Socially Responsible Investing
Ethical or Socially Responsible Investing usually refers to integrating investment decisions with ethical values. The ethical screening used can be positive (seeking companies that have good practices) or negative (excluding companies that engage in activities that are considered unethical.)
Common negative screens include prohibitions on companies in industries such as defense, tobacco, alcohol, gaming and other vices. Alternatively, they may target high polluters, companies that don’t adopt humane animal welfare practices or other factors. These are the most common types of screens.
When considering the investment performance of a socially responsible fund, it is important to choose a benchmark that reflects similar goals. For example, a portfolio that excludes tobacco stocks should not be graded harshly when tobacco stocks are doing well, and should not be rewarded for avoiding them when they are doing poorly. The benchmark should have the same exclusion on tobacco stocks as the manager.
Although typical SRI portfolios employ bright-line measures such as industry exclusion, it is also possible to have a portfolio based on relative adherence to the social goals. For example, an investor concerned with pollution may choose to avoid industries that are considered polluters, or may want to invest in the least-polluting company in each industry. Advocates of this relative SRI approach argue that it encourages companies to do as well as they can by rewarding the companies that try hardest. Opponents say that the social standards are too important to reward companies that violate the principles even a little bit.
For more information, see all articles on: Asset Allocation, Corporate Governance, FInancial Planning, Investing in Stocks, Investment Returns, Portfolio Management, Security Selection See also:
The Intelligent Investor: The Classic Text on Value Investing
Financial Statement Analysis: A Practitioner's Guide, 3rd Edition
Managing Investment Portfolios: A Dynamic Process (CFA Institute Investment Series)
