Not Just For Tree-Huggers Anymore

THEN AND NOW

Thirty-five years ago, that seemed to be pretty much the attitude of the American investor. In fact, that was the attitude of almost all investors everywhere. Over the intervening years, however, there has been a shift of emphasis, and that shift is accelerating.

Money management companies first presented investors with socially responsible investing (SRI) mutual fund choices back in August 1971. In 1967, a woman in Ohio wrote a letter to Luther Tyson, who was then on the Board of Church and Society for a large organization, asking him, "Is there a mutual fund that will manage my pension money without investing in war-related industries?" To his surprise, Tyson discovered that the answer to her question was "No." Four years later, Tyson and his friend Jack Corbett began the Pax World Fund with just over $100,000.

Since then, there have been something in the neighborhood of 200 funds launched with socially responsible screening as a part of their criteria, in addition to their primary responsibility of making money. Today, well over $2 trillion is invested in funds that have some social or ethical investing criteria in the US alone. About one out of every eight mutual fund dollars invested today goes into SRI funds. At least a few of those knowledgeable in the field feel that the trend toward social responsibility will grow to the point that SRI will eventually claim one dollar out of every two invested in the US.

SRI IN THE UNITED KINGDOM

A survey of UK pension funds indicated that the SRI percentage in Great Britain could be a lot higher. About 59% of all the UK pension funds — controlling 78% of assets — use socially responsible screens of one kind or another in their investment decisions. Only 14% of the UK pension funds have the investment attitude presented at the beginning of this article that was popular 35 years ago. One of the more interesting findings of the survey of the pension funds was that the larger the fund, the more likely it was to be socially responsible.

SRI CRITERIA

The terms "socially responsible investing" and "green investing" are often used almost interchangeably. In overall attitude there are many similarities, but in reality, there are some significant differences. Some funds screen out war-related companies, some screen out companies with unethical working conditions, and some screen out corporations that produce lethal civilian products. (Nearly 78% of all SRI funds screen out tobacco-related companies.)

Within the funds there are classifications for the companies that SRI funds will buy shares in. The Green Century Balanced Fund, for example, ranks companies as environmentally proactive, environmentally responsible, or environmentally benign. Other companies have their own criteria, but many of them fall into these same categories, in addition to the nonwar category.

Since making money is the basic reason for mutual funds' existence, these funds sometimes have to make the best of what is available. Often, huge corporations — those that make great investments — are not really contributing to world good, but then, they are not hurting the environment in an obvious way, either. Soft-drink companies may have great environmental practices and good employee relations, but is providing sugared carbonated water good or bad for the world? Many SRI companies endorse a company's good points and don't dwell too greatly on questions of a less contested nature. If a company makes a legal product that won't kill you, especially if that company is extremely profitable, then said company makes it into many "green" portfolios.

BUT CAN THE GREENS MAKE MONEY?

In July 2001, The Green Money Journal reported that about two-thirds of the SRI funds with individual assets of more than $100 million received the highest performance marks from at least one of the major fund-ranking organizations, Lipper Analytical Services and/or Morningstar.

While the winning percentage may not be quite that high when all SRI funds are included, it does appear to a greater degree that these funds hold their own with the nonscreened funds. Yes, there are SRI funds that do not match up to the average. But there are also SRI funds that do better than the average, and the scale appears to tip slightly in the favor of the green funds.

THE BOTTOM LINE

Will saving the world, or making the world a better place, help you save and have a better retirement? Well, like most mutual funds, that has more to do with the skill of the fund manager than with the screening criteria. There are those SRI fund managers who are good at what they do, and then there are those who are not so good. Choose your fund with due diligence, and you will find that a desire to help the planet will not greatly enhance or detract from your long-term goals when compared to the average mutual fund investment.

If there is any effect, then it appears to be a slight edge in the favor of the green investor. Socially responsible investing has reached a level of sophistication that makes it as safe, or safer, than nonscreened funds. Green investing is not just for tree-huggers anymore.

Bruce Faber may be reached at BFaber@Traders.com.

Current and past articles from Working Money, The Investors' Magazine, can be found at Working-Money.com.

RELATED READING

Green Century Balanced Fund

Green Money Journal [2001]. "SRI Mutual Funds Perform Well," August/September 2001.

Just Pensions

Pax Funds

Social Investment Forum News