Socially Responsible Investing (SRI)

Socially responsible investing (SRI) refers to financial contributions into investment vehicles designed to combine the traditional investment philosophy favoring profit maximization with a values-based component seeking nonfinancial benefits. Such nonfinancial benefits are often referred to as social returns. These social returns vary in scope but can be broadly defined as company policies and actions that enhance a socially responsible investor's specific environmental, religious, or social values. These enhancements may or may not have any impact on the profit-maximization component of the socially responsible investment and may actually cause a socially responsible investment to decrease in value. Socially responsible investing is the common term for this practice in the United States but the concept is also referred to as “ethical investing,” primarily in the United Kingdom, or “valuesbased investing.”

Today, major institutional investment groups such as corporations, hedge funds, insurance companies, mutual funds, pension funds, religious institutions, [Page 1976]and universities, along with the environmentally/religiously/socially motivated individual investor, are entering the realm of SRI. According to the Social Investment Forum (SIF)—the most prominent SRI industry group—more than $2.16 trillion was invested in 2003 in professionally managed portfolios that implemented at least one core aspect of SRI. The SIF claims that this figure, representing one out of every nine dollars invested professionally in the United States, grew from $1.19 trillion in 1997 and from $40 billion in 1984. On the other hand, it is important to note that many scholars and investment professionals remain skeptical of this investment philosophy. Many academic studies demonstrate that socially responsible investors are not able to achieve either their desired social objectives or a competitive return, at least when compared with traditional investing practices focusing on profit maximization alone.

SRI is an umbrella term covering three core investing groups—(1) environmentally motivated investors, (2) religiously motivated investors, and (3) socially motivated investors. While all three groups seek social returns along with capital appreciation, the major difference between the groups stems from the motivations behind their investment practices. Environmentally motivated investors seek corporate policies and actions that either benefit or do no significant harm to the environment—both in the United States and abroad. Religiously motivated investors are guided by specific faith-based issues such ethical treatment of employees. Socially motivated investors, on the other hand, desire company policies and practices that adequately address key social issues such as diversity, HIV/AIDS, as well as corporate governance. The history of SRI demonstrates that all three groups played a prominent role in the establishment of SRI as a major player in the investing landscape of the 21st century.

SRI also encompasses three core subject areas—(1) social screening, (2) shareholder advocacy, and (3) community investing. While social screening is by far the most popular of these categories—with $2.14 trillion invested in this manner in 2003—each of the other areas comprises a growing component of the SRI community.