Booming Social Investing Wins Surprising Returns
`THEY used to laugh at us," says John Schultz. "They don't laugh any more."
As president of Ethical Investments in Minneapolis, Mr. Schultz has seen socially conscious investing - something conventional money managers used to give short shrift - slice out a sizable chunk of the market for itself.
Schultz's own company proves the case. He has more business than he can handle as calls pour in daily from individuals (more often women), who prefer not to buy securities in companies with questionable standards. These investors typically want to screen out businesses that have links with South Africa and the defense industry, have bad environmental records, poor employee relations, or deal in tobacco, alcohol, and gambling.
The rapid rise of social investing has been largely driven by growing public and shareholder interest in companies' ethics and accountability.
Socially responsible investing in the United States has gone from $40 billion in 1984 to $625 billion in 1991, according to the Minneapolis-based Social Investment Forum. This includes investments by endowment funds, banks, insurance companies, religious organizations, community investment funds, and mutual funds. Within the next decade, advocates maintain, this will become the way most people invest.
In the future "socially neutral or blind investing will be considered a dinosaur," says Sophia Collier of Working Assets Capital Management in Portsmouth, N.H.
Putting your money where your mouth is need no longer be financially foolish, either. The Domini Social Index, an index that tracks stock prices of 400 companies screened for social responsibility, has closely paralleled the Standard & Poor's 500 index since its inception in 1990 and is currently outperforming it.
Mutual funds investing in this field have doubled over the last 15 months to about 24. Almost all these funds rated above the average in their category in 1992. These funds now offer almost as wide a choice of investments as conventional funds. They range from conservative bond funds like the Muir California Tax Free Fund to aggressive contrarian funds like Parnassus, which climbed 31.85 percent last year.
All these funds apply a screening process, some more rigorous than others, when researching possible companies in which to invest. Working Assets Capital Management is one of the most stringent. Ms. Collier, owner of 60 percent of the management company, says "the theme we use in managing our funds is leadership.... We are in companies that represent the future of American industry, rather than the past."
What distinguishes Working Assets funds from competitors, Collier says, "is that we don't do a balancing act. If a company fails one of our screens we won't invest in it no matter how good it is in other areas."
By way of example, she says Working Assets disinvested from jam-maker J. M. Smucker Company in 1991 because it had no women or minorities on its board or in the top two layers of management - despite a good overall financial and social record.
Working Assets's criteria tend to be more specific than competitors', Collier says. For instance, they will invest in a medical company that tests on animals but not in a consumer company that does the same. Collier chides a competitor, the Calvert Group, saying that "they don't invest in any company that tests on animals, unless there is a viable rationale for it. You could certainly march a whole army through that."
Working Assets funds have performed well, despite the narrowed field of investment. Lipper Analytical Services Inc. rated its growth fund among the top 10 percent of growth funds and cited its balanced fund as the No. 1 performer in the three months ending Oct. 31, 1992.
"Social criteria reveals a company's true relationship with the community, and that often leads us into insights into the company that have direct financial ramifications," Collier says.
Social investing has been gaining wider currency since the early 1980s when a public boycott of companies doing business in apartheid-riven South Africa forced corporate boardrooms to take note. But the earliest principled investors date back to at least the 1800s, when the Quakers refused to profit from war and slave-running.
The two oldest social funds had similar roots. The Pax World Fund ($250 million last year) was launched in 1971 by Methodist clergymen concerned about the Vietnam war. Its primary screen is military.
The Pioneer Fund set up the same year served evangelical Protestants opposed to alcohol and tobacco consumption.
"The entire social shareholder movement has been fostered by social investors and by the funds," says Peter Kinder, joint author of "Investing for Good," due out in April. "I think the change is palpable."
Traditional business management has focused on rewarding the shareholder. The demands of the impending 21st century, Schultz says, are forcing a reexamination of that philosophy. Management's first objective must be to maximize the wealth of what he calls the "stakeholder," - that includes not only the shareholder, but also the employee, customer, vendor, community, and environment.
Corporate accountability is on the rise largely because customers and employees demand it.