June 18: What is SRI

by David Jenyns on June 18, 2007

SRI Stands for Socially Responsibly Investing and SRI indexes and founds strive to be just that.

What is it?

Socially Responsible Investing is basically the art of putting your money where your beliefs are. Since different people have different beliefs, it is going to be different for every one. Some Investors see it as Investing in the things they like and believe in. Others see it as a tool to use their influence as an investor to achieve social and economic goals. Still others see it simply as a way to profit from changes in the cultural climate or changes in society.

Socially Responsible Investing is usually seen as having at least 3 components.

1. Screening. This first step is what most people think of when they think of socially responsible Investing. It is the concept of excluding or including companies on the basis of social, ethical or environmental criteria, but it may also involve giving preference to including companies with strong positive features that support your belief. For example, companies which are good to their workers.

2. Community Investing Acting to provide capital to socially beneficial projects or local business, especially those that would otherwise find it difficult to attract capital.

3. Shareholder Activism. No one can deny that in today’s market stockholders have some power. Engaging with companies in an attempt to achieve positive changes to management and performance is Shareholder Activism. In the United State of America this is typically supported by shareholder resolutions. In Europeans tend to use more informal methods. Shareholders can and sometimes do, change the way a company is run.

A fourth Component called “Investment Integration” is also sometime cited. Investment Integration is when an investor attempts to integrate data of ethical, social, and environmental criteria with conventional financial data in order to maximize their investment returns in regards to both profit and social influence.

History

Socially responsible investing is said by some to have begun in the 1920’s with churches who divested of the so called “sin stocks” – alcohol, tobacco and gambling. As the ability to get more information on companies improved it became easier to screen companies for unwanted behaviors, or even the desired behaviors.

In the 1970’s the Inter-faith Center of Corporate Responsibility (ICCR) was founded in NY. It was made up of some 285 institutions that collectively controlled more than $110 billion in assets. The ICCR is credited with creating the South African divestiture movement and they continue to be leaders in the active use of assets to express or support their membersí larger purpose in the world.

During the 1970’s and 19080’s a number of socially responsible mutual funds were established in the US and Europe, the Pax World Balance Fund is often considered the first, these funds attract billions of dollars on behalf of millions of customers.

There has been a growing Interest in SRI’s since 2000 from mainstream investors. Several countries now have legal requirements for pension funds to disclose their policy on SRI. This has led to some large investors adopting SRI policies across the board.

Performance

Investors interested in SRI, often have to confront it’s critic’s claim that social investors must sacrifice returns in order to invest in line with their values. This is just not true. The Domini Social index was launched as a mirror of the S&P 500, but with a large number of social and environmental screens applied. Over its 15 years it has not only mirrored but out-preformed the S&P 500.

Divergence

The means by which people match their Socially Responsible investing criteria are many and varied. Some people do it by politics, some by religion. It is interesting to note that no matter what the group or reason, most SRI funds exclude both tobacco and alcohol.

SRI’S and the Future.

Socially Responsible Investing is quickly becoming the norm according to some. Others however, claim the people have always invested in some way in what they believe in and believe thing have not changed, only been given a new name. Because of better Information gathering and distribution, more investors are able to acquire more information on their companies of choice. This includes such things as hiring and firing policies and Environmental impact studies. Now, with several European Countries requiring Pension funds to inform their shareholders of their SRI policies, Socially Responsible Investing may indeed become the norm.

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