01/01/2012 (8:28 am)
Socially responsible investing may warm heart and pocketbook
Imagine this: You open your eyes, and find yourself standing in front of a tall, lean fellow. He has a long white beard, and wears a long white robe.
Big Pearly Gates loom up behind him. It’s St. Peter, and he looks ticked off.
He’s sitting at a desk with a big book open to a page with your name on it. It’s time for your final performance appraisal.
Pete is a sourpuss. “Well,” he says, fingering a page. “I see you cheated on your eighth-grade English test. And that was a very nasty thing you did to Mary Murphy’s pigtail.”
“Uh, I was just a kid and …”
“Ahem! That’s enough out of you,” gruffs Pete. “Now moving on to your adulthood. I see you were in church all of twice last year. Couldn’t drag your sorry carcass out of bed, huh? And you were chintzy on the United Way contribution.”
You’re sweating. It’s getting warm.
“Now, let us review your investment portfolio,” says old Pete. “What’s this? Altria? Isn’t that a tobacco stock? And here’s a whiskey stock. And Playboy Enterprises! Great balls of fire!”
St. Peter raises his eyebrows and pins you with a stare.
“Well, just how much money did you make from sin?” asks the saint.
At this point, you’re doing a little dance. The ground under your toes is getting very, very hot.
OK, wake up now.
A dream like that might get you thinking about socially responsible investing. There are about 250 mutual funds that promise to ally you with the angels. They screen out companies engaged in vices, war, pollution and workplace meanness while investing in companies that are green, peaceful, socially sensitive and sweet to employees. If you need some quick salve for your guilty conscience, there you go.
The nice thing is that you can feel all smug and socially superior without losing investment return. There have been lots of studies on socially sensitive fund performance, and they’ve generally concluded that social screens have little effect on investment return over the long haul, says David Kathman, analyst for Morningstar, the investment analysis firm.
Over shorter periods, the screens can both help and hurt. For instance, take the Amana Income fund. It invests according to Islamic principles, which means avoiding banks that charge interest. That helped the fund a lot in 2008, when the banking system nearly collapsed. It hurt in 2009 and 2010 when banks bounced back somewhat.
The Domini Social Equity fund screens for environmental behavior and good treatment of workers overnight pay day loans. During the 1990s, that moved its investments away from dirty industries toward technology companies where workers brought dogs to work and played foosball in the office.
That helped Domini shine in the late 1990s, while the tech bubble was inflating, and pulled down returns when the bubble popped.
“It tends to even out,” says Kathman.
That gets us to another thing about such funds. They vary in what they consider responsible. Some lean toward religious principles, others favor the environment. Some ban alcohol stocks. Others will tipple away. Defense stocks? Nuclear power? OK with one fund, not another.
You can find a handy guide to such funds, with performance returns and social screens, at ussif.org/resources/mfpc.
It’s harder to determine whether social investing does anything to change society. In theory, the movement would switch capital away from disfavored companies and toward favored ones. As the shunned companies’ stock price falls, management would change its behavior. Rewarded companies would get even nicer.
But are there enough bleeding hearts to swing a stock price? The U.S. Social Investment Forum, the movement’s trade group, claims heavy clout: $3.07 trillion out of $25.2 trillion in the U.S. investment marketplace is run in a socially conscious way, the group says.
Of course, its definition is pretty broad. It includes mutual funds that are perfectly happy to own a sin stock or a polluter, as long as they can hector management through shareholder proposals and the like. Investors qualify if they deposit money in banks with good community lending records.
With so many different social agendas, influence gets diluted. In fact, there’s some academic evidence that socially shunned stocks do a little better than others. Socially blessed stocks do a little better, too.
Perhaps the answer lies in observing St. Louis. The movement has been around for a couple of decades now, and you can still buy a pack of Camels. Boeing keeps churning out fighter jets. Ameren keeps burning coal, and we’re still a town that loves beer.
Socially conscious investing may get you points with St. Peter. But the CEOs of the world don’t seem to care much.