Sept/Oct 2007

feature article

Socially responsible Investing:

The Balance Between Green and Greed

BY CHRIS O'BRIEN

There’s a tremendous focus these days on investing your money, planning for retirement and creating passive income. And with the internet explosion over the past decade, it’s become easier than ever to start an IRA, throw some money in a mutual fund or trade stocks online.

With this new era of choice comes the opportunity to be particular about which companies you invest in. And if you’re inclined towards socially responsible investing, it’s easier than ever to choose funds or build a portfolio in line with your principles and ethics.

Investing is designed to provide a return on your money. But what you’re really doing when you invest is giving a company your dollars to spend on their operations and grow their business–and hopefully make a profit to share with you. Maybe you’re okay with handing your nest egg over to a money manager whose guiding principle in choosing companies is profit. But if you’d rather not support tobacco and firearms companies, industries that use “sweat shop” labor or organizations that pollute or otherwise damage the environment, socially responsible investing may be your best choice.

What Is Socially Responsible Investing?
The question itself opens a can of worms. How do we define socially responsible investing? Most socially responsible companies adhere to two main principles.

1. Do no harm. This principle automatically rules out chemical companies that pump toxic sludge into the rivers and skies, as well as the recently very profitable oil and gas companies. The do no harm principle also precludes “vandalizing” the earth for a profit–ruling out precious metal miners (another recent boom industry), clear-cutting lumber companies, ocean bottom-dredging fisheries and the like.

2. Do something good. Here’s where it gets tricky: how do we define “good”? Let’s say a large national natural foods store donates money to communities, uses wind power and supports local farming and the organic industry. That’s four goods. But somewhere in the shadows of the mega-retailer’s partnerships, there may be connections to companies that violate animal rights or pollute the environment. Does this rule them out?

Here’s another example. Microsoft is considered by some to be an industrial and social tyrant, with their aggressive domination of the worldwide OS software market. Additionally, their business fuels the need for more personal computers, which means more plastic and toxic heavy metals in landfills and the general overuse of resources to fill the demand of constantly upgrading consumers. However, Microsoft chairman Bill Gates has outpaced the Rockefellers, Mother Theresa and the Pope combined in terms of financial commitments to humanitarian aid worldwide. Does this make Microsoft a candidate for inclusion in a socially responsible portfolio?

Then, consider companies that are “making efforts” in the right direction. Certain oil refineries, for example, are working towards more environmentally kind practices–sort of like slowing down from 30 mph over the speed limit to 25 mph over the limit. They’re still pumping and refining oil, which causes direct and indirect environmental damage, political and economical improprieties, and possibly humanitarian violations (not to mention war). But they’re making strides toward change. Does this count?

We could go on and on in the debate of what’s socially responsible and what’s not. Ultimately, however, the answer to the question lies in the individual investor who, if he or she is concerned with these matters, will undoubtedly have to come to terms with the conflict between greed and altruism–or, at least, between personal goals and the greater good.

“At least 70 percent of our customers want to be part of something that’s green or socially responsible,” says Jonathan Banis, financial advisor at Waddell & Reed in Boulder. “We all want to do right, and have certain decisions to make. But can we afford to make them?”

There’s Money In Doing The Right Thing
The good new is, you can choose the higher road and still make money. You don’t have to push smokes to teens and ICBMs to Israel to protect your retirement. It’s not necessary to profit with Exxon Mobile to save up for a Prius or trade gold stocks, Kraft and Monsanto to put a down payment on your solar-powered mountain home.

In July, the Dow Jones Industrial Average was up 11 percent, the NASDAQ was up 11 percent, and the S&P 500 (the top performing 500 companies) was up about 9 percent–all tallied, a huge gain for the year so far. And while there’s no “green” index per se, consider the year-to-date performance of certain socially responsible companies:

Gaiam Inc. (GAIA)
Increased by almost 30 percent

Green Mountain Coffee (GMCR)
posted an 87 percent increase

Hansen Natural Corp. (HANS)
increased by 36 percent

Evergreen Solar (ESLR)
was up 28 percent

Fuel Cell Inc. (FCEL)
was also up 28 percent

Calgon Carbon Corp. (CCC)
(air and water filtration) increased more than 100 percent

But before you get seduced by double-digit gains, remember green and socially responsible stocks cycle up and down just like any other stock; there’s no guaranteed performance. Buying solar companies a few years ago was disastrous, as they floundered and false-started, then fell again in the face of the elusive promise of a sudden renewable energy boom. It’s more accurate to look at the bigger picture: as the price of fossil fuels soars and impending environmental devastation becomes less acceptable to more people, renewable energy is slowly but surely gaining ground in the market.

The bottom line: a savvy investor can do just as well investing with a conscience as he or she can in the broader markets. However, there are a couple of considerations. First, some socially responsible companies have smaller market capitalizations or trade a lower share volume and might not be appropriate for high-dollar investments. Second, you might not want to scour individual stocks trying to pick winners. In that case, consider a green fund.

“Green” Mutual Funds
First rule: don’t assume that a “green” or socially responsible fund will necessarily meet your personal definitions of that term. For example, Spectra Funds in Boston has a fund titled “Spectra Green Fund” reporting 30 percent growth last year. But when you take a closer look at its holdings, the green starts to look a little gray. It’s not just that their top holdings include Google (GOOG), Starbucks (SBUX), Microsoft (MSFT) and Yahoo (YHOO)–companies that perhaps have philanthropic endeavors but can hardly be considered green–but they’re also holding Valero Energy (VLO), a huge oil and gas refinery, and Ameristar Casinos (ASCA). You decide.

On the other hand, some green funds actually show their true colors. Winslow Management Company in Portland, Maine, offers the Winslow Green Growth Fund (WGGFX), which holds green energy companies such as Fuel Tek (FTEK), renewable energy like First Solar (FSLR), and healthy living companies such as Gaiam (GAIA) and Whole Foods (WFM). To boot, they’re boasting a one-year return of 21.5 percent and a five-year return of more than 20 percent.

We can’t list all the green and socially responsible funds in this article, but there are great resources on the internet. Check out www.socialinvest.org/areas/SRIGuide/mfsc.cfm for an A-to-Z list of all the potentially socially responsible funds screened for their involvement in 11 different categories, including tobacco, gambling, animal testing, environment and more. The main site, the Social Investment Forum (www.socialinvest.org), holds a full discussion of socially responsible investing, news,
community and research. And professionals will find an opportunity for membership and institutional investing on a socially responsible level.

If you’re an in-the-know investor, you’ve heard of ETFs (exchange traded funds), which are essentially a basket of stocks–like a mutual fund–that trade like a stock, meaning you can buy and sell an ETF whenever you want with no load, maintenance fee or penalty. For example, check out PowerShares WilderHill Clean Energy Portfolio (PBW); it primarily holds companies focused on greener and generally renewable sources of energy as well as technologies that facilitate cleaner energy.

If being socially responsible in your investing is important to you, don’t get bullied by close-minded financial advisors who only know how to trade the Dow, oil and technology. Many market pundits, along with well-meaning neighbors and co-workers, may say that you can’t make money investing in social responsibility. Not true. Find someone who will work with you to allocate some or all of your invested funds into profitable socially responsible opportunities. Your IRA isn’t necessarily guaranteed to get as fat sitting in solar as it will in cigarettes, but it is absolutely possible to approach investing consciously and make money. Ultimately, each investor will have to find his or her own shade of comfort in the balance of green and greed.

If you’re ready to get good and green, check out these resources:

www.socialinvest.org
a major resource for socially responsible investing including fund screener

www.socialfunds.com
a huge resource including fund search, discussion and links

www.lohas.com/weekly/stockcharts/default.htm
chart of many socially responsible individual stocks with performance data

www.paxworld.com/index.htm
a series of responsible investing mutual funds.