Socially Responsible Investing

For those of you who aren’t familiar with the concept of socially responsible investing (SRI), it means aiming your investment dollars at what are considered to be investments which promote some good cause, and therein lies part of the rub: what’s a good cause? 

Some people want to avoid investments in countries with bad human rights records—places like the Sudan or Myanmar. So political considerations may make for socially responsible investing. Others may want to avoid manufacturers of certain products, like alcohol or cigarettes. Still others may want funds that only invest in green technologies, or Christian companies or companies that make third world micro-loans. Back in the mid-1990s, Jesse Jackson wanted Congress to require that all retirement plans be required to invest 5% of their assets in projects that would benefit minority-owned businesses. As all of this suggests, the first problem in addressing SRI is defining what exactly is meant. My guess is that not everyone who is asking for that type of investment is meaning the same thing. 

A second, somewhat related problem is that there just aren’t that many funds out there that are SRI funds. I took a quick look at the site SocialFunds.com, and found fewer than 200 that meet their various criteria, and many of those were run by companies that I had never heard of before. Also, that quick look shows funds with higher expense ratios, a not-surprising situation when you consider the extra screening required. 

The third issue is that SRI funds generally don’t perform as well as other similarly situated funds. Why? Well, the higher expense ratios may be one reason. A more pervasive reason is that the funds have to choose their investments from a smaller potential pool. Think of it this way. I’m a fund manager, and I go through all of the normal screens to pick my investments. If I’m an SRI manager, I then have to go through another step, and screen out investments that don’t meet my fund’s criteria. It doesn’t matter whether those investments are great performers, I have to screen them out. So, I have fewer funds to pick from. Fewer choices mean lower returns and more risk. 

So am I saying that SRI is a bad way to go? No, not exactly, but I am saying it will usually result in a lesser return. If you’re willing to sacrifice some return for something you see as a greater good, that’s certainly an option available to you. 

The first problem in addressing SRI is defining what exactly is meant.