investing

Does socially responsible investing help?

Compass laying on paper money and change
Highlights
  • Socially responsible investing leads to sustainable business practices.
  • Shareholder advocacy is one of the central tenets of SRI.
  • New websites inform and enable investors to vote alongside SRI funds.

Little fish in a big pond can still make waves. The same is true of individual investors who take the plunge in socially responsible investments.

Socially responsible investing, or SRI, refers to the attempt by investment firms to effect positive change from corporations or institutions. Also known as ESG, for environmental, social and governance issues, socially responsible investing involves various investment vehicles and approaches for steering corporations toward sustainable business practices.

Shareholder advocacy

One of those approaches is shareholder advocacy. In general, stock ownership comes with rights, such as the right to vote in proxy elections on shareholder resolutions.

"Shareholder advocacy is the act of using your shares in companies or your equity in companies to engage them on environmental, social and corporate governance issues, to ask them to reform or engage in better conduct," says Peter DeSimone, director of programs at the Social Investment Forum, an association for professionals and organizations dedicated to socially responsible investing.

However, most individual investors eschew individual stocks in favor of mutual funds to diversify their portfolio. But that doesn't mean they have no way to engage in socially responsible investing or shareholder advocacy.

Socially responsible funds

Mutual funds that focus on socially responsible investing have grown in popularity in recent years. In 2007, investors could choose from 260 socially screened mutual funds with assets of $201.8 billion. This compares to 55 such funds with $12 billion in assets in 1995, according to the Social Investment Forum.

These funds either screen out companies that don't meet ESG criteria or they will "look at sustainability issues through a risk and opportunity lens and try to find the companies that are best-positioned to meet the sustainability challenges of the future," says DeSimone.

But there has been some controversy about the screening criteria SRI funds use for their holdings.

For instance, by some measures, oil and gas companies have no place in a green fund, but the oil company BP was a component in the Dow Jones Sustainability Indexes until May 31, when it was removed following the explosion of the Deepwater Horizon well and the disastrous oil spill.

Screening is not the only measure of an SRI fund.

At Calvert Investments, for example, funds are organized by their shareholder advocacy strategies in addition to screening criteria. Only one of their approaches includes investments in companies that they consider questionable based on ESG criteria. But they engage with these companies differently and take a proactive advocacy stance, which involves frequent discussions with senior management.

For example, the funds in Calvert's "SAGE Strategies" group have looser standards than its other groups.

"But we have a commitment to engage with a good number of companies. We list multiple objectives for that set of companies and ... we've made a commitment to divest companies if we don't think we are making progress on the issues we've identified for engagement," says Stu Dalheim, director of shareholder advocacy at Calvert Investments.

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Traditional mutual funds

Shareholder advocacy and engagement with company management are generally limited to mutual funds with an ESG bent. Most traditional mutual funds vote their proxies when it comes to voting for board members, but ignore environmental or social issues brought up by shareholder resolutions.

"It's something that is largely confined to the (socially) responsible asset management sector. A lot of mutual funds don't vote their proxies on concerns like climate change, labor issues or water-scarcity issues," says Dalheim.

 

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