Special Report: Socially Responsible Investing

Socially Responsible Investing — SRI for short — is a type of investing that focuses on companies that meet certain ethical criteria. Simply stated, if a company does not meet predetermined ethical guidelines, a socially responsible investor will avoid it. Perhaps the investor avoids companies that pollute the environment, do not fairly compensate employees, or participate in certain political activity. These guidelines, or “screens” as they’re called, shape the portfolio and determine what securities it will contain. Portfolios built around ethical screens have been going strong since the 1960s, and certain SRI indices have consistently provided higher returns than the S&P 500 for over 20 years.

Socially Responsible Investing is a clear-cut, simple way to pick stocks that has the added benefit of providing moral satisfaction to the investor. This document contains everything you need to know about SRI and why it is a strong investment strategy.


SRI began in earnest with the Vietnam War.

Agent Orange, like other colorfully-named chemical “agents”, was sprayed over 12,000 square miles of Vietnam to act as an herbicide and defoliant. From 1961 to 1971, the chemical was used in vast quantities to kill plants, which included both the crops that fed the Viet Cong, and the thick jungle vegetation that made the conflict so perilous for American forces.

Agent Orange proved to be so toxic that hundreds of thousands of people were sickened and killed by it.

The poisonous concoction was manufactured for the U.S. military by the Monsanto Corporation and Dow Chemical Company. Other companies participated in the production as well, including Thompson Chemicals Corp, Hercules Inc., Thompson Hayward Chemical Company, Diamond Alkali/Shamrock Company, United States Rubber Company, Agrisect Company, and Hoffman-Taft Inc.

Dow Chemical, which produced both Agent Orange and the incendiary napalm was seen by many as a war profiteer. Among a string of protests against the company, Harvard University's newspaper, the Harvard Crimson, said Dow was “guilty of war crimes and partner to genocide.”

Religious institutions, likewise, assumed humanitarian stances that opposed both the war and these war profiteers.

But churches did not have a place to invest their money according to these humanitarian beliefs.

This is how Pax World Investments came to be.

According to the mutual fund's folklore, co-founder Luther Tyson was serving as director of the Department of Economic Life for the Board of Church and Society of the United Methodist Church in 1971 when he received a letter of inquiry from a member of the church in Ohio.

The letter asked if there was anywhere to invest that specifically avoided war-related industries.

There were no mutual funds that did so, so Tyson along with Jack Corbett and Tony Brown, launched the Pax World Balanced Fund (PAXWX) with $101,000 worth of assets.

The fund would, according to Brown, “Allow churches to invest their money in harmony with their message.”

It was the first SRI fund in the United States.

Environmental, Social, and Governance Ratings (ESG)

It can be hard to quantify the positivity or negativity of a company’s contribution to the world. Sometimes a company that does major good also does some major ill. For this reason, SRI funds and indices focus on three main categories: environmental impact, social impact, and corporate governance. Each of these categories contains a handful of specific traits that can be tracked and measured.

Environmental, for example, looks at a company’s carbon footprint and its contribution to climate change, and also tracks the disposal of hazardous wastes and pollutants. If a company contributes heavily to environmental pollution and climate change and isn’t sustainable, then these are all red flags.

Social ratings look at how a company treats people. That includes everything from customer protections, to human and animal rights violations up and down the company’s supply chain. This also examines the big class of activities known as “vices.” This means alcohol, tobacco, pornography, gambling, and weaponry. If a company participates in any of the vices, it is unlikely to be found in any SRI portfolios anywhere, but there are a few exceptions.

Finally, governance ratings measure the fairness within a company, this includes the balance of power between CEO and executive board, strength of employee relations, executive compensation versus employee compensation, and employee benefits and treatment. A company’s internal culture can be seen as a strong reflection of its overall ethics.

SRI Indices

Morgan Stanley Capital Investment KLD 400 — originally known as the Domini 400, this index looks at 400 U.S. securities that have outstanding ESG ratings. It started back in 1990 and is the longest-running SRI index in the United States. As a testament to the strength of SRI as an overall strategy, the KLD 400 has provided average annual returns of 9.51%, outperforming the S&P 500. The Index excludes nuclear power, tobacco, alcohol, gambling, military weapons, civilian firearms, GMOs, and adult entertainment and focuses on companies that have a rating higher than 2 on MSCI’s scale known as the “Impact Monitor.” The Impact monitor looks at 28 different indicators across the ESG spectrum. The majority of the constituents in the KLD 400 are information tech, but includes some telecom, health care, and consumer goods.

International Markets — Russell Investments is a signatory of the 2005 UN Principles for Responsible Investment (UN PRI), and its analysis and decision-making process includes ESG issues. It has indices of ethical companies traded on England’s FTSE, South Africa’s JSE, and Australia’s ASX. Canada’s TSX has the Jantzi Social Index that looks at 60 socially responsible Canadian corporations.


PAX World Investments

The PAX World brand is the oldest SRI going, and it currently includes nineteen different funds, each catering to different investment goals while adhering to their ethical screens. They include:

PAXWX — Balanced Fund, Individual Investor Class. Equity and fixed-income securities that range from 60% - 70% for equities and 25% - 40% for fixed income. This is the fund that started it all. The company has kept it going since 1971.

PXWGX — Growth Fund, which invests primarily in large cap companies.

PXSCX — Small Cap Fund, 80% of its assets are common stock, only companies listed in the Russell 2000 Index

PXWEX — A first-of-its kind diversified mutual fund focusing on companies advancing the role of women in the workplace. First launched back in 1993, this fund only invests in companies that have female executives, board members, CFOs and CEOs, and so forth.

These are just a few among many funds offered by PAX World. Its most recent ESG change has been to reduce the carbon footprint of all its funds. This has been going on since 2013.

PAX is the Cadillac of SRI mutual funds, a long-running, trusted brand providing a consistent product.

Green Century Funds

Boston-based advisory firm Green Century Capital Management was formed in a partnership of a handful of nonprofit environmental advocacy groups. Its primary stance wasn't to provide an investment vehicle for the socially conscious investor, but rather it was to act as an activist shareholder on important environmental issues.

Its two funds, Green Century Equity (GCEQX) and Green Century Balanced (GCBLX) have both served as forces for change in corporate environmental responsibility.

Like all SRI funds, Green Century adheres to a series of environmental, social, and corporate governance (ESG) screens to determine what companies can go into its portfolios. It does this mostly by only investing in stocks that make up the Morgan Stanley Capital Investment (MSCI) KLD400 ex-fossil fuels index. Because the KLD 400 consistently beats the S&P 500, this is a relatively safe bet.

But the main reason to invest in any of Green Century’s funds is in its shareholder activism. It pushed the world's five largest palm oil producers to adopt an immediate ban on deforestation in their supply chains last year. It has also engaged in a years-long fight to get BPA epoxies removed from consumer packaging from 26 different companies.

What’s more, it was the first U.S.-based investment firm to disclose its funds' carbon footprints. Green Century's Balanced Fund (GCBLX) now claims to have just a little under half of the carbon footprint of the S&P 500.

Green Century is the ideal SRI fund manager for environmentally-focused investors.

New Alternatives Fund

While environmental activism is one type of socially responsible investing, there is another related type in the energy sector.

The New Alternatives fund (NALFX) started back in 1978 as the first solar-focused mutual fund. Today, it’s the longest-running alternative energy fund in the United States and its 17 related funds focus on all aspects of SRI, including everything from anti-war investing to protecting worker’s rights.

In the energy sector, New Alternatives invests in solar, wind, hydroelectricity, fuel cells, hydrogen power, biomass, and ocean energy. It also dabbles in natural foods, clean water, clean air, and natural gas, but the majority of its holdings remain in renewable energy.

The nice thing about the fund is that it doesn't bother at all with the notion of negative screens. It has positive screens and exclusions. In other words, it never invests in oil, coal, nuclear power, weapons companies, tobacco, or companies with discriminatory policies, unfair labor practices, or animal testing procedures, and there will be no exceptions.

That gives New Alternatives a lot fewer ideological grey areas than comparable socially responsible funds, and makes it a lot easier to mentally categorize.

It also limits its focus to such a degree that it is susceptible to unfavorable market conditions.

New Alternatives is the SRI mutual fund for the socially conscious energy investor.

The Secret to SRI

The secret to SRI is finding a fund that does not deviate from its goal in the name of easy money. This means an individual investor needs to pick their cause beforehand, and then vet funds based upon the consistency of their actions. This is generally a very easy exercise that involves going through one annual filing and checking the holdings. Because social responsibility is an evolving concept, these funds need to change with the world. If they don’t, it’s a red flag.

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