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Debating socially responsible investing is a bit like arguing whether a glass is half full or half empty. Research has shown that returns from socially responsible investing, or SRI, can be roughly equal to those of index funds. But critics argue that matching index-fund returns isn't good enough, especially given that expenses are often higher for socially responsible funds.

Despite the passionate debate, more investors are opting to marry their money with their morals. Total SRI assets rose more than 258%, to $2.29 trillion, in 2005, surpassing the 249% increase for all assets under management, according to the Social Investment Forum, a nonprofit trade association for the SRI industry.

Investors are choosing funds that exclude "sin stocks" such as


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Harrah's Entertainment


. Sometimes SRI practitioners go even further by screening companies on the basis of religious beliefs, labor practices and environmental records.

Many investors, however, still are not sure how SRI returns compare with those of other mutual funds, according to a recent survey for Calvert, one of the largest SRI fund companies.

And there's the rub: Critics say investing on the basis of morals runs counter to efficient market theory. Indeed,'s


Jim Cramer has argued that investors are better off making as much money as they can (legally) and then donating their proceeds to charity.

But other experts disagree. "That's like telling an Orthodox Jew to buy cheaper nonkosher meat and donate the savings to the synagogue," quips Santa Clara University finance professor Meir Statman, who has studied SRI since the early 1990s.

In a 2000 study, Statman found that the difference in risk-adjusted returns of the Domini Social Index, an index of 400 socially responsible stocks, and the

S&P 500

was not statistically significant between 1990 and 1998.

Statman also compared the returns of 31 socially conscious and 62 conventional mutual funds of roughly equal asset size and expense ratio. He found that the returns of all socially responsible funds trailed those of the Domini Social Index and S&P 500 but outperformed those of the conventional funds, although the difference was not statistically significant.

Statman updated his research of the indices last year, extending the period of analysis through April 2004 and adding the

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Calvert Social Index, the Citizens Index and the U.S. portion of the Dow Jones Sustainability Index. The SRI funds still did better.

The problem is that their expenses are higher than those encountered when investing in a standard index, Statman acknowledges.

"You might say in statistical terms that the advantage given by the Domini Index is being eaten away, at least for individual investors, by the higher expense ratio," Statman says.

Meanwhile, professors at Wharton found that investors who prefer actively managed mutual funds over indices fare worse if they narrow their choices with SRI screens. Professors Robert Stambaugh and Christopher Geczy and grad student David Levin found that investors who choose actively managed SRI funds can lose more than 3.5 percentage points of return a year as their investment strategies get narrower -- limiting investments to value stocks or small-company stocks, for instance.

So what's an investor to do?

"People need to ask themselves if all they're interested in is making money. They should ask themselves whether that's their bottom-line priority," advises Christopher Hormel, who manages several trusts invested exclusively according to SRI screens. "If they feel like ethics, morality, sustainability and caring for people that don't have the power and money to be able to dictate their own fate, if those people's interests are included in the equation ... then they have to act according to that."

Hormel, whose grandfather invented Spam, acknowledges that he has missed out on some top-performing stocks.

"If we were just investing in oil companies, we would have probably made a lot more money over the last few years," says Hormel. But "for me and a lot of people doing socially responsible investing ... maybe our own personal financial bottom line isn't as important as the welfare of all of us together."

Just how effective SRI is at causing change is another widely debated question. Lisa Leff, a vice president and portfolio manager with Trillium Asset Management, notes that social screens merely provide a baseline for addressing issues of importance to clients, which range from animal rights to sexual orientation.

"We are much more interested in the work we can do engaging in corporations on behalf of our clients who are their shareholders," says Leff, whose firm manages portfolios for institutions and high-net-worth individuals. Last fall, for instance, Trillium filed 21 resolutions to press companies to do more on a broad range of social and environmental issues.

Other firms with SRI funds also take an activist approach.

Minding the Gaps

Smaller investors interested in SRI investing would be well advised to pay close attention to expenses and manager experience, advises Greg Carlson, an analyst with Morningstar who covers SRI funds.

One fund Carlson likes is the

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Calvert Social Equity Investment Fund, because it has an

experienced manager, Daniel W. Boone III, and a focus on quality growth stocks. "It's not an aggressive growth strategy, so it held up quite well during the bear market," Carlson says.

Performance of Calvert Social Invest Equity Fund
(Growth of $10,000 -- 03-31-06)

Source: Morningstar

Another recommendation from Carlson -- the

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Pax World Balanced Fund -- often flies under the radar screen. It's been around since the 1970s, and its manager, Christopher Brown, has been running the fund for eight years, after taking it over from his father, a company founder.

Brown boasts that his fund has a lower expense ratio -- 0.95% -- than many peers; one of the lowest minimum contributions, at $250; and low turnover, at 22% a year, with a three- to five-year time horizon. Equally important, the fund is in the top 9th percentile of about 550 SRI and non-SRI balance funds, on the basis of 10-year return, and also fared well for three- and five-year time frames, according to Brown.

Performance of Pax World Balanced Fund
(Growth of $10,000 -- 03-31-06)

Source: Morningstar

When picking stocks, the fund manager first looks at companies' financials and then runs them through social screens, avoiding the sin stocks, examining fair-employment practices and environmental policies and looking for products and services that enhance the quality of life. Those screens meant, for instance, reluctantly divesting 375,000 shares of


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because of the company's deal with whiskey maker Jim Beam.

Brown notes, however, that he replaced Starbucks with another strong-performing beverage company,


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"Our funds demonstrate you don't have to sacrifice performance," Brown says. "We've proven that not only in the short term but in the long term."

Which suggests that for the discerning investor, the SRI glass can be even more than half full.