Understanding Socially Responsible Investing

Suppose that a pharmaceutical company -- let's call it Drugex -- developed a cure-all for cancer. This new drug would eliminate all forms of cancer known and unknown. It is the perfect drug. When I asked the audience if they would invest in this company there was affirmative unanimity in their response.

Next I added a few facts. Drugex was also a manufacturer and distributor of birth-control products. The company uses the profits and cash flow generated from the sale of those products to perform the research and development for the new cancer cure. Then I asked the audience, "Now would Drugex fit your personal SRI portfolio?" The responses were mixed.

Conversely, we had to question potential conflicts when it comes to investing in so-called sins.

Assume you could invest in a winery. By the strictest definition of SRI, this company would be considered a sin investment and would be excluded from your portfolio. However, if I told you that this winery not only produces wine for consumers but also produces and donates wines for religious ceremonies, would that be considered SRI or sin?

The bottom line: I believe that socially responsible and/or sin investing is in the eyes of the investor. Each of us has to decide what is socially responsible and what is not. And for all investors, what should ultimately matter is performance.

As I outlined in "Five Investing Tips I Learned at the Track," a key to investing is learning to eliminate stocks that will underperform the market rather than concentrating on stocks that will outperform the market.

SRI eliminates stocks from the pool of stocks or other assets available for investment without regard to potential return. As such, the investor or money manager may be restricted to a population of stocks that may yield substandard returns vs. the broad market or a specific benchmark.

Several studies have been performed attempting to measure the performances of SRI and sin portfolios vs. those of benchmark indices. However, frankly, I think there is no conclusive evidence that SRI or sin investing outperform the market or any benchmarks. I believe that the drawback in such studies may be due to the subjectivity in defining what is SRI or sin investing (as I described above).

Still, I have found a few Web sites that are worth looking at if you're interested in SRI. The first is KLD Research & Analytics (kld.com), which provides SRI resources and has developed several SRI-based indices. The second site is the one for Calvert Investments (calvert.com), which provides SRI mutual funds. Lastly, there is the site for the SRI-devoted trade organization the Social Investment Forum (socialinvest.org).

A Viable Alternative

Let me propose a potential solution for individuals who desire to promote socially responsible behavior or financially support a better world. Rather than invest in socially responsible companies, I suggest investing without restriction in order to maximize your returns. Then donate your investment gains to organizations that promote the cause or causes of your choice. For example, use your investment income to donate to behavioral treatment programs, cancer research or alternative energy.

Your Homework

If you want to give back to society or the environment through investing consider one of the following approaches:

• Invest in a SRI fund. Seek out the fund with the best track record and management team.
• Create a charitable trust that will earmark investment income to benefit a socially responsible cause. My wife and I have such a trust. If you're interested in taking this route, you may want to refer to the Planned Giving Design Center at pgdc.com.