"This is where the social, environment and governance factors come into play. It helps us identify companies that are better managed," says Steven J. Schueth, president of First Affirmative Financial Network, specializing in socially responsible, transformative investing and based in Boulder, Colo.
Those three broad categories -- environmental, social and governance -- form the basis for much of the criteria that managers use if they promote socially responsible investing.
The strategy has changed since the 1920s when socially responsible investing mainly meant avoiding "sin stocks," or companies peddling vices such as alcohol, gambling and tobacco.
"Then it evolved into avoiding egregious polluters. And in the early '80s, it was avoiding companies that were involved in South Africa," Schueth says.
Over the past 20 years, socially responsible investing has evolved. In fact, the acronym SRI doesn't necessarily mean socially responsible investing anymore. "When I say SRI, the acronym is, for me, sustainable, responsible and impact investing. It's about investing to do more than just make money," he says. "We want to make money, but we also want to have a positive impact on the world as we're making money."
While the field's name is still in flux, the acronym ESG is very efficient as it describes some of the screens that fund or portfolio managers apply to pick good investments, but SRI is widely used as well.
"We put our screens or criteria into five general areas. One is environment. The second is workplace practices, which include diversity, labor management relationships. The third is corporate governance, fourth is community impact, and the fifth is product safety and integrity," says Julie Gorte, senior vice president for sustainable investing at Pax World Management in Portsmouth, N.H.
In the old days of sustainable and responsible investing, the screens used were mostly negative, meaning asset managers would mainly exclude investments with them. Rather than cutting out companies, today's screens are largely proactive.
"We're looking for value, which is pretty much exactly what we do when we do the financial analysis of the company," Gorte says.
Some criteria are easier to fulfill than others. For instance, mutual fund investors interested in avoiding all companies that conduct tests on animals will have a tough time in the U.S. There are funds that avoid animal testing in other countries, such as the Henderson Global Care Growth Fund in the United Kingdom, which avoids investing in companies that produce slaughterhouse products as well as those that conduct animal testing.
American fund companies with an SRI orientation typically look for company policies that try to minimize animal suffering.
"We don't necessarily avoid companies that are required to test on animals. That would be pharmaceuticals and also medical devices. But we do want them to have criteria that will minimize the number of animals used, trying to use in vitro rather than the actual animals or the suffering of the animal test subjects," Gorte says.