Socially Responsible Investing 101: Invest in Social Good and Your Portfolio

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By understanding the performance of socially responsible stocks, individual socially responsible stock, the socially responsible investor can gain the profits of socially mindful investing, either through individually socially responsible investments, or by engaging with socially responsible investment funds and socially responsible funds. In addition, the article also confers the sustainable investing approach in investing with ethics, green investing, values investing, and socially responsible investments.

Although socially responsible investing has expanded dominance in the last numerous decades, countless socially responsible investors are still under the feeling that to invest in social good, they must decline certain levels of portfolio performance. However, with the confirmation escalating that socially responsible investment funds strictly match, if not surpass, their market counterparts, many socially responsible investors are capitalizing their earnings – and their involvement to social good.

Long-term vs. short-term corporate focus

Socially responsible investing (SRI) takes the long term vs. short term investment discussion to a socially alert investing level. In comparison to countless corporations who take advantage of natural assets and human labor for short-term profits, a socially responsible stock drives under long-term natural sustainability, lending itself well to green investing. For example, the oil magnates such as Exxon-Mobile and Chevron have experienced exponential expansion in the last numerous years. However, where will these corporations be in 10 or 20 years – when the oil rigs are pumped dry and clients have switched over to hydrogen-fuel cars? In stark contrast, green investing stress the long-term sustainability of corporate social responsibility on the environment, society, and monetary well-being.

 

Overarching SRI principles

The extensive investment ideology of socially responsible investing are conceptualized based upon unstable techniques of social investing analysis. The execution of social investing in Europe is usually diverse than in the United States, but the underlying essentials are based upon using a set of foundation values. Depending upon the socially responsible investments portfolio or socially responsible funds, the SRI analysis may be based on one or several of the following criteria:

1. Sustainability Practices : This socially conscious investing perspective analyzes whether a company’s business practices are sustainable in the long term. If the business operations negatively impact the environment, economy, communities, or human welfare, then it is not considered sustainable investing for long term profitability.

2. Corporate Governance : This socially responsible investing component analyzes the company’s policies on employee, community, investors, stakeholder, and environment relations. Social investment’s mutual authority analysis is a separate process from the company’s financial outlook.

3. Religious Beliefs : Considered the original father of socially conscious investing, religious beliefs have screened many portfolios. For example, a Catholic screened socially responsible investing portfolio may divest companies that produce contraceptives. Both Christian and Muslim screened socially liable funds are prevalent, imparting strong religious beliefs onto the social investing analysis of opportunities.

4. Public Policy : Geared for socially responsible stock portfolios that include international holdings, the public policy filter analyzes foreign governments’ actions, either on an individual country case-by-case basis, or based upon an international mandate, such as a ban by the UN or NATO.

Socially responsible investment funds’ performance

Beyond the desire to contribute to social good, socially responsible investors are seeking SRI investment performance. Values investing demonstrate that socially conscious investing can be done quite profitably. In fact, in some market conditions, socially responsible funds outperform their market counterparts.

The Domini 400 Social Index (DS 400), the socially responsible investing industry benchmark, has outperformed the S&P 500 since its inception in 1990. According to KLD Indexes, as of November 30, 2007, the DS 400 has enjoyed 11.75% annualized returns, leading ahead of the S&P 500’s 11.21%. The DS 400 screens its index for socially responsible stocks based upon environmental, governance, and social filters, and within its index, there are 250 S&P 500 represented companies, 100 companies not on the S&P 500, and another 50 socially responsible stocks that have demonstrated significant strength in social investing filters.

With the sustained long-term SRI investment returns in the socially responsible investment funds, such as the DS 400, socially conscious investing can match or outperform its market counterparts – dispelling the myth that a socially responsible investor must sacrifice performance for social consciousness.

 

The risk exposure of socially responsible stocks

However, when comparing SRI indexes against market benchmarks, the question begets: does the performance of socially responsible investment funds come at a higher portfolio risk than its market counterparts?

Considering the rigorous screens of socially responsible investing portfolios, the socially responsible stocks are naturally geared towards companies with smaller market caps. Theoretically, the lower market caps contribute to a higher volatility and beta for the overall socially conscious investing portfolio. For example, the Domini 400 has a weighted average market cap of 83% of the S&P 500.

Beta Coefficient: measurement of an investment’s volatility against the market

However, instead of reducing the overall beta, the socially responsible investments screens minimize the individualized corporate risk. By evaluating a socially responsible stock based upon its governance, sustainability and relationship with stakeholders, social screens reduce the economic risk of the individual corporate holding. For example, by not choosing to invest in tobacco, socially responsible investors shield their portfolios from the negative performance factors of lawsuits. Or, by selecting companies that have good relations with their employees, the negative financial reprimands of strikes are curtailed from the socially responsible investment portfolio.

Risk and volatility are not necessarily synonymous in the world of financial portfolios. Whereas beta may be a good indicator to evaluate the short-term probability that a negative event may occur, this does not specifically analyze the individualized corporate risks. Though socially conscious investing portfolios may have higher betas, the risk of the socially responsible stocks in the portfolios experiencing financial degradation is more limited than the market benchmarks.

Alpha: risk-adjusted measurement of an investment’s excess return over “risk-free” instruments

One of the most compelling factors of socially conscious investing is that despite its demonstrated increased returns, the risk does not necessarily increase. Social investing may be one of the few exceptions to the risk-to-reward ratio. In fact, the performance of the socially responsible funds may not be fully indicative of its true earnings, once the lowered individualized corporate risk is weighted. After adjusting for both short-term and long-term risk, social investing’s alpha may be stronger than the numbers indicate. For more information visit our website http://www.sristocks.com

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