beginning to pay attention to more than just the bottom line when choosing a stock. While many people are skeptical that companies can both earn a profit and have positive social effects, this new wave of investors believes that responsible investments are equally, if not more, profitable compared to other investment methods.
The beauty of socially responsible investing, or SRI, is that it means something different to everyone. Like many individual investors, those investors in sync with SRI frequently opt for a hands-off approach: One out of eight professionally managed dollars is in socially responsible assets. However, these investors could attain higher returns and lower fees by taking charge of their own assets, all with a portfolio of positive, sustainable businesses.
Socially responsible investing incorporates many investing strategies designed to include corporate responsibility and companies' impact on society in investment decisions. Two typical SRI approaches are screening and shareholder activism.
Screening investments can be divided into positive and negative strategies. Negative screening, the easiest and most widely used form of SRI, involves avoiding "sin" industries, like tobacco and gambling, or avoiding specific problematic companies. Many investors actually enforce such screens without recognizing their participation in the larger SRI movement. Unfortunately, other investors may believe they are adhering to such screens, while their ownership of mutual funds or index funds exposes their portfolio to companies they would rather avoid.
Positive screening, the more subjective side of screens, involves selecting companies that meet certain socially responsible investment criteria. These criteria vary among investors, but often fall under the category of environmental, social, or corporate governance standards. Selected companies could actively promote the values of the investor, for example, through a campaign to reduce the company's environmental footprint or a hiring program committed to increasing diversity.
Investors frequently turn to socially responsible mutual funds to conduct the screening process for them. Demand for these funds is growing. All told, 250 socially responsible mutual funds were included in the 2010 Report on Socially Responsible Investing Trends in the United States (link opens PDF) (the most recent issue -- expect an update in November 2012), up from 173 in 2007. Each fund has different screens companies must pass, and then the fund monitors its holdings for social, environmental, or corporate performance in addition to traditional financial performance. One disadvantage of socially responsible mutual funds is that the additional screening and monitoring can result in higher management fees.
Another socially responsible investment strategy is shareholder activism. Many investors forget that the stock they own is more than a ticker symbol, but an actual piece of a living, breathing company. As partial owners, investors can file resolutions to modify aspects of a company, including matters of environmental or social importance. Even if resolutions do not pass, they put investor pressure on the company to change, and can attract media attention. By presenting resolutions, or voting for resolutions that promise positive change, investors can directly impact the direction corporate America is heading.
Making a socially responsible investment means something different to every investor, and many strategies exist beyond the two discussed above. Still, it is clear that many investors are focusing on the business characteristics of their assets in addition to financial performance. Furthermore, many of these investors are enjoying greater returns than you might think through this investment strategy. It could be your next step to more positive returns, and a guilt-free portfolio, as well.
Socially responsible investing is an emerging trend, but that does not mean it's for everyone. Perhaps you would prefer an all-inclusive index fund or even the "sinful" Vice Investor(VICEX) fund. However, this series of articles will help you get started if ethical investing interests you.
To learn more about SRI, check out any of the articles in this series:
The article Socially Responsible Investment: A Fool's Guide originally appeared on Fool.com.
Fool contributor Charlie Kannel has no interest in any of the companies mentioned above. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.