SOME SIMPLE STEPS
& STRATEGIES FOR SRI

The first thing to remember is that socially responsible investing is not that different from traditional investing. It just adds a step, the social screening process. First, start by determining your financial needs. Do you want security, high income, or capital gains for future financial needs? Second, identify your most important social concerns, both what you want to avoid and what you want to support. Keep your absolutely not social screens to a minimum. Third, decide what your investment can accept in terms of financial risk, and compare this to the potential social benefit. Finally, select those investments that best meet both your financial and social goals. (see: HOW MONEY MANAGERS SCREEN TO CREATE SOCIALLY SCREENED PORTFOLIOS.)

For social screening, there are five strategies. They vary in the degree of their complexity and in the difficulty of implementation. The strategies are not necessarily mutually exclusive, and some can be combined in various ways.

This strategy involves the most stringent social screening - no investment connections to companies with bad environmental records, that use animals in product testing, that have a connection to the nuclear-power industry, etc. Since this strategy is so exclusive, it is sometimes difficult to apply. For example, some industries such as pharmaceuticals are inherently environmentally polluting, and an absolute screen would lock out some investment opportunities in companies that have in the past been in the vanguard of dealing with this problem (Johnson & Johnson and Merck & Company). Some companies like Procter & Gamble have made a serious attempt to radically reduce the number of animals used in the testing of products but argue that tests on rats and mice are still necessary in order to protect humans who may accidentally misuse a product. Several years ago, P&G announced that it had discovered an adequate alternative to animal testing and would be sharing it with others through the Johns Hopkins Center for Alternatives to Animal Testing. However, in spite of these limitations, a limited number of absolute social screens can be applied successfully. During the years that both individual and institutional investors avoided investments in any companies doing business with or in South Africa, research indicated no evident impact on portfolio return, when the performance of screened portfolios was compared to the performance of unscreened portfolios over time.

Some socially concerned investors deal with the problems inherent in absolute screening by using the strategy of proportionate impact. This strategy is based upon the axiom we all learned in elementary physics - for every action there is an equal and opposite reaction. There is some price to be paid for industrial production, so the real question is what price in comparison to other alternatives? This strategy is most evident in environmental screening. For example, when Magma Power (now merged with CalEnergy) was developing geothermal energy fields in Northern California, there were hundreds of small earthquakes a day. The company tried to combat this by recycling used water back underground. In addition, drilling releases gases such as hydrogen sulfide that can be harmful to plants, animals and humans. However, the Magma fields were located in a desolate and unpopulated area inhabited essentially by rattlesnakes. Furthermore, dangerous emissions from geothermal exploration are insignificant when compared to emissions from some other forms of energy exploration and use. The proportionate impact strategy can also be applied to other screens. During the years of South African divestiture, some socially concerned investors were willing to invest in companies doing business in South Africa so long as the company record for equal employment opportunities was excellent, the products and services supplied by the company did not have a direct connection to the maintainance of the apartheid system, and/or the community policies of the company were directed toward the elimination of apartheid. Similarly, funds that screen for military sales and contracting, such as Pax World Fund, often use a proportionate screen (for example, no more than 5% of gross sales from defense contracts) so as not to exclude companies that sell food to military PXs.

This strategy involves a kind of free market model where companies within the same industries compete with one another for the best records on a variety of social issues (for example, environmental awareness and the best records for the recruitment, training and promotion of women and family-friendly practices). There are a variety of sources that rank the best companies on various social issues. The Council on Economic Priorities (CEP) has given awards in a number of categories to companies with especially outstanding policies. In 1993, CEP gave first place Corporate Conscience Awards to The Clorox Company for community involvement with youth, Pitney Bowes for equal employment opportunity, and Merck & Company for responsiveness to employees. In the last several years, books have been published that describe the most family friendly companies and the best companies for women, the best companies to work for, the best companies for African Americans and other minorities, and the best companies for gays and lesbians. Business magazines frequently carry features on such companies as well.

This strategy requires investors to decide whether or not they are concerned if an investment has a secondary involvement with a social problem. It involves asking how far back in the industrial process one wants a particular social screen to go. For example, is it acceptable if a coal utility purchases coal from a mining company with a bad environmental record? The so called hamburger connection is an example of this strategy. Fast-food companies, such as Burger King, have been criticized for purchasing beef from around the world. The problem is that vast amounts of rainforest land are being cleared to provide range land for cattle. The clearing not only destroys thousands of potentially valuable plants and animals, but it also contributes to the greenhouse effect. In addition, slash-and-burn clearing adds pollutants to the air. In contrast to the usual pattern, McDonalds outlets in the U.S. use only beef purchased from ranches in the American Southwest.

The final strategy involves investors in deciding whether to exclude investments with potential social problems as well as those with actual problems. For example, because a utility has a good and safe record for operating nuclear power plants does not negate the fact that this technology still entails major environmental risks. A 1992 study by the Environmental Action Foundation and the Energy Conservation Coalition estimated that the spent fuel generated by the nuclear industry without any new reactors would total 75,100 metric tons by the year 2020. There is currently no place to put that much radioactive nuclear waste.

© 2007 Good Money, Inc. A version of this can also be found in GOOD MONEY: A Guide to Profitable Social Investing in the '90s by Ritchie P. Lowry (W. W. Norton & Company, 1991 and 1993).

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