Pros and Cons of Socially Responsible Investing

Contributed by Alana Elsner

For some, the issue of social responsibility may seem new- a post-millennial development- part a new consciousness about the world around us that spurred the onslaught of hybrid vehicles and carbon credits. But for others, like the executives at Trillium Management and the Calvert Group, socially responsible investing began decades ago. Perhaps its beginnings can more accurately be traced to grassroots movements in the 1960s or to the gas crisis of 1973. Since its humble beginnings, socially responsible investing (SRI) evolved from being perceived as an eccentric offshoot of mainstream investing to a legitimate and meaningful investment strategy. But how has the recent economic downturn affected this new field of investment?

Socially responsible investments can be one of the most challenging and frustrating portfolios to maintain, especially in a bear market. Research departments devote hours evaluating almost every area of corporate sin, from human rights violations to poor environmental controls. They screen investments for every possible problem from gambling, to corruption, to labor relations.

Despite the limited scope of securities that pass these stringent tests, many corporations are becoming socially conscious and paying increasing attention to the SRI criteria when evaluating investment opportunities. Companies like Johnson & Johnson and Verizon are among the many recognizable names in the Domini 400 Index, the SRI version of the S&P 500. With Wall Street turning an eye towards social responsibility, recent research shows that SRI funds are performing as well as non-screened funds.

Part of SRI’s evolution into mainstream investing has necessitated an improvement their ability to keep up with and even outperform market benchmarks like the S&P 500. For example, the Calvert Group’s Social Investment Fund has had a positive alpha measure, beating the S&P. The firm posted an over 7% gain against no-risk securities in the last year. When measuring portfolio gains, SRI funds like the Calvert Group and Trillium Capital prefer to use the S&P as a standard benchmark of the overall market, instead of the Domini 400. Joan Bavaria, C.E.O. of Trillium Asset Management, explains that consultants insist on and clients need conventional benchmarks like the S&P to have an accurate view of the overall market.

Of course, SRI portfolios fluctuate with the market as other stocks do, at times beating the benchmark and at times underperforming. But much of SRI portfolios’ success stems from the fact that they are long-term growth oriented. In addition, SRI portfolios tend to be more volatile than non-screening portfolios, making portfolios more prone to the boom and bust cycles of finance. This can mean that SRI portfolios are good in a bullish market but an Achilles heel in today’s market.

Yet SRI portfolios have one more crucial advantage: their screening criteria may help them identify companies with long-term growth potential. Companies with poor employee or shareholder relations tend to run into more trouble in the long term. Wasteful and inefficient corporate practices, such as not building sustainable resources, may inevitably become pronounced in stock performance. Thus, even though they don’t boast flashy market-beating returns in a bear market, SRIs might be a good long-term investment.