Socially Responsible Investing:
You Don't Have To Sacrifice Profits For Principles

By Bob Evans

With today's increasing global awareness of social and environmental issues, many investors want to reflect their strongly held beliefs in their invest ment portfolios. Socially responsible investing (SRI) gives investors a unique way to incorporate personal values into investments. Concerned individuals, as well as institutional investors, are making SRI a priority investment issue. In fact, nearly one out of every ten dollars under management in the United States is now part of some type of SRI portfolio.

Socially responsible investors show concern about a wide range of issues. To reflect those concerns, they design portfolios that avoid problematic areas and support investments which actively promote social and environmental well-being. Investors may avoid investing in corporations involved with tobacco, gambling or nuclear power. Or they may choose not to do business in countries known for human rights violations. Alternatively, investors may invest in companies that show strong records in community service, charitable giving or environ mental problem solving. Whether concerns revolve around the envi ronment, the workplace or a host of other issues that affect the world we live in, SRI gives people a way to invest with their values.

The performance debate

Although SRI is becoming increasingly popular, the gnawing question remains: Must investors sacrifice return to achieve social objectives? If an investor screens a traditional stock and bond portfolio on social criteria, will that portfolio under perform similar, unscreened investment vehicles? There have been three major schools of thought on this critical issue.

1. Some believe that investment portfolios designed to meet investors' social and political objectives cannot also provide competitive returns. A key argument is that the social screening process leads to lower returns by limiting investment options and reducing opportunities for portfolio diversification.
2. Others advocate that over the long term, investments identified as socially respon sible will prove to be among the most profitable. The theory is that good cor porate citizenship can lead to increased earnings and ultimately higher-than-market returns for screened stock portfolios. For instance, corporate investment in environmental initiatives can pay off in reduced resource costs and fewer legal liabilities, or companies promoting equal opportunity can better access a diverse talent pool and multicultural markets.
3. The third, less glamorous school of thought proposes that there is no intrinsic cost or benefit to the social screening process.

Profits and principles

Current studies strongly support the third theory and suggest that investors do not have to sacrifice profits for principles. In May 1990, Kinder, Lydenberg, Domini & Co., an investment research firm that provides social investment research to the financial community, created the Domini Social Index (DSI). The DSI is a tool used to gauge the performance of the socially-screened equity market and to measure its returns against unscreened market returns. As a market capitalization-weighted common stock index, the DSI monitors the performance of 400 corporations which pass multiple broad-based social screens.

In the more than six years since its inception, the performance of the DSI has surprised many SRI skeptics by generating returns close to or above those of the Standard & Poor's 500, an index generally accepted as a performance benchmark for the United States equity market. For the five years ended June 30, 1996, the DSI had annual ized returns of 16.96 percent versus 15.73 percent for the Standard & Poor's 500.

Like all sensible investment choices, the decision to select a social investment manager should be based on three fundamental steps: define your investment objective and time horizon, determine your risk tolerance and evaluate how the socially responsible investment fits into your total finance picture. Although past performance is not indicative of future results, the evidence indicates that socially responsible investors have been able to meet their risk and return objectives in much the same way as investors in unscreened portfolios by carefully assessing their goals and selecting a suitable money manager.

Bob Evans is vice president of investing at Smith Barney in Dallas, Texas. He is making available to NASE Members a free copy of Smith Barney's market outlook for 1997 entitled Where We Stand (order number GP0676). To receive your free copy, contact him at 1-800-766-1088.

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