If you have money to invest, how do you choose which companies to support with your investment? It seems sometimes that businesses make vicious decisions with only profit maximization in mind and run over the rights of the communities and environments they inhabit. Owning stock means you own a piece of a company. As an investor who cares about environmental and social values, how can you invest without a guilty conscious haunting you every time the dividend check arrives in the mail? Luckily there are ways to invest with your values in mind. Some companies do think through the moral consequences of their decisions and make an effort to tread lightly. It is possible to sort out the good companies from the bad, and many investors create portfolios that do exactly that. Socially Responsible Socially Responsible Investing (SRI) takes into account value consideration beyond the purely economic. Green Investing, a type of SRI, focuses particularly on protecting environmental interests, allowing you to use your dollar to promote green choices in big business. And while not all SRI investments do as well as traditional ones, many do as well or better than investing in the companies that make up traditional portfolios. In fact, practitioners of Sustainable Investing believe that choosing companies for their positive environmental, social, and governing practices predicts long-term profitability. If you wish to follow your conscious as you invest you will have a lot to research to do. You probably will want to consult a financial planner to help you create a portfolio tailored to your financial and moral needs. Below is a brief outline of Socially Responsible Investing to get you started.
1. The first step to guilt free investing is to determine which values are most important to you. Do you care most about investing in renewable energy, in traditional industries seeking to reduce their environmental impact, in local businesses, or in a specific green technology? Also consider your values as they relate to other spheres of business decisions. How would you like a company you own to treat their workers? Relate with the communities they do business in? Which activities would you want the company to embrace and which to shun? It’s your money you are investing, you have a right to support practices that you agree with and censure those that you don’t.
2. What counts as “green” in your book? You’ll need to decide this while you tackle the issue of green investing. Oil and coal companies will never be good for the environment, but some of these companies treat the environment with more deference than others. Do you want to include the oil and coal companies using the best environmental practices in the industry, in a green investment strategy? Some people believe that including select mainstream companies in socially responsible investment portfolios provides shareholders some leverage to influence company decisions through shareholder activism. Others believe that coal, oil, and similar companies are inherently not green. These investors choose to avoid supporting these industries through their investments. Knowing how you feel about this issue will help you to choose the right environmentally responsible investments for you.
3. Once your values are somewhat sorted out, you need to determine what tactic you will use to make sure that your money makes you a profit through good rather than evil. Socially Responsible Investing (SRI) uses a variety of methods to help investors support environmentally and socially responsible investing. You can use these strategies in any combination, and can even take advantage of them all.
• Apply Negative Screens to filter out of your profile companies engaged in practices you frown upon. Avoid supporting and financing actions you find immoral. Common negative screen include avoiding companies engaged in human right violations, or who participate in the alcohol, tobacco, gambling, and war industries. An investor can also screen out polluting companies.
• Utilize Positive Screens to identify and invest in companies with good records on social and environmental issues. Invest in companies that are exceptionally good rather than avoiding those which are exceptionally bad.
• Track an Index. Screening each company by yourself would be almost impossible. How can you possibly dig up the dirt on companies that may appear good, but violate the environment and the community when people have turned their backs? Even if you could access all the information it may be difficult to balance the necessary facts. One option is to let finance firms do the work for you. Socially Responsible mutual funds often have higher fees, because so much research must be done to vet the companies included. Professionals put together indices, imaginary portfolios made up of stocks according to certain criteria. In the case of socially responsible investing an index often includes the most profitable companies that pass the positive and negative screens required by the index. One famous socially responsible index is the Domini 400 Social (DS400). The DS400 uses a positive screen to include companies with good records in social and environmental arenas including employee relations, human rights, corporate governance, and the environment. You cannot invest directly in an index and so must invest instead in mutual funds and Exchange Traded Funds (ETFs) that track an index. Mutual funds and ETFs that invest in a broad selection of socially responsible companies allow investors to diversify investments and reduce risk.
• Invest in a green company or sector. Rather than use a screen, you can invest in your favorite green company or in a specific green sector. For example, Wilder Hill Clean Energy Index (ECO) is an index that follows the “clean energy sector” (http://www.wildershares.com/index.php). By investing in a mutual fund or ETF that tracks the ECO Index, you support companies furthering clean energy. Investing in clean energy, organic products, and other green businesses may help support these sectors, while maintaining consistency with your beliefs. Investing in one particular sector, however, could make you vulnerable if that sector does badly. Talk to a financial planner to figure out how to create a portfolio that will meet your goals.
• Be a Shareholder Activist and take advantage of the fact that as a shareholder you own a piece of the company giving you certain rights. As a shareholder activists you can:
Negotiate with management for better environmental practices.
Propose Resolutions and provide an opportunity for all shareholders to vote on a specific environmental issue.
Vote your proxy vote. Voting proxies give all shareholders the opportunity to vote on certain issues, even if they do not have the time to engage the process further. Shareholders can force management to adopt positive environmental and social practices.
Divest when negotiating and voting fail to no longer own part of a company that behaves inconsistently with your beliefs.
Invest in mainstream companies that are leaning toward better environmental practices to encourage positive decision-making and speed the greening process through the above techniques.
Invest in socially responsible mutual funds mutual funds that use their ownership in a company to leverage positive environmental changes on behalf of the individual shareholders.
As you invest in green companies, what else can you achieve?
Hopefully you will make money. The Domini Index tends to do slightly better than the S&P 500, but this varies with the behavior of the market. Domini may be slightly riskier than S&P 500. There is no indication that socially responsible investments have the tendency to do worse than traditional investments. Companies constantly faced with employee strikes or environmental litigation does encourage investment decreasing the value of these stocks. Sustainable Investing strategies bank on the theory that what is good is also profitable. Overall, SRI mutual funds and other investments do about as well as traditional investments, but fees are usually higher.
As well as making money you can lead others in the effort to create a more responsible corporate world. The publicity from socially responsible encourages people to push corporate America for change via political, legal, and other methods. Socially Responsible Investing encourages potential investors to ask questions about environmental and social practices, thereby forcing companies to engage in these discussions internally.
There are a plethora of green and socially responsible investment opportunities. Finding the right one is a matter of figuring out ones own value and financial priorities, and then determining the right match. This process may require the help of a financial adviser and a good amount of research.
Here are some resources to get you started:
1. Co-op America has a variety of resources (http://www.coopamerica.org/socialinvesting/) sure to check out the article “Seven Ways Your Investments Can Prevent Climate Change” http://www.coopamerica.org/socialinvesting/April2007SevenWays.cfm and Co-op America’s magazine Real Money. http://www.coopamerica.org/pubs/realmoney/index.cfm
2. Investopedia.com (http://www.investopedia.com) provides information about investing in general, including definitions and articles. Be sure to check out the special feature on Green Investing (http://www.investopedia.com/features/green-investing.aspx)
3. Socialfunds.com (http://www.socialfunds.com)
4. The Green Money Journal http://www.greenmoneyjournal.com/
