Overview of the Field of Socially Responsible Investing (SRI)

Since the first stock exchange was established in London in 1698, people have been willing to invest their money in companies which they do not wholly own in order to receive a share of the profits. It has only been in the past 30 years, however, that investors began to be more systematic in applying non-monetary, value-based criteria to their investments. These investors seek to get 'beyond the bottom line' to reap social dividends as well as financial ones.

Such values-based investing has been referred to as ethical investing (mostly in Australia and the UK) and socially responsible investing (in Canada and the US, for the most part). Its major impetus to growth came out of the anti-apartheid movement in the 1970s and `80s, when, spearheaded by the churches, governments and major corporations refused to invest in, or trade with, South Africa. This financial ostracism was a decisive factor in the successful elimination of the apartheid system there by the mid 1990s, and proved the power of applying an investment 'screen' to achieve a socio-political end.

This concept of applying 'screens' to one's investment portfolio is a cornerstone of socially responsible investing (SRI). Screens are criteria that allow comparisons between an investor's values and a company's operations, and they can be both positive and negative. For those investors who think it is important to improve the situation of women in the workforce, for example, a positive screen would be to invest in a company that has a greater-than-average percentage of women in upper management or on the Board of Directors. A negative screen, on the other hand, would be to avoid investing in a company that engages in practices that the investor cannot condone, such as producing or distributing tobacco products.

Another aspect of SRI is that of shareholder activism, in which shareholders actively promote their values by publicly criticizing (or, in some cases, praising) policies and practices of those corporations in whom they hold shares. Besides increasing public awareness of their issues, their main tool for creating change is that of the shareholder resolution. These resolutions are proposals for changes in company policy or activity put forth at a company's annual general meeting. They are voted on by the shareholders present, or via proxy votes by those not in attendance, and, if they pass, must be complied with by management. Even when the resolutions fail, though, they still serve to raise awareness of the issues among shareholders and thereby put more pressure on management to do something.

A third type of social investing is that of community development. Also referred to as alternative investing, it centres around the idea of promoting the local economy by investing in local enterprises. Housing, job creation, and meeting local social needs are the primary aims here.

It is important to note that while ethical considerations are a major factor in deciding which companies to invest in, prudent social investors will always carefully scrutinize potential investments for financial performance as well. There is no reason why screening investments should result in lower rates of return than for non-screened investments.

The field of social investment is rapidly growing. The last ten years has seen a proliferation of organizations emerge to both create and meet the increasing demand for this kind of service. A recent study announced that screened investments have now topped the $1 trillion dollar mark in the US alone.

"Nearly one out of every 10 dollars under management in the U.S. today is part of a responsibly invested portfolio. A total of 710 major investing institutions (including pension funds, mutual fund families, community development funds, and foundations) were found to be involved in socially responsible investing in one way or another with assets totaling $1.185 trillion. This broad figure accounts for roughly 9 percent of the $13.7 trillion in investment assets under professional management in the U.S., according to the 1997 Nelson's Directory of Investment Managers."

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Last update of this page May 8, 1998