Critics of negative screening charge that merely excluding companies for their socially repugnant practices has no net impact, because there is always someone out there that willing to buy their shares instead. They assert that screening offensive companies may make the investor feel better about where they are putting their money, but they are not helping encourage social change and environmental improvement. But negative screening still has an appropriate place in the quiver of tactics used by socially responsible investors, to be complemented by positive screening and shareholder activism, and will remain the most palatable starting point for many.
It is also important to note that while one investor excluding their investment from a company because of a particular activity will not make that company mend its ways, its the cumulative effect that's important. This is analogous to voting in a national election, where individual votes collectively create a "voice." For example, the recent struggles of the tobacco industry illustrate the cumulative and emergent effects of investor and consumer advocacy over its health effects.

Most people imagine that the majority of companies included by positive screening are smaller companies embarking on products that may contribute to the world's future economic and environmental sustainability. Alternative forms of energy that produce less pollution, such as solar power, wind power, and hydrogen fuel cells, constitute a rapidly growing and potentially profitable area for many investors. Natural food and healthy living products, fiber products that conserve forests, environmental cleanup and recycling, are all areas that can benefit the sustainable future, and are fertile ground for positively screened investments. However, it is difficult to create a well-diversified portfolio of the smaller companies.
Large and medium sized companies are also subjected to and included by positive screens. Larger companies, and the problems they face, are more complex. They tend to have more history, usually stretching back long before any culture of corporate responsibility, and old habits can be difficult to change. Positive screening can help discern which of these large companies are heading in a positive direction. But all companies, small and large, can make progress in the areas of social and environmental performance covered by positive screening.
Mutual funds and other institutions often use a "best of class" approach to positively screen companies. They may chose to include a company that has demonstrated leadership in their industry as the best representative, despite the overall record of that particular industry. Forward thinking leaders are often receptive to dialogue regarding social and environmental issues important to shareholders. While some investors may be disturbed by past social or environmental performance of a particular company, there is much to be said for examining more recent positive trends of a company's record to determine how the company is positioned for the future. Rewarding industry leaders or companies that have made significant progress with carefully placed investments can encourage other companies in their industry to improve their social performance.
Whether employing negative or positive screening, it is important to remember that screening can be just one aspect of an individual's or institution's involvement in responsible investing.

Do my investments suffer if I choose a socially responsible mutual fund?
The myth that choosing socially responsible investments hurts financial performance is just that, a myth. The socially responsible investor has a wide variety of high-performing funds to choose from, including several index funds designed to match or better the performance of the market as a whole.

You'll also find bond funds, balanced funds, and a wide variety of equity funds, including those that focus on large companies, mid-sized companies, small companies, and companies in other countries. Before investing, be sure to read the prospectus and understand the risks.

For information on the performance of socially responsible mutual funds that are members of our Green Business Network and US SIF (the association for socially responsible investment professionals and institutions), visit US SIF's Mutual Fund Performance Chart. Socially responsible funds use multiple strategies to promote corporate responsibility, including social and environmental screening, shareholder action, and voting their proxies.

http://www.greenamerica.org/socialinvesting/whattoknow.cfm

http://www.greenamerica.org/socialinvesting/whattoknow.cfm

Modern applications
Socially responsible investing is a booming market in both the US and Europe. In particular, it has become an important principle guiding the investment strategies of various funds and accounts. Assets in socially screened portfolios climbed to $3.07 trillion at the start of 2010, a 34% increase since 2005, according to the US SIF's 2010 Report on Socially Responsible Investing Trends in the United States. From 2007 to 2010 alone, SRI assets increased more than 13%, while professionally managed assets overall increased less than 1%.[11] As of 2010, nearly one of every eight dollars under professional management in the US is involved in socially responsible investing—12.2% of the $25.2 trillion in total assets under management tracked by Thomson Reuters Nelson.
Research estimates by financial consultancy Celent predict that the SRI market in the US will reach $3 trillion by 2011. The European SRI market grew from €1 trillion in 2005 to €1.6 trillion in 2007.[16]
Government-controlled funds[edit]
Government-controlled funds such as pension funds are often very large players in the investment field, and are being pressured by the citizenry and by activist groups to adopt investment policies which encourage ethical corporate behavior, respect the rights of workers, consider environmental concerns, and avoid violations of human rights. One outstanding endorsement of such policies is The Government Pension Fund of Norway, which is mandated to avoid "investments which constitute an unacceptable risk that the Fund may contribute to unethical acts or omissions, such as violations of fundamental humanitarian principles, serious violations of human rights, gross corruption or severe environmental damages."[17]
Many pension funds are currently under pressure to disinvest from the arms company BAE Systems, partially due to a campaign run by the Campaign Against Arms Trade (CAAT).[18] Liverpool City Council has passed a successful resolution to disinvest from the company,[19] but a similar attempt by the Scottish Green Party in Edinburgh City Councilwas blocked by the Liberal Democrats.[20]
Mutual funds and ETFs[edit]
Socially responsible mutual funds counted by the 2010 Trends Report increased in number to 250 in 2010, up from 173 in 2005 & 2007, 189 in 2003, and 167 in 2001. The overall number of mutual funds incorporating environmental, social and corporate governance (ESG) has increased 45% since 2007. Additionally, 26 exchange-traded funds (ETFs) that incorporate ESG criteria were identified with $4 billion in assets at the end of 2009, a 76% increase from the eight ETFs with $2.25 billion in net assets identified at the end of 2007 [11]. Unlike the Employee Retirement Income Security Act of 1974 (ERISA), which severely limits the extent to which socially responsible goals can be considered in managing corporate and Taft-Hartley pension assets (due to ERISA's overriding goal of protecting employees' pensions),[21] registered investment companies can take these factors into account so long as the disclosure and other requirements of the Investment Company Act of 1940 are met.[22] US SIF maintains charts describing the socially responsible mutual funds offered by its member firms.

Social screening is the most common way for investors to practice socially responsible investing. Social screening is the process of selecting companies to invest in based on social and/or environmental performance in addition to a company's financial performance.
There are two forms of social screening: negative or avoidance screening and positive screening. In addition to the usual investment goals, these funds restrict their investments to whatever they define as socially responsible. Such criteria can include: avoiding military, alcohol, tobacco, or gambling industries; selecting companies that demonstrate a high degree of respect for their employees; and selecting companies that have minimal negative impact on the environment.
Negative screening is the easiest and earliest form of social investing. Beginning with the Pioneer Mutual Fund in 1928. Negative screening is the conscious decision not to invest in companies that are inconsistent with the personal values of the investor. The term "socially screened" may be somewhat misleading to investors. There are various levels of screening, which range from excluding tobacco companies to funds that meet an extensive list of screens such as the exclusion of companies that do not meet diversity, workplace, and environmental standards. Currently there are more than 70 mutual funds that screen companies, the first of which was with the Pioneer Fund in 1928.
Criticism for negative screening has emerged from the concern that is not a sustainable method of impacting corporate change. Unless all investors employ the same screening criteria for their investment decisions, there will exist a large pool of people and institutions investing in companies regardless of the company's social and environmental impact.
Positive screening is the process of actively searching for companies to invest in, which reflect the values of the investor through leadership in product design, policies, environmental practices, and human rights. A common form of positive investing is choosing industry leaders to invest in despite the reputation of the industry as a whole with the hope that the standard of business will be raised to compete with the corporate social responsibility leaders within a particular industry.
It is nearly impossible to meet all social screens. All companies employ practices, which on some level may indicate negative social and environmental practices, but the standards are changing business, making the role of the investor more critical.

Introduction to Socially Responsible Investing
A growing number of people are investing their money in the future. Not just their own future, their retirement or their dream house, but in the future of their community, their environment, their world. These people are at the heart of socially responsible investing, one of the most optimistic emerging trends in the financial world. Socially responsible investing integrates financial goals with positive personal values to give investors a voice in shaping the future of our society.
The beauty of socially responsible investment is that everyone's vision of a brighter future is not the same. Some investors are more concerned about environmental problems, some feel strongly about how companies treat their employees, while others worry about the societal effects of certain products, such as tobacco, weapons, or alcohol. There are as many angles to socially responsible investing as there are investors, representing a mosaic of social concerns. But all of these angles share in common each respective individual's or institution's highest aspirations for the world.
What surprises many investors is that you can do well, while doing good. Most investors assume that there is a financial cost to combining societal and financial goals, what's known as a "double bottom line." But the outstanding performance of socially responsible indexes and mutual funds, as well as several recent studies, support the notion that investing with your values does not necessarily compromise your financial gains. On the contrary, some financial analysts suggest that companies that pay close attention to social and environmental risks and opportunities will be more competitive in the long run.
History
The origins of socially responsible investing are ancient, but it has only come full stride in the last 20 years. In biblical times, Jewish laws laid down directives on how to invest according to ethical values. In the U.S., Quakers practiced socially responsible investing as early as the 16th century, based on their beliefs in human equality and nonviolence. More recently, the social climate of the 1960s raised concerns among some investors about civil rights, the environment, and militarism. But the turning point for socially responsible investors came during the campaign to eliminate the institutionalized racial discrimination of Apartheid in South Africa.
Today there are a plethora of environmental and social concerns for socially responsible investors to rally around. Incidents like the Exxon Valdez oil spill or the Bhopal Union Carbide plant disaster, along with repeated warnings about toxic waste, global warming, and other environmental threats, continue to reinforce the seriousness of environmental concerns for responsible investors. Pressing social issues such as diversity in the workplace, employee issues, human rights in oversees factories, and socially destructive products such as tobacco, now provide fertile ground for investors to base their choices on.
Current Status
Although a relatively small portion of total investments, socially responsible investing continues to grow and become more mainstream and influential. Total investments using at least one social investment strategy have grown from $40 billion in 1984 to $639 billion in 1995, to over $2 trillion today, according to a 1999 report by the Social Investment Forum (SIF). Social investments now account for about 13 percent of the estimated $16.3 trillion under professional management in the U.S., according to the SIF report.
The number of socially responsible mutual funds using one or more social criteria has grown to nearly 200 funds - and include equity, balanced, international, bond, index, and money market funds. Hundreds of institutions and mutual fund companies have used the power of their ownership positions in publicly held companies to sponsor shareholder resolutions or vote their proxies on corporate social responsibility issues.
There are still millions of investors who are not including social and environmental concerns in their investment decisions. Just what are they missing?
Examples
There are three primary strategies for investors to follow their social and environmental values. The first is the practice of screening, or choosing securities based on social or environmental criteria. Screening typically involves excluding certain companies for products or practices that are considered negative, called avoidance or "negative screening." A growing movement toward "positive screening" involves selecting companies based on their positive contributions to society or the environment. Because the process of screening requires extensive research into company policies and practices, most socially oriented investors rely on mutual funds to manage their screened investments.
Socially responsible mutual funds address a range of issues, from environmental impacts to animal rights, from tobacco manufacturing to employee relations. There are screened mutual funds to match any investor's values, but it is important to bear in mind that no company is perfect. A company that manufactures weapons might be a great advocate of employee empowerment. Another company that makes chairs from recycled materials might also produce toxic wastes in the process. Socially and environmentally screened mutual funds are likewise not black and white, as they include companies with various strengths and weaknesses based on the fund's qualitative criteria.
The second strategy for socially responsible investors is shareholder activism. Shareholders own a piece of the companies they invest in, and with that ownership comes both rights and responsibilities. A growing number of social investors are using their roles as corporate owners to advocate their issues of concern, whether it is deforestation or employee wages.
Shareholders with social or environmental concerns can express themselves through dialogue with company management, shareholder resolutions, or divestment. These approaches represent three levels of engagement, but they share the common goal of making company management aware of how their practices effect all stakeholders, including customers, employees, vendors, and communities, as well as stockholders.
Community investing is the third option open to socially responsible investors. These investments provide low interest rate loans to people in low-income communities, from villages in developing countries to neighborhoods in your own city, who would otherwise have difficulty gaining access to loan capital. Community development banks and credit unions offer loans that finance affordable housing, small business loans, and other local projects. Community development loan funds are non-profit institutions that offer financing for similar projects in low- or moderate-income communities.
Community investing provides an effective way for socially-oriented investors to put money into grass roots development - and provides steady income for a well-diversified portfolio. But more importantly, it is the most direct route for investors to gain "social" returns. The emergent benefits at the community level in many cases outweigh diminished financial returns, making community investing one of the most satisfying and promising venues for socially responsible investors in the future.
Social investing comes naturally with the realization of the influence corporations have on our quality of life, and on the world's future. People disillusioned with the inertia of modern government would do well to consider the impact they could have if they invested according to their highest expectations for the future. It's no coincidence that a growing number of socially responsible investors are influencing corporate behavior to encourage positive change in society.

The Impact Of Negative Screening
FEBRUARY 1, 2010 • JON QUIGLEY AND LYN TAYLOR

Most arguments against socially-responsible and/or sustainable investing (SRI) are centered on the specter of lost opportunity. If one is limiting the opportunity set by removing securities from the investable universe, they are necessarily hampering returns-or so goes the story. If we examine this argument more closely, we recognize it as inadequate at best, flat-out wrong at worst.

The notion of a limited opportunity set in SRI holds validity at face value. SRI strategies most often incorporate negative screens, eliminating companies deriving more than 5% of their revenue from industries such as tobacco, alcohol, pornography, abortion and defense. Others may restrict investments in companies doing business with countries such as The Sudan or Iran. Those SRI strategies which integrate environmental, social and governance (ESG) concerns may introduce still more negative screens, avoiding investment in companies which score worst along those respective metrics. By definition, then, we see that the investable universe of an SRI practitioner is narrower than that of an "unconstrained" investment manager.

Let's turn back to the notion of an "investable" universe for a moment. We know the "market portfolio" is the true, unconstrained investable universe. This includes a representative percentage of all investable assets, including real estate, art, precious metals and stones, fixed income (government, municipal, corporate), and equities (public, private, international, domestic, emerging, large cap, small cap, growth, value) to name a few. By selecting the U.S. large-cap equity category for investment, one has already narrowed the investable universe tremendously. Second, nearly every U.S. large-cap manager uses screens in their investment process. These may used as risky top-down calls to avoid certain industries or sectors, to substantially raise cash levels due to a lack of perceived investment opportunities, or to eliminate low-priced, more illiquid securities or companies with negative earnings. The point here, then, is to acknowledge and understand that while SRI strategies do eliminate certain securities from the investable universe, this fact should not lead to the treatment Hester Prynne got in The Scarlet Letter.

There's also a general misunderstanding as to just how limiting the negative screens applied in SRI actually are. The concerned financial advisor should focus on two consequences of the screening process: the amount by which the investable universe is limited, and the impact of this limitation on the risk/return attributes of the new portfolio.

To illustrate these consequences, we created four scenarios: the original S&P 500 Index S&P 500 Index, with a socially responsible screen to eliminate companies deriving more than 5% of their revenue (directly or indirectly) from alcohol, gaming, tobacco, military and defense, or involvement with The Sudan (as measured by KLD Research & Analytics) S&P 500 Index, with an ESG screen to eliminate companies ranking in the bottom 20% of their respective sector when measured against all U.S. companies along environmental, social and governance criteria (as measured by ASSET4) S&P 500 Index, with a screen to eliminate the combination of the socially responsible and ESG screens described above

The analysis was repeated for each month from October 2004 through November 2009, with a monthly rebalancing of the S&P 500 Index.

First, we examine the extent to which the three screens described above limit the investable universe: The socially responsible screen eliminates an average of 6.09% of the S&P 500 Index's market cap. The ESG screen eliminates an average of 5.02% of the S&P 500 Index's market cap. The combined socially responsible and ESG screens eliminate an average of 10.78% of the S&P 500 Index's market-cap.

[pic]

Next, we measured the impact of these negative screens on the risk/return profile of the investable universe: The S&P 500 Index had an annual compound return of 2.04%, with an annualized standard deviation of 15.85%. The S&P ex socially responsible-screened companies had an annual compound return of 1.61%, with an annualized standard deviation of 15.75%. The S&P ex ESG-screened companies had an annual compound return of 2.13%, with an annualized standard deviation of 15.73%. The S&P ex combined socially responsible and ESG screens had an annual compound return of 1.68%, with an annualized standard deviation of 15.65%.

[pic]

As you'd guess by the total return chart presented, the various investable universes have very high correlations with the S&P 500 Index. Although the return stream is slightly less volatile for the socially responsible-screened universe, the screen does have a negative impact of 0.43% per annum over this time period versus the un-screened S&P 500 Index. We should note that this is a generic screen, and one size certainly does not fit all.

The ESG-screened universe outperformed the S&P 500 Index in four of five calendar years. The total return for the ESG-screened universe edges the return of the unscreened S&P 500 Index over this time frame by 0.09% annualized, again with slightly lower return volatility. By definition, the ESG-screened universe has superior risk-adjusted returns to the S&P 500 Index over this time period. Here, we must re-iterate that this is a simple negative screen for bottom-quintile ESG; we make no attempt to overweight stocks with the highest ESG scores.

Finally, applying both negative screens, we find the resulting universe underperforms the unscreened index by 0.37% during this period, albeit with the lowest volatility of any series tested.

We find most advisors and consultants are quite interested-and maybe a bit surprised-by these results. Not only do the various negative screens described in this article have a rather limited impact on the market cap of the potential investment universe, but the return impact is also quite muted. With respect to a negative ESG screen, we have found that a "passive" ESG-screened portfolio had returns slightly better than the S&P 500 Index over the 62 months ended November 30, 2009, with slightly lower volatility. The correlation of the return streams for the S&P 500 Index with and without the ESG screen was .9998 (the tracking error is 0.33%). There is no apparent cost-and perhaps a modest reward-for using negative ESG screens.

Our research has found the perceptions surrounding negative screening used in most SRI/ESG strategies bears little resemblance to the facts. Combine this with clients' increased desire to live and invest in a fashion more consistent with their collective beliefs, and a well-educated, thoroughly discussed decision can be reached with respect to whether negative social screens and/or ESG screens should be integrated into your client's investment strategy.

Jon Quigley is a managing partner, investment management, and Lyn Taylor is a research associate for Advanced Investment Partners, a quantitative U.S. equity investment boutique in Safety Harbor, Florida. The company has a 13-year history of managing assets for a range of clients, including two of the world's largest pension plans and several large U.S. brokerage firms. The company's Sustainable Responsible LargeCap Strategy recently completed its fifth year, and has topped the S&P 500 Index by better than 2% annualized since inception. AIP is owned by individual partners and Wayne Hummer Asset Management.

http://www.socialfunds.com/page.cgi/article1.html

| |
|Screening Your Portfolio |
|Introduction to screening |
|Anyone who has ever pondered the activities of companies they own through their stock portfolio, mutual fund, or pension plan, is able to find at least one corporate |
|practice that they would rather not profit from. Depending on the individual investor, this may be animal testing, producing military weapons, poor environmental |
|performance, or supporting inhumane labor conditions overseas. Because the diversity of potential issues is so broad, and so pressing in many people's minds, screening |
|is the most common entry point for socially responsible investors. |
|Screening is the process of selecting companies to invest in based on their social and/or environmental performance. Researching the records of individual companies is |
|usually beyond the capacity of most individual investors, but is readily performed by certain public pension funds, mutual funds, and money managers offering screened |
|portfolios. That leaves individual investors to decide which screens align with their social values and choose their investment products accordingly. |
|The process of screening can be easily broken down into two very different methods, negative and positive screening. Negative (or avoidance) screening refers to |
|excluding companies that manufacture certain products that are objectionable, such as weapons or tobacco products. Positive (or affirmative) screening is more proactive,|
|selecting companies that show leadership in product design, employee policies, environmental protection, human rights or other practices. Although positive and negative |
|screening are easily distinguished, they are best considered as complementary tactics that can effectively be used to select socially responsible companies. |
|Social and environmental criteria have to be weighed together with financial performance as well. The goal, using a set of criteria, is to arrange companies on a |
|continuum from least responsible to most responsible, and invest in the latter. |
|Negative or avoidance screening |
|Negative screening is the simplest method used by socially responsible investors. Some mutual funds have been screening companies that participate in the production of |
|alcohol, tobacco, or gambling products, known collectively as the "sin" screens, for over 60 years. Tobacco products are now so publicly reviled that tobacco screens are|
|being used by nearly 200 mutual funds. Other popular negative screens include military weapons production, firearms, and nuclear power. They are fairly simple to apply, |
|and often require a simple "yes" or "no" analysis. |
|Critics of negative screening charge that merely excluding companies for their socially repugnant practices has no net impact, because there is always someone out there |
|that willing to buy their shares instead. They assert that screening offensive companies may make the investor feel better about where they are putting their money, but |
|they are not helping encourage social change and environmental improvement. But negative screening still has an appropriate place in the quiver of tactics used by |
|socially responsible investors, to be complemented by positive screening and shareholder activism, and will remain the most palatable starting point for many. |
|It is also important to note that while one investor excluding their investment from a company because of a particular activity will not make that company mend its ways,|
|its the cumulative effect that's important. This is analogous to voting in a national election, where individual votes collectively create a "voice." For example, the |
|recent struggles of the tobacco industry illustrate the cumulative and emergent effects of investor and consumer advocacy over its health effects. |
|Positive or affirmative screening |
|As a more proactive approach, positive screening is being employed by a growing number of investors. Rather than merely excluding companies with objectionable products, |
|the investor methodically supports companies that set positive examples of environmentally friendly products or production methods and socially responsible business |
|practices. Unlike negative screens, which are generally more black and white, positive screens require an analysis of complex issues such as pollution, workplace |
|practices, diversity, and product safety. Analytical methods are being refined all the time, and promise some day to make these issues clearer for both businesses and |
|shareholders. |
|Most people imagine that the majority of companies included by positive screening are smaller companies embarking on products that may contribute to the world's future |
|economic and environmental sustainability. Alternative forms of energy that produce less pollution, such as solar power, wind power, and hydrogen fuel cells, constitute |
|a rapidly growing and potentially profitable area for many investors. Natural food and healthy living products, fiber products that conserve forests, environmental |
|cleanup and recycling, are all areas that can benefit the sustainable future, and are fertile ground for positively screened investments. However, it is difficult to |
|create a well-diversified portfolio of the smaller companies. |
|Large and medium sized companies are also subjected to and included by positive screens. Larger companies, and the problems they face, are more complex. They tend to |
|have more history, usually stretching back long before any culture of corporate responsibility, and old habits can be difficult to change. Positive screening can help |
|discern which of these large companies are heading in a positive direction. But all companies, small and large, can make progress in the areas of social and |
|environmental performance covered by positive screening. |
|Mutual funds and other institutions often use a "best of class" approach to positively screen companies. They may chose to include a company that has demonstrated |
|leadership in their industry as the best representative, despite the overall record of that particular industry. Forward thinking leaders are often receptive to dialogue|
|regarding social and environmental issues important to shareholders. While some investors may be disturbed by past social or environmental performance of a particular |
|company, there is much to be said for examining more recent positive trends of a company's record to determine how the company is positioned for the future. Rewarding |
|industry leaders or companies that have made significant progress with carefully placed investments can encourage other companies in their industry to improve their |
|social performance. |
|Whether employing negative or positive screening, it is important to remember that screening can be just one aspect of an individual's or institution's involvement in |
|responsible investing. Shareholder activism is another growing tactic used by institutional investors, including initiating dialogue with companies concerning their |
|record or filing shareholder resolutions pertaining to some aspect of corporate social responsibility. Shareholder advocacy efforts of socially responsible investors |
|have greatly increased the awareness of many important issues and resulted in significant changes at some companies. |
|Screening has come a long way, from the most basic sin screens to broad positive screens applied through complex analytic frameworks. We can expect them to continue to |
|evolve, including new issues to accommodate the evolving corporate and social landscape. The other key areas of socially responsible investing, shareholder activism and |
|community investing, continue to grow as well. But it is likely that screening will provide the backbone of socially responsible investing, comprising the central method|
|for meeting the social and environmental goals of concerned investors. |
| |
| |

http://www.socialfunds.com/page.cgi/article2.html

SOME SIMPLE STEPS
& STRATEGIES FOR SRI
[pic]The first thing to remember is that socially responsible investing is not that different from traditional investing. It just adds a step, the social screening process. First, start by determining your financial needs. Do you want security, high income, or capital gains for future financial needs? Second, identify your most important social concerns, both what you want to avoid and what you want to support. Keep your absolutely not social screens to a minimum. Third, decide what your investment can accept in terms of financial risk, and compare this to the potential social benefit. Finally, select those investments that best meet both your financial and social goals. (see: HOW MONEY MANAGERS SCREEN TO CREATE SOCIALLY SCREENED PORTFOLIOS.)
[pic]For social screening, there are five strategies. They vary in the degree of their complexity and in the difficulty of implementation. The strategies are not necessarily mutually exclusive, and some can be combined in various ways.
1. All-Or-Nothing
[pic]This strategy involves the most stringent social screening - no investment connections to companies with bad environmental records, that use animals in product testing, that have a connection to the nuclear-power industry, etc. Since this strategy is so exclusive, it is sometimes difficult to apply. For example, some industries such as pharmaceuticals are inherently environmentally polluting, and an absolute screen would lock out some investment opportunities in companies that have in the past been in the vanguard of dealing with this problem (Johnson & Johnson and Merck & Company). Some companies like Procter & Gamble have made a serious attempt to radically reduce the number of animals used in the testing of products but argue that tests on rats and mice are still necessary in order to protect humans who may accidentally misuse a product. Several years ago, P&G announced that it had discovered an adequate alternative to animal testing and would be sharing it with others through the Johns Hopkins Center for Alternatives to Animal Testing. However, in spite of these limitations, a limited number of absolute social screens can be applied successfully. During the years that both individual and institutional investors avoided investments in any companies doing business with or in South Africa, research indicated no evident impact on portfolio return, when the performance of screened portfolios was compared to the performance of unscreened portfolios over time.
2. Proportionate Impact
[pic]Some socially concerned investors deal with the problems inherent in absolute screening by using the strategy of proportionate impact. This strategy is based upon the axiom we all learned in elementary physics - for every action there is an equal and opposite reaction. There is some price to be paid for industrial production, so the real question is what price in comparison to other alternatives? This strategy is most evident in environmental screening. For example, when Magma Power (now merged with CalEnergy) was developinggeothermal energy fields in Northern California, there were hundreds of small earthquakes a day. The company tried to combat this by recycling used water back underground. In addition, drilling releases gases such as hydrogen sulfide that can be harmful to plants, animals and humans. However, the Magma fields were located in a desolate and unpopulated area inhabited essentially by rattlesnakes. Furthermore, dangerous emissions from geothermal exploration are insignificant when compared to emissions from some other forms of energy exploration and use. The proportionate impact strategy can also be applied to other screens. During the years of South African divestiture, some socially concerned investors were willing to invest in companies doing business in South Africa so long as the company record for equal employment opportunities was excellent, the products and services supplied by the company did not have a direct connection to the maintainance of the apartheid system, and/or the community policies of the company were directed toward the elimination of apartheid. Similarly, funds that screen for military sales and contracting, such as Pax World Fund, often use a proportionate screen (for example, no more than 5% of gross sales from defense contracts) so as not to exclude companies that sell food to military PXs.

3. Best Of Industry
[pic]This strategy involves a kind of free market model where companies within the same industries compete with one another for the best records on a variety of social issues (for example, environmental awareness and the best records for the recruitment, training and promotion of women and family-friendly practices). There are a variety of sources that rank the best companies on various social issues. The Council on Economic Priorities (CEP) has given awards in a number of categories to companies with especially outstanding policies. In 1993, CEP gave first place Corporate Conscience Awards to The Clorox Company for community involvement with youth, Pitney Bowes for equal employment opportunity, andMerck & Company for responsiveness to employees. In the last several years, books have been published that describe the most family friendly companies and the best companies for women, the best companies to work for, the best companies for African Americans and other minorities, and the best companies for gays and lesbians. Business magazines frequently carry features on such companies as well.

4. Primary Versus Secondary Involvement
[pic]This strategy requires investors to decide whether or not they are concerned if an investment has a secondary involvement with a social problem. It involves asking how far back in the industrial process one wants a particular social screen to go. For example, is it acceptable if a coal utility purchases coal from a mining company with a bad environmental record? The so called hamburger connection is an example of this strategy. Fast-food companies, such as Burger King, have been criticized for purchasing beef from around the world. The problem is that vast amounts of rainforest land are being cleared to provide range land for cattle. The clearing not only destroys thousands of potentially valuable plants and animals, but it also contributes to the greenhouse effect. In addition, slash-and-burn clearing adds pollutants to the air. In contrast to the usual pattern, McDonalds outlets in the U.S. use only beef purchased from ranches in the American Southwest.

5. Actual Versus Potential Problems
[pic]The final strategy involves investors in deciding whether to exclude investments with potential social problems as well as those with actual problems. For example, because a utility has a good and safe record for operating nuclear power plants does not negate the fact that this technology still entails major environmental risks. A 1992 study by the Environmental Action Foundation and the Energy Conservation Coalition estimated that the spent fuel generated by the nuclear industry without any new reactors would total 75,100 metric tons by the year 2020. There is currently no place to put that much radioactive nuclear waste. http://www.goodmoney.com/srihowto.htm Socially Responsible Investing (SRI) is sometimes referred to as “sustainable”, “socially conscious”, “mission,” “green” or “ethical” investing. In general, socially responsible investors are looking to promote concepts and ideals that they feel strongly about. They accomplish this in 3 ways:

1- Investment in companies and governments that the investor believes best hold to values of importance to the investor. These include the environment, consumer protection, religious beliefs, employees’ rights as well as human rights, among others. These areas of concern can be summarized as “Environmental, Social and Governance” and is referred to as ESG investing. In addition, SRI includes shareholder advocacy and community investing.

2- Shareholder advocacy is exactly what it would seem; socially responsible investors proactively influencing corporate decisions that could otherwise have a large detrimental impact on society. The various goals of shareholder advocacy is to pressure those entities into improving practices and policies and acting as a good corporate citizen, while at the same time promoting long-term value and financial performance. The goals are accomplished through various means including dialogue, filing resolutions for shareholders’ vote, educating the public and attracting media attention to the issue, which generally garners support and puts additional pressure on the corporation to do the socially responsible thing.

3- Community investing has become the fastest growing segment within SRI, with some $61.4 billion in managed assets. With community investing, investors’ capital is directed to those communities, in the U.S. and abroad, which are under served by more traditional financial lending institutions and gives recipients of low-interest loans access to not just investment capital and income but provides valuable community services that include healthcare, housing, education and child care.

Community investing, a subset of socially responsible investing, allows for investment directly into community based organizations. Community investing institutions use investor capital to finance or guarantee loans to individuals and organizations that have historically been denied access to capital by traditional financial institutions. These loans are used for housing, small business creation, and education or personal development in the US, or are made available to local financial institutions abroad to finance international community development. The community investing institution typically provides training and other types of support and expertise to ensure the success of the loan and its returns for investors

How is Socially Responsible Investing applied to investing?

The SRI approach is to invest in stocks and bonds from those companies and counties or municipalities that promote certain actions or eschew those, which participate in offending actions. It is not unlike the carrot and the stick premise; you reward those that you agree with by investing in their companies (the carrot) and avoid buying shares of those companies that offend your core values (the stick).

There are three general methods of screening an individual company for inclusion into an SRI fund; the Negative Screen, the Positive Screen and the Restricted Screen. A Negative Screen, for example, could be a fund manager’s conscious decision not to invest in a company that has any involvement within a particular sector, such as tobacco. Other SRI investments might seek out and invest only in those companies which are involved in activities that promote say “green living,” such as wind or solar power; those types of investment are then referred to as a “Positive Screen.”

Because many corporations tend to become highly diversified as they grow, SRI fund managers make use of a “Restricted Screen” type of filtration. In that way, though a small part of the corporation’s activities may be in a less than desirable sector because the amount is so small relative to the rest of the company’s holdings the SRI investment in the corporation would be permitted.

Socially Responsible Investing is Big Time!

Over the last two years, SRI investing has grown by more than 22% to $3.74 trillion in total managed assets, suggesting that investors are investing with their heart, as well as their head. In fact, about $1 of every $9 under professional management in the U.S. can be classified as an SRI investment.

Socially Responsible Investing investment options

When the time comes to invest you will find that you have several options. Traditionally, mutual funds have been the most common way to invest in SRI. Fund companies such as Parnassus, GuideStone Funds, and Calvert are some of the largest. Exchange Traded Funds or ETF’s have recently come out in the SRI format. Powershares and iShares both have several offerings.

Tom Nowack, CFP® is the author of the recently published book “Low Fee Socially Responsible Investing” which describes how to buy individual stocks using the SRI approach. For those investors with larger amounts to invest, Separately Managed Accounts may be an option.

How to get started with Socially Responsible Investing

If you are interested in ESG or Socially Responsible Investing, take some time to research the concepts online or read some books such as “The Complete Idiot’s Guide to Socially Responsible Investing” “Socially Responsible Investing for Dummies”. If you are looking for professional advice, you may wish to use the services of a fee-only advisor where there are no commissions when you acquire the investments.

http://www.forbes.com/sites/feeonlyplanner/2013/04/24/socially-responsible-investing-what-you-need-to-know/

Example of company using sri Socially Responsible Investing (SRI)

Accor’s ambition: to develop while respecting people and the environment. In recognition of this commitment and its performance, Accor is now included in the four leading socially responsible investment indexes.
More about the four socially responsible investment indexes

This commitment is backed by social, environmental, ethical and corporate governance criteria covering four key areas.
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1. Responding to Accor’s growth and changes with a truly outstanding human resources policy.This policy is designed to attract talented people, increase opportunities for job mobility, step up training initiatives, support the development of hotel schools and meet the expectations of employees, who are the key drivers of customer satisfaction.
More about the Group’s human resources policy

2- Reinventing hospitality sustainably is Accor’s new ambition with PLANET 21 program. As the Group enters a new phase of sustained expansion, it is reaffirming its approach to responsible development, which generates value shared by everyone. PLANET 21 accelerates and intensifies Accor’s sustainable development commitment, transforming it into a decisive competitive advantage for the Group, its brands and its partners, in the eyes of customers who are increasingly sensitive to social and environmental issues. The program is structured around 21 commitments backed by quantifiable objectives that all hotels are expected to meet by 2015. With PLANET 21, Accor is making sustainable hospitality the focus of its strategic vision, as well as its development and innovation processes.
More about the PLANET 21 program 3. Linking cultures by supporting the development of individuals and their integration into the community. Created in 2008, the Accor Corporate Foundation enables employees to express the Group’s values at the local level through actions involving children, health care, local culture and community support. These issues are addressed by corporate sponsorship projects that are backed by long-term partnerships.
More about the Accor Corporate Foundation

4. Ensuring a responsible, collective approach to corporate governance. Corporate governance is the responsibility of senior management, which, through its delegation of powers and selection of committees, ensures that Accor’s ethical commitments are taken into consideration.

Impact of SRI

Socially responsible investing (SRI) has been defined as "the integration of social or ethical criteria into the investment decision-making process." Based on the values they hold, investors distinguish socially responsible investments from those which are not by implementing social screens: nonfinancial criteria applied in the decision-making process. Socially responsible investors typically follow one of three approaches to ethical investing: avoidance of businesses whose activities they do not support, a positive approach where they seek investments that will enhance the quality of life, and an activist approach where they attempt to influence the company's activities. In addition to individuals, many institutional investors are heavily involved with SRI. Activist investors can judge their investments' performance by the success of their shareholder activities. Investors might also look at the societal effects of their investments. If investors are seeking to change the corporation or society, SRI has proven to be successful. Empirical studies have shown mixed results with respect to the financial performance of SRI, but the findings tend to show that SRI has minimal impact, either positively or negatively, on investment returns. Nevertheless, many factors indicate that SRI may be here to stay.

http://www.ncbi.nlm.nih.gov/pubmed/10137947

Socially responsible investing (SRI) has been referred to as "double-bottom-line" investing. The implication is that you're seeking not only profitable investments, but also investments that meet your personal standards. For instance, some investors don't want to support companies that sell tobacco products or rely on animal testing. Of course, not everyone has the same set of beliefs, so SRI can mean different things to different people.

According to the Social Investment Forum, total SRI assets in the United States rose from $639 billion in 1995 to $3.07 trillion at the start of 2010. Clearly investors believe in SRI. One question for investors in SRI funds is: Is there a price to pay for avoiding "sin stocks"?

Expenses To answer the question, we begin by considering that SRI funds are typically more expensive than index funds and passive funds in general. One reason is that they incur the extra costs of screening out the undesirables. Those extra costs hurt returns.

Diversification SRI investors also typically sacrifice diversification. SRI funds typically are domestic and large cap. Thus, investors sacrifice exposure to small-cap and value stocks, and perhaps international and emerging market stocks as well. They also then lose exposure to the higher expected returns provided by small-cap, value and emerging market stocks.

SRI investors also may be accepting other risks. Because they avoid investing is "sin" stocks, they're not fully diversified across industries.

Cost of Capital There's one other important point to consider. Economic theory tells us that because there are $3 trillion of SRI investments that avoid "sin" stocks, the cost of capital of sin stocks is driven higher than it would otherwise be, and the cost of capital of the non-sin stocks is driven lower. In other words, by avoiding investing in sin stocks, investors make those stocks cheaper (smaller and more value-oriented). And since the flip side of the cost of capital is the expected return to investors, SRI investors are missing out on the higher expected returns of "sin" stocks.

The authors of the study, "The Price of Sin: The Effects of Social Norms on Markets," provide evidence that the hypothesis that there's a societal norm against investing in "sin" stocks is correct, and that it does impact the cost of capital. The following is a summary of the findings:
When compared to stocks of otherwise comparable characteristics, sin stocks have less institutional ownership -- approximately 18 percent lower institutional ownership than comparable stocks (23 percent versus 28 percent).
Sin stocks receive 21 percent less analyst coverage.
Sin stocks are less held by norm-constrained institutions such as pension plans as compared to mutual or hedge funds that are natural arbitrageurs.
The prices of sin stocks are relatively depressed, and, therefore, have higher expected returns than otherwise comparable stocks -- consistent with them being neglected by norm-constrained investors and facing greater litigation risk (e.g., tobacco stocks) heightened by social norms.
For the period 1965-2006, a portfolio long sin stocks and short their comparables has a return of 29 basis points per month after adjusting for a four-factor model comprising of the three Fama-French factors and the momentum factor. The statistics are economically significant. And just looking at a portfolio long sin stocks would yield even more significant out-performance of sin stocks relative to these benchmarks.
The market-to-book ratios of sin stocks are on average about 15 percent lower than those of other comparable companies. These valuation ratios, using a Gordon growth model calibration, imply excess returns of about 2 percent a year.
As out of sample support, sin stocks in seven large European markets and Canada outperform similar stocks by about 2.5 percent a year.
The conclusion we can draw from this study is that social norms have important consequences in for the cost of capital of sin companies. They also have consequences for investors who pay a price in the form of lower expected returns and less effective diversification.

While many investors will vote "conscious" over "pocketbook," there's an alternative to socially responsible investing that's at least worth considering: Avoid socially responsible funds and donate the higher expected returns to the charities that you are most passionate about. In that way, you can directly impact the causes you care most about and get a tax deduction at the same time!

Why Partake in Socially Responsible Investing?

The rationale behind socially responsible investing is that corporations which combine positive financial and social performance make the best long-term investments; with the down side being those who do not follow socially or environmentally responsible practices will tend to have greater liabilities and charges against earnings due to regulatory pressures, fines, strikes, boycotts, and decreased public opinion and sales.

What Is Socially-Responsible Investing?

Socially responsible investing is investing in companies that refrain from practices which harm the environment, exploit workers, engage in animal testing or destruction, or in some other way negatively affect society, be it morally, ethically, or in general operations. By association, investors in socially responsible firms believe they are acting socially responsible as well. Investors are aligning their values to the corporation’s values to determine where to invest their money. This supports the general concept that investors are looking for more than just a return on their money; they are looking to do some good in the process. Investing in socially responsible companies is one way of doing both.

What Factors Contribute to a Company’s Social Responsibility?

The idea of social responsibility and morality is very often a subjective matter. What may be immoral or socially irresponsible to one person may be acceptable to another. Some of the areas social responsibility covers include:

Environmental impact
Quality of products and services
Nuclear weapons or nuclear power involvement
Tobacco, alcohol, or gambling
Animal welfare issues
Gay/lesbian rights
Human rights
Corporate practices
Workplace issues, violence, safety
Employee relations
Outside country involvement/Relations with repressive regimes

For more detailed information, visit the Social Investment Forum.

Socially Responsible Investing Is Proving to Be Good Business

According to a recent report from the Social Investment Forum, nearly one out of every nine dollars are now involved in socially responsible investing. This equates to $2.71 trillion (11% of the $25.1 trillion) in total assets under management using one or more of the three core socially responsible investing strategies – screening, shareholder advocacy, and community investing.

The socially responsible investing concept is being tested by investors’ dollars as it relates to what companies are being invested in and the growth of the socially responsible companies compared to the overall industry growth.

Socially Responsible Investing Is on the Rise

More on this topic

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The United Nations developed the Principles for Responsible Investing in 2005 in order to bring together a large group of institutional investors to create guidelines for examining how environmental, social and corporate governance issues can affect the performance of investment portfolios. The annual Moskowitz Prize for Socially Responsible Investing was established in 1996 to recognize the best quantitative socially responsible investing study. The Social Investment Forum has an excellent guide to community investing, which focuses on local investing and betterment of communities.

How to Join the Socially Responsible Investing Movement

It is not in the investing process, but the company being invested in, that marks the difference in socially responsible investing. Investing in a socially responsible firm doesn’t differ from investing in any other firm. The rules, regulations and risks of investing are the same regardless of a company’s social responsibility standing. Talk to a financial advisor and/or conduct plenty of research before engaging in socially responsible investing.

http://www.e-personalfinance.com/basics-of-stock-investing/how-to-engage-in-socially-responsible-investing

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The best-in-class approach is used to evaluate companies or borrowers that are recognized leaders on environmental and risk management systems, energy and resource consumption, training programmes for employees, dialogue with stakeholder groups, board remuneration, and shareholders right.
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The focus of thematic approaches is on products and services of an organization. The goal is to invest in a sector whose products contribute solutions to ongoing challenges.
The most prevalent form of screening is negative (or avoidance) screening. This may include screening for companies with involvement in certain industries such as adult content, alcohol production, animal testing, armaments production, nuclear power, violation of human rights, etc.
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Strategies & Themes

Everyone's vision of an improved world is not the same. Some are concerned about the production of certain products, such as alcohol, tobacco or military weapons. Others are more concerned about the effect corporations have on the environment, while still others want to ensure the protection of basic human rights or progressive employee relations.
Nevertheless, certain distinctive SRI approaches can be identified. Thereby screening is a process whereby investments are selected based on certain criteria and requirements:

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The most prevalent form of screening is negative (or avoidance) screening. This may include screening for companies with involvement in certain industries such as adult content, alcohol production, animal testing, armaments production, nuclear power, violation of human rights, etc.
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Positive screening is a proactive process, selecting companies that show leadership in social, eco-nomic and/or environmental issues. For example, such as companies with exemplary employee relations practices or companies that make a contribution to environmental sustainability. SRI fund companies that employ these positive screens will seek out such companies.

Therefore, positive (or affirmative) screening involves the application of social and environmental guidelines or "screens" to the investment decision process.

With positive screening, a distinction can be made between best-in-class and thematic approaches: https://yoursri.com/responsible-investing/strategies-themes The most common form of socially responsible investment is the screened investment account. These include both socially screened mutual funds and socially screened separate accounts managed for individual and institutional clients. Screening can be positive, meaning that the fund or account has a preference to invest in socially responsible companies. Screening can also be negative: the 1980s movement to disinvest or "divest" from companies doing business in apartheid South Africa (and which contributed to that regime's demise) was one important factor that led to today's socially responsible investing movement. Other examples of negative screens include bans on investing in certain industries (such as tobacco or defense) and bans on investing in companies with poor labor or environmental records. According to the Social Investment Forum, the number of dollars invested in screened assets has climbed from $162 billion in 1995 to $2.98 trillion in 2007.

Shareholder activism involves using stock ownership as leverage to introduce shareholder resolutions and otherwise act to influence corporate behavior. Measuring such activity is difficult since often the most successful interventions are the ones that work "behind the scenes" to affect change. Nonetheless, there has been plenty of visible activity as well. Shareholder resolutions on social and environmental issues climbed from 299 proposals in 2003 to 348 in 2005, a 16 percent increase. By 2007 shareholder resolutions reached 367. Social resolutions reaching a vote rose more than 22 percent from 145 in 2003 to 177 in 2005. Institutional investors that sponsored or cosponsored resolutions on social or environmental issues controlled $739 billion in assets in 2007, a 69 percent rise over the $448 billion in assets counted in 2003. According to the 2010 Trends Report by the Social Investment Forum, this value is now estimated to be $858.8 billion.

The final form of socially responsible investing is community investing. This involves directly taking funds out of investments in multinational corporations and actively reinvesting them — through community development financial institutions or CDFIs — in local communities that face shortages of capital. Currently, the Social Investment Forum Foundation and Co-op America are leading a campaign to persuade social investment funds to dedicate one percent of their assets to support the growth of CDFIs. Assets in community investing institutions rose from $25 billion in 2007 to $41.7 billion at the start of 2010.