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Profits and Morals - SRI provides an ideal mix
Ben Larkman

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NEW YORK - Morally motivated investment paid off in 2003, as Socially Responsible Investments (SRI) increased in scale.
SRI investors screen companies to avoid industries that are notoriously socially harmful such as tobacco, weapons and nuclear energy. Investors also pay attention to companies’ records on human rights, the environment and employee relations.

Most companies in the market aren't blacklisted outright. Instead SRI investors with clout, such as major mutual funds, advocate their interests as shareholders. They encourage directors and boards to adhere to ethical policies, and attempt to increase democracy in the election of directors.

Funds in SRI screened portfolios grew to $2.14 trillion in 2003, up 6 percent from 2001, according to Social Investment Forum’s 2003 Report on Socially Responsible Investing Trends in the United States. During the same time, funds in professionally managed portfolios as a whole decreased.

Reggie Stanley, Senior Vice President of Calvert Group, a leading SRI mutual funds firm, explains why SRI expanded while funds in the overall market declined.

“Part of that story is the strong performance of socially responsible investments. Another key element is the fact that social investors are loyal; they truly are in it for the long haul,” says Stanley.

He adds, “Not only do social investors see compelling financial returns, they also have confidence that they are encouraging greater corporate responsibility and investing in a better world.”

Financial economist Larry D. Wall argues an opposite direction of causation. His research of SRI indicates that expansion of SRI will bid up stock prices for socially responsible stocks. The bid up stock prices then explains the strong performance of mutual funds screened for socially responsible firms.

According to this perspective, the strong performance of SRI is a short-term phenomenon and growth in SRI will plateau. When it does, returns on SRI will drop until the returns reflect the performance of firms, rather than the bidding up of stocks.

However, until SRI plateaus, investors are faced with an ideal opportunity: to make good returns, while at the same time encouraging ethical behavior.

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