Are There Socially Conscious Ways To Invest?

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Are there socially conscious ways to invest?
-Kara Bloomgarden-Smoke, 26

The short answer is yes. But before you decide to practice socially responsible investing, you should carefully consider what exactly it means to you – and how much you’re willing to sacrifice in terms of money and transparency to follow your conscience.

Socially responsible investing, or “SRI,” is defined as investing in which both traditional financial factors and ethical concerns are taken into account.

Most people, when thinking about socially responsible investing, go straight to the conventional window on the issue: drop your money into SRI mutual funds. These are funds that exclude companies with poor track records in everything from labor relations and executive compensation to pollution and animal testing, or include companies that exhibit good behavior.

But many SRI funds have significant downsides, even beyond the problems of mutual funds in general. Mutual funds are expensive and lack transparency; SRI mutual funds are typically even more expensive.

While there are a few inexpensive, passively managed SRI funds that have sprung up (I’ll tell you how to find them in a minute), it may be worth your while to consider socially responsible investing in a broader context.

When I was researching this post, I came across two other ideas for ways to be a socially responsible investor:

  • Put your emergency funds into a credit union or a community development bank. This can ensure that your cash remains in your community, perhaps to be loaned out to people and businesses in that community. This idea is a lot like the “buy local” movement that encourages people to shop at local retailers.
  • Invest in index funds. The idea here – touted recently by John Bogle, the founder of Vanguard — is that you should avoid having your dollars further enrich the financial fat cats of Wall Street. (Index funds are far less expensive than actively managed mutual funds.) If you are uncomfortable with the role large financial services companies play in our culture, keep the business that you do with them to a minimum. (See our recent post: Where’s The Revolt Against Mutual Fund Fees?)

“People are increasingly understanding the impact of their money,” says Fran Teplitz, the director of social investing at Green America, a nonprofit that aims to harness economic power to create a just and sustainable society. “There’s no such thing as ‘I just bank here and it doesn’t matter’—when you make a deposit your money is being deployed for you in ways that you may or may not agree with.”

Tread carefully with SRI funds

Much of the money in socially responsible investment strategies belongs to institutional investors like universities and pension funds. There was $3.07 trillion under professional management invested in SRI strategies in 2010, up 380% from 1995, according to the Forum for Sustainable and Responsible Investment (US SIF).

US SIF publishes a listing of more than 100 SRI mutual funds. As the chart shows, most of them are actively managed funds, many of them with expense ratios of more than 2% a year. On the SRI list, for instance, the Calvert Small Cap Fund B has an expense ratio of 3.19%.

There are a few passively managed SRI funds, such as the TIAA-CREF Social Choice Equity Retail fund, which has an account minimum of $2,500, an expense ratio of .39% and is benchmarked against the Russell 3000 Index. The fund’s managers pick companies that are “strong stewards of the environment, devoted to serving local communities and are managing their companies in an exemplary and ethical manner” among other criteria.

The fund costs more than you’d pay for a traditional Russell 3000 fund, such as Vanguard’s VRTTX, but it’s still a low fee. So your choice comes down to whether easing your conscience is worth that higher cost – or whether you’d be better off buying a traditional index fund and giving the difference you save to a cause of your choice.

On a side note: SRI funds were once widely believed to cost investors potential returns, but more recent research has been less definitive, as blogger Fran Hawthorne pointed out this summer. The MCSI KLD 400, a widely used index of socially responsible companies, generated average annualized returns of 9.24% between its creation in May 1990 and September 2010. Over the same period, the MSCI USA, a more traditional index, offered 8.68 % in average annualized returns.

Viewing your portfolio broadly

Sophisticated investors look across their entire financial lives and consider their emergency funds, held in cash, as part of their portfolios. That perspective opens the door to the idea of using your cash allocation to practice socially responsible investing.

Expressing moral values by moving money out of a major bank and into a credit union qualifies as socially responsible investing. Not only does it screen the large bank out of your investment portfolio, it’s also a way to make sure your depository funds get invested back into a given community.

It occurs to me that an investor unsure whether they want to jump into an SRI mutual fund could deposit their emergency funds in a credit union.

Consider the source of your investment products

A few months ago, Vanguard Group founder John Bogle told Bloomberg News that Occupy Wall Street sympathizers could strike a blow against big banks by investing in low-cost index funds (such as those offered by Vanguard).

“The implication of [investing in index funds] is if many more people indexed, there’d be much less trading in the market, and that’s good because it’s costly,” Mr. Bogle told Bloomberg. “There’d also be much less big payoffs to investment managers, and that’s good for the returns earned by investors and good for our society, too.”

Mr. Bogle is not the most objective observer – he is one of the most passionate advocates of passive investing, and the company he founded, Vanguard, is a passive powerhouse. Yet his suggestion makes some sense in the context of the growing movement against Wall Street.

Financial decisions are complicated, and adding an additional factor to the mix – social responsibility – makes them even more so. I hope I’ve helped with some ideas for thinking about the issue.


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