Socially Responsible Investing: Does is really work?

Socially Responsible Investing - Hero

Pop quiz: What kind of investing makes up roughly 12% of the $25 trillion moving through the U.S. stock market?

Hint: It’s not the kind that places profit before people (and the planet).

The answer is surprising (but thankfully): Socially Responsible Investing (SRI).

By examining why investors would choose this strategy and how they would do it.

We’ll get into the details of how to build an environmentally and socially friendly portfolio while staying competitive alongside other kinds of securities in a typical market environment.

We’ll also look at some examples of successful socially responsible companies.

What is Socially Responsible Investing?

In 1987’s Wall StreetGordon Gekko proclaims that “Greed is Good” – that profits above all else are what matter.

But it’s not 1987 anymore…

In today’s modern world, investors and the general public expect companies to maintain some social conscience, and they’re putting their money where their mouths are.

Here is what’s undeniable: trillions of dollars are pouring into SRI every day and that number is growing.

The US SIF (Forum for Sustainable and Responsible Investment) estimates the volume to be at about $3.7 trillion. That’s a nice chunk of change!

Investors are proving some of the basic and underlying assumptions of people’s incentives wrong. You don’t have to be out for just yourself!

Look, nobody in their right mind invests to lose money, but Socially Responsible Investing is one path to seeking returns that poses a significant collateral benefit for everyone.

When you think about how it works, everyone stands to gain. If people invest in socially responsible companies, they show that they care about our ecosystem. In turn, companies see this and react to it by working to be more socially responsible. This results in an increase in value as investors are looking for SRI. It’s a win, win, win!

Definition: Socially responsible investing is the buying and selling of stock in companies that aim to do no harm. That is, they conduct business in such a way that there is little to no negative impact on the environment or human beings”

Fun Fact: Some claim that the very first Socially Responsible Investors were Quakers! In 1758, Philadelphia Quakers were prohibited from participating in the slave trade for ethical reasons. So now you know!

 

Case Study in SRI: Green Mountain Coffee

Fair Trade is a big deal when it comes to coffee beans, and Green Mountain Coffee Roasters got this part of roasting right early on. While there is a perennial debate about the ins and outs of growing, exporting, and importing coffee, the Fair Trade brand licenses its logo to companies that qualify under its rubric. To join the Fair Trade circle, a coffee company has to meet a number of political, payroll, and price-oriented standards.

In fact, Green Mountain Coffee is a two-time winner of the Best Corporate Citizen award, given to the publicly traded company which demonstrates the best SR practices.

Green Mountain Coffee was founded in 1981 as a single shop on the base of a mountain in Vermont, upholding free-trade practices.

In 1993, GMC went public via IPO (initial public offering) and today sells over 20 million pounds of coffee per year. The company’s annual revenue is close to $4 billion.

If you haven’t heard of Green Mountain Coffee, you may have heard of Keurig (“K-Cups”), and their popular single serving coffee.

 

What are Socially Responsible Companies?

Socially responsible investing sounds like the best of both worlds, doesn’t it?

It sure seems like a natural strategy for the ecology and fair-trade minded investor: hitch your funds only to companies that are practicing a sensible kind of world stewardship, and taking care of the environment. But how can investors find SR companies? Certainly not all of them are as transparent as Green Mountain Coffee.

The truth is, finding SR companies requires quite a bit of research. When it comes to socially responsible investing: it’s not all earthy-crunchy companies.

It may be easier to start by crossing certain industries off the list. Here are some things to avoid:

So that means companies like Budweiser (Alcohol), Altria and Philip Morris (Tobacco), Las Vegas Sands (Gambling), Smith and Wesson (Firearm), Energy Solutions (Nuclear Power) and Nike (Sweatshops) wouldn’t be part of a Socially Responsible Investor’s portfolio.

Ok! We’re almost there.

According to the Forum of Sustainable and Responsible Investing, here are the top 10 socially responsible considerations Investors find most important.

Here they are, Letterman Style:

Examples of Socially Responsible Companies

So now that we’ve learned what type of companies not to invest in when building a socially responsible portfolio, let’s look at some examples of companies that should be investing in.

Unfortunately, researching and quantifying SRI companies is pretty difficult. Unlike profitability, there aren’t readily available metrics like P/E or EPS to measure social impact. Fortunately enough, the web has some great resources like the USSIFMaclean’s and ethispehere that do most of the heavy lifting.

We’ve hand picked a handful of the top US companies in terms of Corporate Social Responsibility. Some of these companies might even surprise you. When you’re done reading the descriptions, think about the company that makes the

Most positive impact in your mind, and add their stock to your portfolio.

1. GENERAL ELECTRIC – GE

This one is probably not too much of a shocker. For years, General Electric has been leading the charge in the “Going Green” movement, producing energy efficient products that range from light bulbs to washing machines. More recently, GE launched “Healthymagination”, a $6 Billion dollar fund focusing on improving healthcare. They also launched “FlexEfficiency 50″, a solar and wind power plant capable of powering 600,000 homes.

2. WALT DISNEY – DIS

Walt Disney not only pushes innovation in animation and movies but also in their environmental impact. For example, some of Disneyland’s rides and activities are powered by biodiesel waste generated from Disney hotels! Want another outstanding factoid? Disney recycles over 1,338.92 tons of waste per year.

3. MCDONALD’S – MCD

Surprised, aren’t you? McDonald’s is renown for their advancement of women in the company. In fact, over 25% of employees that are at the vice-president level and above are female, the highest percent among Fortune 100 companies.

PROCTOR & GAMBLE – PG

The makers of Gillette, Pampers and Duracell have made a conscious effort to limit their environmental harm and promote social initiatives.

By 2020, the company has committed to run 30% of their factories with renewable energy and reduce their total packaging by 20%. Maybe more importantly, the company has provided over 4 billion liters of clean water to children in developing countries. Pretty impressive!

Taking the time to research what kind of impact the company in question is making is a very important step in investing.

Stay in the know as to what actions the companies you have invested in are making in order to remain socially responsible.

SRI Indexes

An index helps investors get a glimpse at the overall performance of a market. Some of the most famous indexes are the Dow Jones and the S&P 500.

SRI Indexes

While the DOW and S&P 500 capture the entire broad market, there are also a number of indexes that represent subsets of the market. This is good news for Socially Responsible Investors – there are a number of indexes designed to provide a snapshot of the entire SR market. Let’s look at a few:

Domini 400 Social Index

This index is probably the most popular among Socially Responsible Investors. These 400 public companies meet the Domini Social Investments’ criteria for environmentally and human-friendly practices. You won’t find, for example, makers of guns, cigarettes, booze, or nuclear power plants on this index.

 

FTSE4Good Index

These indices include companies throughout the world that have been vetted according to globally recognized corporate responsibility standards. If a company fails to make the grade along the lines of human rights, labor practices, environmental management, or climate-change criteria, it gets deleted from the index. Recent additions to FTSE4Good include: LG, Siemens, and Aetna.

 

Dow Jones Sustainability Index

Including big players such as General Electric and Verizon, the DJSI is a prime example of how socially responsible doesn’t have to mean small-entity investing. Companies from any and all sectors are included in the index, so long as they continue to fulfill certain sustainability criteria and benchmarks.

 

The Future of Socially Responsible Investing (SRI)

We’ve learned what Socially Responsible Investing is, how to find SR companies and how to track the market. Nice work!

Here are some closing thoughts:

In today’s economy, it can be very profitable to be a socially responsible investor. In a study by Ethisphere, “ethical” companies have outperformed the S&P 500 since 2007. But that’s not all; the Domini 400 Social Index, the FTSE4Good Index and the Dow Jones Sustainability Index have also outperformed the general market.

On the other hand, some investors believe the pendulum may have shifted too far – that companies can justify or write-off losses as social costs.

Some capitalists believe in profits and corporate efficiency above all else and have been extremely successful investors. Like many things in life, the truth probably lies somewhere in the middle.

This goal of this mission wasn’t to prove that being a socially responsible investor is better than the alternative but rather to prove investing in socially responsible companies doesn’t mean sacrificing profits.

How can you invest responsibly?

The good news is that there are many startups and investment companies whose mission is based on providing investors with Socially responsible options. And they work!

Here are the 4 leading the charge. (be sure to take advantage of their offers today)

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One final thought

Just because a company is socially responsible, it doesn’t minimize investment risk. The probability of negative returns is roughly the same for SR and non-SR companies. Due-diligence and research is still required!

If you are looking for stocks to buy, then read this article about the best stocks to buy now.



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