NEW YORK — Although institutional investors have hopped on the socially conscious investing bandwagon, individual investors may be wondering whether it really pays to allow their conscience to dictate their investment strategies.
Over the past 10 years, the number of socially conscious funds has nearly doubled — to 121, from 65. Assets in such funds, meanwhile, have climbed to $43.7 billion, from $7.9 billion, according to Morningstar Inc. in Chicago.
So far this year, 359 shareholder proposals — addressing a wide variety of issues ranging from climate change to executive compensation — have been filed with U.S. companies, according to Institutional Shareholder Services Inc., a Rockville, Md.-based proxy consulting service for institutional investors. “In the last decade, there’s been a growth of interest in climate change and carbon disclosure,” said Timothy Smith, senior vice president and director of socially responsive investing at Boston-based Walden Asset Management. “There are more shareholder resolutions now.”
But shareholder advocacy is just one part of a three-part process that leads to ethical investing, according to the Social Investment Forum, a Washington-based non-profit group, of which Mr. Smith is chairman.
The other two parts are screenings: including or excluding certain securities from a portfolio, based on their ethical policies and level of community investment — helping finance businesses and affordable housing in poor neighborhoods.
While these standards may protect shareholder value by weeding out companies likely to come under fire for questionable governance practices, they may also result in missed opportunities for investors.
“In a certain kind of market, portfolios have a harder time keeping up when they don’t invest in major oil and tobacco companies,” Mr. Smith said. “Some funds aren’t performing as well as their benchmarks. People say you’re paying a conscience penalty, because you can’t invest in everything.”
Investors may also be saddled with losses if fund managers are forced to yank a security from a portfolio abruptly because of a shift in company policies.
“If we started divesting for various causes, we wouldn’t be able to fulfill our mandate, which is to make money for the funds and reduce the burden on taxpayers,” said Clark McKinley, senior information officer at the California Public Employees’ Retirement System in Sacramento.
The nation’s largest public pension fund, CalPERS is often lobbied by activists and legislators to pull investments from specific companies because of questionable governance practices, or political or social stances. While the $247 billion fund rarely bows to such pressure, last May, it said that it would eschew companies that contributed to the Sudanese government without doing anything to stop the civil war in Darfur.
Socially conscious investing, however, remains a relatively small part of the market.
The Vanguard FTSE Social Index Fund, which was created in 2000, had $650 million in assets at the end of last month. While that’s not chump change, it pales in comparison with the nearly $100 billion in the Vanguard Total Stock Market Index Fund, which was created in 1992. Both funds are offered by
The Vanguard Group Inc. of Malvern, Pa.
Some advisers encourage their socially conscious clients to take a more active role by directly contributing to their causes or by creating their own foundations.
“You can’t make the world a better place just by boycotting ownership of a company,” said Gary Greenbaum, president of Greenbaum & Orecchio Inc. in Old Tappan, N.J. “You can make charitable donations to good causes, buy shares in a ‘bad guy’ company and become an activist investor or start your own charitable foundation.”
U.S. companies are starting to pay attention to the rise in investor activism. More, for example, are issuing “corporate-responsibility reports” detailing work force diversity initiatives, charitable contributions and environmental strategies.
“Companies that have poor social and environmental records are hurting investors,” Mr. Smith said. “Acting in a socially responsible way may — in the long term — protect that portfolio and long-term shareholder value.”
