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What is socially responsible investing?

Socially responsible investing (SRI) describes an investment strategy that combines the intentions to maximize both financial return and social good. In general, socially responsible investors favor corporate practices that are environmentally responsible, support workplace diversity and increase product safety and quality.

RI strategies provide investors with the opportunity to create positive change in the world through their financial decisions while remaining focused on their long-term investment strategy.

Investing money in a socially conscious manner has gained popularity since the 1970s, though the origins of the concept can be traced back to the 17th century. The idea grew for a number of reasons, including issues regarding the environment, consumer and employee rights, and military activities.

Many individuals who were civil rights and anti-war protestors in the 1960s became investors in the 1970s and 1980s and were looking for a way to express their convictions through their investment portfolios. The first mutual fund to screen investments based on social criteria was established in 1971.

Today, more than 200 mutual funds offer investors a way to access a social investment strategy. Some funds are broad in nature, while others focus on a specific cause.

According to the Social Investment Forum, in 2007, nearly 1 out of every 9 dollars under professional management in the United States (more than $ 2.71 trillion) was involved in socially responsible investing, outpacing the overall market. Interest in this investment approach has grown significantly since the mid-1990s.

Along with funds and other professionally managed portfolios that specialize in socially responsible styles, the Social Investment Forum reports that mainstream money managers are also incorporating social and environmental screens into their investment selection processes. The approach has also taken on global dimensions, as more investors around the world seek to promote specific causes through their investment dollars.

Results can be favorable

An indication of the competitive performance of SRI funds is the performance of SRI indexes. The longest-running SRI index, the Domini 400, was started in 1990 and continues to perform competitively. When benchmarking this index against the S&P 500, the Domini 400 showed a 10.83% return vs. 10.33% total returns with the S&P 500.

Implementing social awareness in different ways

How can socially responsible investing be applied? This is something that can change from investor to investor, depending on each individual’s views. Generally, there are three ways that investors can try to effect change through their investment choices:

• Social screening. Eliminating companies from consideration for inclusion in a portfolio due to specific practices or types of business it pursues. Many social investors avoid companies whose products and business practices are harmful to individuals, communities or the environment.

• Shareholder activism. In some cases, investors or groups of investors (this can include mutual fund managers) will try to influence the behavior of a company or decisions by its board of directors. While this often is focused on improving financial performance, activism can also be a strategy to change a company’s business practices that could be considered detrimental to society.

This can involve filing shareholder resolutions on topics such as corporate governance, political contributions, gender/racial discrimination, pollution and problem labor practices, among other issues.

• Community investing. Institutions use investor capital to finance or guarantee loans to individuals or organizations to improve their own communities. Community investing projects are small and local and often focus on affordable housing, small business startups, improving community facilities and empowering minorities.

Mutual funds vs. individual investing

For most investors, mutual funds offer an easy way to gain access to the world of individual investing. Investors have a wide array of options available and the ability to select funds to invest in large-cap, mid-cap and small-cap stocks, and even in bond funds with a socially conscious angle.

Those who invest in individual securities or use a professionally managed account have the ability to be more selective in screening investments. This approach may be most appropriate for investors whose screening criteria are more specific than would occur with a mutual fund.

Themes arise with the times

Major social issues can often drive the interests of investors in terms of the social screens they favor. In the 1970s and 1980s, there was a great deal of pressure on investment managers to avoid investments in companies doing business in South Africa, at a time when the country maintained a policy of apartheid. In the 1990s, tobacco companies took center stage. Tobacco currently represents the most popular social screen employed in socially responsible mutual funds.

Today, there is increasing focus on the environment, as global warming has become a headline issue. Consumers have taken a greater interest in environmentally friendly products like hybrid cars and energy-efficient lightbulbs.

That same interest extends to investing, as more individuals seek out “green” funds. These portfolios may screen stocks of companies with poor pollution records and may seek to invest in technologies such as solar and wind power development.

Hypo Venture Capital – Investing in your priorities

A socially responsible strategy allows individuals to invest in a way that is consistent with their own priorities. As indicated by performance in recent years, choosing to invest in this manner does not mean sacrificing potential return. However, not all investments will perform in the same way.

If this method of investing interests you, work with your Hypo Venture Capital financial advisor to learn more about how SRI options can work in conjunction with your overall investment strategy. There are a number of mutual funds to choose from that can be incorporated into an existing or proposed asset allocation strategy. Alternatively, you can select specific investments that fit more particular criteria or apply your own social screens to your managed portfolio. Be sure to consider how any investment you choose matches your risk profile and your return expectations.

The most effective approach to socially responsible investing is to make sure that the execution of the strategy is consistent with your overall financial plan. Your HVC financial advisor can help you review your current asset allocation and help you consider whether social investing is right for you.