Socially Responsible Investing (SRI) is constantly evolving. As more investors pour money into socially responsible investments, additional resources in the form of technology, indexes, and corporate information is available to the SRI community. As additional resources develop, investors will have to change with the industry. Additional decisions will have to be made, and the way sustainable investors make their decisions will change. Below, is an example of one of those decisions.
I will start with a quick review of Social Screening. The history of socially responsible investing started with religions and religious groups in the eighteenth century. These groups did not want to invest, work, or support certain activities and businesses that were thought to be against the values of these organizations. This same idea applies to the basis of most SRI mutual funds. The start to most socially conscious mutual funds is founded with the idea that it will not invest in companies based on certain social criteria. Prior to new indexes that promoted environmentally friendly companies, screening was the easiest and one of the only ways to run a cost efficient socially conscious fund. With this in mind, most funds still use social screening as the basis or start of each fund.
When an individual owns stock in a company, they actually own a part of the corporation. As owner of the company, they have the right to vote on the members of the board of directors, propose shareholder resolutions, and vote on shareholder resolutions.
Shareholder Advocacy or Activism is actively working with corporations to point out or change behavior that conflict with the core values of socially responsible investors. Shareholder advocacy is an active way to communicate directly with companies and has the potential to produce quick results. Investors that own mutual funds rely on the mutual fund company they invest with to vote on the board of directors, propose shareholder resolutions, and vote on shareholder resolutions.
Many investors like the idea of social screening because they are not investing in companies that do not fit their values. For example, an investor may not want to invest in companies that produce tobacco. The investor feels good about not owning or supporting these companies, but divestment has not been an effective way to change an industry. The result is an entire industry that goes unregulated without the influence of socially responsible investors.
One solution to this Dilemma is what the industry usually refers to a “best-in-class” approach. With this approach, SRI mutual funds invest in all industries. They will choose the companies in each industry that are the most socially responsible based on a set of criteria. This allows an investor the opportunity to promote change within that industry. In addition, the stock may have good qualities that socially responsible investors seek out. This may include a good environmental track record, employee treatment, and diversity. However, the stock may be in an industry typically not included in a socially responsible mutual fund.
No Tolerance Verses Promoting Change
There is not a right answer for this situation. The correct answer is based on what is important to a socially conscious investor. If an investor is not going to feel right about investing in a company that does not agree with their values, a socially screened fund makes sense. However, if the goal of the investor is to promote change across all industries while possibly investing in a “sin” stock, then a best-in-class socially conscious mutual fund may make sense. This is one of the decisions that socially conscious investors now must make as a result of the growth in socially responsible investing.