NEW YORK (MainStreet) -- If you've ever bought shares of a mutual fund and silently grimaced at the prospect that it might be investing your money in unsavory ways--how do you feel about investing in Big Tobacco or oil companies or anything else that makes you uncomfortable?--then you might want to give a little thought to socially responsible investing.
This is oft-misunderstood field suffers from a great number of misconceptions. Are socially responsible investors all a bunch of hippies? Do they have to forego portfolio returns in order to put their money where their values are? What is socially responsible investing, sometimes called simply SRI, and how do people's definitions of "socially responsible" differ?
For these answers and more, we talked to Jared Peifer, assistant professor at Baruch College and expert on socially responsible investing. The author of studies on SRI and why people choose to invest this way, Peifer participated in a MainStreet Q&A on how the industry is changing and what prospective investors in SRI mutual funds should know.
When people invest in socially responsible mutual funds, do they expect to earn the same or better returns than in a typical mutual fund?
Jared Peifer: Most outsiders and financial types think that all people care about are returns on their investments, so I've been trying to find empirical evidence about why we're motivated to invest. It's not just about returns. Some of the research I'm doing in this vein has been finding evidence that in addition to being interested in returns, people are also moral actors.
There have been a lot of different analyses on whether these socially responsible funds produce better or worse results than traditional ones. A researcher named Marc Orlitzky performed a meta analysis that found it's basically a wash. A handful of studies say there's a positive association between social consciousness and financial performance, a handful say there's no relationship and some say there's a negative correlation. So I don't think it's empirically true to say it'll lead to higher or lower performance on average. When we talk about mutual fund investing, a lot depends on fees. Many of these are smaller operations, so they have higher fees than companies like Vanguard or Fidelity. But if you're in the active investment realm, you're often going to have fees if the fund manager is good and can do well in the SRI realm. If you're not investing in energy for ethical reasons, then you will miss out when the energy industry is doing well--there are industry effects, but on average it's a wash.
Most socially responsible investors mix conventional and socially responsible assets. That's just a reality. No one is strictly moral in everything they do; they make tradeoffs.
Why do most socially responsible investors choose to invest their money this way?
JP: Investors are people. We're not just money maximizers but moral actors. That's a part of the descriptive picture that's missing when we look at most retirement articles. The assumption is that everyone wants to maximize his return all the time, that no one would rationally invest in anything with lower returns because of a moral impulse to do so. In my work, there is evidence to the contrary. For example, I give a lot of money to charity, and that doesn't help me monetarily, but it's ironic to me that when you ask investors about SRI, suddenly 0.5% is a reason to not invest. You give away 100% of a given set of funds to charity but less than 1% is where they draw a line.
But that's when we're talking about motivation. It's worth noting that there's this belief that SRI investors are making a sacrifice, which is why so many people don't do it. As we discussed before, that's not necessarily the case.
How has socially responsible investing evolved in the past few years?
JP: We started to see mutual funds grow in the 1960s, and as early as there were mutual funds, SRI was part of that mix. In the 1970s and 1980s, a lot was around the anti-apartheid movement in South Africa, in which people wanted to divest assets from the apartheid regime. Even before that there were people refusing to invest in alcohol, Napalm in Vietnam and so on, but apartheid was the galvanizing cause. Over the last ten years, the 2% of mutual fund market share held by SRI funds has held pretty steady.
These days, environmental awareness is very timely and that's where a lot of the motivation is, around climate change, but there's no one united rationale behind socially responsible investing. Anti-apartheid is obviously very different from the environment. There's conservative Christian groups refusing to invest in abortion providers, Muslim funds that won't invest in alcohol or tobacco and so on. If you have a moral position on something, you could likely find a mutual fund that addresses it. During my dissertation research, I think I found a Christian Science fund that refused to invest in the pharmaceutical and medical industries.
What's the average demographic of a socially responsible investor?
JP: On the whole I think the demographic portrait of SRI tends to be younger, progressive people who care about the environment, but there are not a lot of good surveys out there. I haven't even found a survey that gives me clean estimate of how many Americans invest in SRI funds. That said, there's a wide variety. And I do think that some of the more conservative funds do feel a bit uncomfortable being lumped in with the environmental crowd, because they're doing the same basic thing by using moral criteria to guide their investments.
Do you think socially responsible investing can instigate real change in the causes these investors support?
JP: Simply refusing to invest in certain types of companies, does that change corporate behavior? Many argue that it doesn't, and I probably think that's true. By my estimate, 2% of mutual funds are socially responsible. If 2% of assets say, 'We're screening out a certain kind of corporation,' I don't think anyone's arguing that those corporations will suddenly behave more responsibly in order to be part of that small group's investment portfolio. Now, if market share grows to 30%, then maybe withholding assets could make corporations change, but at this point if you think investing in socially responsible funds is changing the world, you're part of the 2% of the market share. These are small changes, but they're not going to lead to big changes. If the phenomenon grows, then there's more potential for change.
Now, I think it's possible that investing in socially conscious funds could lead to more environmentally friendly policies or increased responsibility of corporate America, but that would have to occur through shareholder advocacy. Some mutual funds only care about their specific screening criteria, while others are very intentional about making their voices heard on environmental criteria, child slavery, etc. A group of nuns started the Interfaith Center on Corporate Responsibility to work with faith-based investors to help them be effective shareholder advocates. So maybe if we saw more Americans investing in socially responsible funds, shareholder power would increase. For example, if Vanguard knocks on the door of any firm, they're listening because so many assets are held by vanguard that the mutual fund company has sway. If other socially responsible funds get more clout, we'd see their power increase and perhaps corporations would have to listen to them.
--Written by Allison Kade for MainStreet