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Socially responsible investing


Socially responsible investing allows people to use financial assets to influence how corporations and governments address a variety of social problems. Stocks, bonds, mutual funds, special lending programs, and other financial tools can be chosen and tailored by investors to favor particular social issues, including tobacco-related health problems, civil rights, environmental destruction, violence, community development, and other social concerns. SRI is sometimes referred to as ethical investing, social investing, mission-based investing, and natural investing.

For hundreds of years religious groups have practiced socially responsible investing. John Wesley, the founder of the Methodist Church, believed that the use of money is an important lesson from the New Testament. The Quakers in early America and other Christian groups practiced a form of SRI called avoidance investing, when they avoided investing in companies that supported activities to which they were opposed on religious grounds, such as slavery, gambling, alcohol, tobacco , and weapons production.

The rise of the modern corporation brought with it new forms of investment, and the growing corporate economy allowed more people to own shares, or stocks, in corporations. In 1934, the U.S. Congress created the Securities and Exchange Commission (SEC), which would oversee the trading of financial instruments such as stocks. Congress mandated that all owners, or stockholders, should be able to vote on company concerns when it stated that, "fair corporate suffrage is an important right that should be attached to every equity security bought on a public exchange."

The political activism of the 1960s, when people strongly protested issues concerning civil rights, women's rights, war, and environmental degradation , had rippling effects upon corporation activity and the development of SRI. In the 1970s, church groups including the National Council of Churches, which had stock holdings in major corporations, began actively using shareholders' resolutions to address social concerns. As an offshoot of the National Council of Churches, an important organization in SRI was formed in 1972, the Interfaith Center on Corporate Responsibility (ICCR), which brought together religious groups to increase shareholder power. One issue in particular had a profound effect on the development of SRIthe policy of apartheid in South Africa, which was the forced and often violent segregation of blacks from whites. In the 1980s, many shareholders demanded investment tools that utilized divestment, which eliminated from stock collections all companies that had South African holdings. Shareholders in some companies also demanded disinvestment, or the withdrawal of corporate activities from South Africa.

Increased concerns about environmental problems have led to the development of environmental investing tools. As early as 1970, an environmental mutual fund called the Pax World Fund was offered, which used pollution control as one of its standards for selecting companies. (Mutual funds are professionally managed collections of stocks, shares of which can be purchased and traded.) In March 1989 the Exxon Valdez oil spill in Alaska prompted further development of environmental investing. The Coalition for Environmentally Responsible Economies (CERES) developed the Valdez Principles ,a list of 10 environmental principles related to corporate activity. Companies can be rated on how well they adhere to the principles, and shareholders have also created resolutions asking companies to adopt the principles for their operations. These principles include protection of the environment, sustainable use of natural resources, reduction and disposal of wastes, wise use of energy, risk reduction, marketing of safe products, damage compensation, disclosure, environmental management, and self-assessment.

In the free market society of the United States, corporations are set up by law to be responsible to their shareholders, and the market is governed as little as possible. In a capitalistic system, maximizing the profits for shareholders is the main goal of the corporation. As efficiently as this system has worked to create a materialistically wealthy society, the profit-motive corporate structure has also contributed to some social and environmental problems that were growing as capitalism moved into the new millennium. For instance, energy companies can maximize their profits by producing and selling as much energy as possible. In the early twenty-first century, the problems of global warming and air pollution were receiving increased attention, problems that are directly related to the burning of fossil fuels , from which most energy is produced. Thus, the shareholders of an energy company might benefit from increased production of energy, while society as a whole may face new problems from such activity. Energy companies powerfully oppose new governmental regulations such as air pollution controls, and there can be conflicts between private and public interest. That is, corporations desire a market free from government interference, while the government is the main tool the public has to regulate large corporations. Some people, wishing to affect change from within, become what are known in SRI as activist shareholders, and utilize share holders' rights. Activist shareholders are often in the minority, and it may take many millions of dollars worth of stock to be able to pass shareholders' resolutions in large companies. In the early twenty-first century, shareholders in some of the world's largest energy companies were initiating resolutions on air pollution, alternative energy, sustainable development , and global warming, for instance.

Socially responsible investing relies upon three main strategies to further its social and environmental goals: screening, shareholder advocacy, and community investing. Positive screening uses various criteria to select companies that have excellent track records, while negative screens eliminate companies with poor records from investment possibilities. Tobacco is the most commonly used screening criteria, and other popular screens include environmental protection, human rights, employment equality, gambling, alcohol, and weapons production. Other commonly used screens have been labor relations, animal testing, community investing, and community relations, while specialty screens include issues such as executive compensation, abortion and birth control, and international labor standards, among others.

Shareholder advocacy utilizes the legal rights of shareholders as owners of companies. Shareholders can influence corporate operations by direct communication with management as well as by shareholder resolutions. These resolutions, when filed, get published in a company's proxy statement and are voted on by all shareholders during the company's annual meeting. Although they rarely receive a majority vote, which would mandate their adoption, proxy resolutions can initiate the process of change.

Community investing is direct investment into underprivileged communities that have failed to receive adequate assistance from traditional financial institutions. This type of investing encourages economic development by providing start-up loans to small businesses, affordable housing, employment programs, and financial assistance for low-income people, for example. Community investing utilizes community development banks and credit unions that are set up specifically for low- and middle-income communities. Community loan funds and venture capital funds are other community investing tools that provide funding to underdeveloped areas.

According to the Social Investment Forum, a nonprofit industry group, screening strategies accounted for about 61% of SRI funds in 2001, shareholder advocacy was utilized by 13%, screening and advocacy together accounted for 26%, while community investing garnered less than 1% of total SRI funds.

In the new millennium, SRI has grown to be a significant and influential part of the investment world. From a 1985 total of $65 billion, SRI funds had grown to over $2 trillion by 2001, according to the Social Investment Forum. The 2001 total represented 13% of the $16 trillion that was in professionally managed funds, or one in every eight investment dollars. Furthermore, SRI funds grew at a faster rate (1.5%) than the rate for all professionally managed funds, meaning that socially and environmentally conscious companies were positioned strongly in the economy of the 2000s. Industry analysts have noted that socially responsible firms tend to be well managed, adaptive, and technologically adept. In 2001, there were 230 mutual funds that were using social and environmental screening for various causes. There were funds that emphasized alternative energy, sustainable development, and workers' rights, and other funds that avoided nuclear power , weapons building, gambling, and pornography. There were funds for fundamental Christians, Catholics, and a fund specifically tailored for Muslims.

Shareholder advocacy actions were on the increase in 2001, due in part to new reports on global warming and concerns over corporate ethics brought about by the Enron energy scandal. Since the 1980s, institutions, including religious groups, mutual funds, foundations, pension funds for public and private organizations, and others, have become the largest shareholders in the United States. When these institutions come together they create powerful shareholder associations, such as the Council on Institutional Investors which controlled over $1.5 trillion in assets in 2001 and has its own corporate governance guidelines. Shareholder advocacy for social and environmental issues had some successes in the late 1990s and early 2000s. Shareholders in 2000 persuaded Home Depot to gradually stop using old-growth timber, and investors convinced General Electric to spend up to $250 million to clean the Housatonic River in Massachusetts from PCB contamination. Furthermore, shareholders convinced Texaco, General Motors, Ford, and DaimlerChrysler to end their memberships in the Global Climate Coalition, an industry group that maintains that global warming is not valid and opposes actions to curb it. In 2001, 262 social policy resolutions were presented to 177 companies, and 45 of these resolutions garnered more than 10% of shareholders' votes.

[Douglas Dupler ]


RESOURCES

BOOKS

Brill, Jack A., and Alan Reder. Investing from the Heart: The Guide to Socially Responsible Investing and Money Making. New York: Crown, 1992.

Domini, Amy L. Socially Responsible Investing: Making a Difference and Making Money. Dearborn, MI: Dearborn Trade, 2001.

Hawkin, Paul, Amory Lovins, and L. Hunter Lovins. Natural Capitalism: Creating the Next Industrial Revolution. Boston: Little Brown, 1999.

Kinder, Peter, Steven D. Lydenberg, and Amy L. Domini. Social Investment Almanac. New York: Henry Holt, 1992.

PERIODICALS

Bogo, Jennifer. "Business Savvy: Making Room on the Shelves for a New Generation of Greener Goods." E Magazine (July/August 2000): 2633.

Rose, Sarah. "Responsible Investing: Is It Living Up to Its Promise?" Sierra (November/December 2000): 26.

Social Investment Forum. "2001 Report on Socially Responsible Investing Trends in the United States." Washington, D.C.: Social Investment Forum. [cited July 2002]. <http://www.socialinvest.org>.

OTHER

Co-op America Home Page. [cited July 2002]. <http://www.coopamerica.org>.

Shareholder Action Network Home Page. [cited July 2002]. <http://www.shareholderaction.org>.

Social Investment Forum Home Page. [cited July 2002]. <http://www.socialinvest.org>.

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