Who Invests Responsibly and Why - dummies

By Consumer Dummies

Social investing is big business. It’s estimated that 10 to 12 percent of all professionally managed investments in the United States come with social restrictions of some sort. These restrictions can be anything from a refusal to invest in the so-called “sin” industries (alcohol, gambling, pornography, and tobacco companies) to a comprehensive style looking at the environment, society, and corporate governance.

Investors who like this style look at how employees are paid and whether they can become owners in the company. They look at the company’s mission statement, and then evaluate how well it’s put into practice. They want to know: Does this company understand its business, and is its business making friends rather than enemies?

Who are these investors? Some are religiously observant and want to avoid anything that may interfere with their spiritual journey. Some simply think it’s about time that company managers listened to the people who own the joint. And some would just like a mutual fund option in their 401(k) plan that doesn’t make them nervous.

The leaders in social investing are the leading institutional investors: pension funds, charitable foundations, and institutional endowments. The role of institutions is important for two reasons:

  • These investors care deeply about performance. Most pension funds are required by federal law to consider investment performance first. They can consider other factors, such as social criteria, only as long as performance criteria are met. Pension funds for religious orders and labor unions often want to consider social criteria, so money managers have figured out how to accommodate the performance must-have and the values nice-to-have factors. Foundation and endowment managers have a fiduciary responsibility to the philanthropists who donated the money in the first place. Because these investors have to worry about performance, all investors can benefit from their experience with social investing.

  • In a changing world, investing can be a tool for making a difference. The simple reason to invest socially is to maintain a clear conscience, but many social investors believe they can also get better performance through responsible investments:

    • If investors look for companies that are trying to reduce their effect on the environment, they may find companies that are saving money and generating more profits.

    • If they search out businesses that pay workers well, they may find some that create more consumers to grow the overall economy.

    • If they avoid companies with bloated executive pay packages and cronies on the board of directors, they may avoid scandals and a string of bad financial results.

A couple of persistent myths linger about socially responsible investing; no doubt you’ve heard them and may have been put off by them. The following points help clear up a couple of common myths:

  • Myth: Social investing is nice if you don’t care about return. Those who buy into this myth suggest that you instead follow a standard, nonjudgmental investment strategy, and then give the extra profits to charity.

    Fact: Contrary to popular belief, socially responsible investing does pay off. A social portfolio is likely to be no better nor any worse than any other. The keys to success are to carefully select asset classes and use activist techniques to boost returns.

  • Myth: Social investing is some sort of pinko plot to undermine capitalism.

    Fact: The vast majority of social and activist investors come to their practice in hopes of making more money. They are the owners, so they’re in charge. That means their investments work for them. He who has the gold should be able to make the rules, as the cliché says. Activist investing is pure capitalism. It uses the power of capital ownership to make change.

The fact is that companies can do well by doing good.