Socially Responsible Investing

“Try to leave the earth a better place than when you arrived.” [1] Sidney Sheldon’s famous quote resonates with many of us, but the pathway to making a positive impact beyond volunteerism and philanthropy may not be clear.

Socially Responsible Investing (SRI) offers the potential to influence corporate actions toward common good. The premise is simple: investors support companies whose practices promote environmental stewardship, human rights, consumer protection and/or diversity. This most commonly translates into avoiding so-called “sin” stocks (those perceived as profiting from exploiting human weakness and frailties: tobacco, gambling, sex exploitation, alcohol, weapons including nuclear, and the military) and pollution contributors. Often investors are drawn to those “screens” or “filters” that are most near-and-dear to their hearts. [2]

The roots of SRI can be traced back to the mid-eighteenth century, where the Religious Society of Friends (Quakers) in 1758 prohibited participation in the slave trade. [3] Concurrently, the Methodist’s John Wesley (1703-1791) advocated “not to harm your neighbor through your business practices.” [4] Dr. Martin Luther King subsequently established early SRI models by advocating the Montgomery Bus Boycott and Operation Breadbasket Project in Chicago. However, it was SRI’s critical role in abolishing the South African apartheid government in the late 1970s that brought the field to world prominence. [5]

Today, about $1 of every $9 under professional management in the U.S.. can be classified as an SRI investment [6], putting the industry over $3.74 trillion by early 2012 [7]. Common vehicles that comprise the industry include:

  • Government-Controlled Funds including public pensions
  • Mutual Funds
  • Exchange Traded Funds (ETFs)
  • Separately Managed Accounts

While the concept of Socially Responsible Investing has increasingly broad appeal, there are a number of shortcomings of which investors need to be aware:

  • Financial Returns Trade-Off: Critics argue that restricting a manager’s universe of investments may inhibit performance. [8] Specifically, socially responsible investment “… is more likely than not to underperform an appropriate market average…” on a risk adjusted basis. [9]
  • Additional Expenses: SRI funds are usually more costly because of the additional expenses in screening out those stocks deemed undesirable, which in turn can inhibit returns. [10]
  • Increased Cost of Capital: By avoiding “sin” stocks, non-sin stocks’ cost of capital is driven relatively higher, which makes sin stocks cheaper by comparison. This can represent an opportunity cost in that socially responsible investors may miss out on more “value-oriented” opportunities and the potentially greater returns that sin stocks may offer. [11]
  • Stand Alone Deficiency: Negative screening by itself may be limited in its actual results. To be effective, SRI “…needs to be combined with shareholder advocacy and community investing,” according to Amy Domini, leading SRI advocate, author and CEO Founder of Domini Social Investments. [12]
  • Lack of Purity: Screening environmental polluters, for example, does not guarantee that those same firms support equal rights. While their end products and services may have social appeal, the internal process by which those goods come to market may or may not have that same appeal. Similarly, corporate policies may embrace SRI when economic conditions are strong, only to curtail those programs when times get lean. [13] These behaviors can be difficult to track and may inhibit the social good that SRI efforts seek to accomplish.

SRI critics argue that investors may be further ahead by investing for maximum profit potential consistent with their goals and risk tolerance, and then supporting their favorite causes directly (e.g. via charities) with those profits.

Despite these drawbacks, the concept of Socially Responsible Investing is appealing, especially to people who are concerned over increasing societal scarcity and governmental ineffectiveness to address an expanding list of social and environmental challenges. SRI allows us to support companies that may help address these challenges plus potentially earn a competitive financial return.

Whether you decide to allocate all or a portion of your portfolio to SRI goals that are consistent with your “passion causes,” it is important to have realistic expectations. A thoughtful review of these with your financial advisor is the best assurance of constructing an SRI program that can potentially meet both your financial goals as well as address your social concerns.

This information is not considered a recommendation to buy or sell any investment or insurance and is being provided for information purposes only and is not a complete description, nor is it a recommendation. We strongly recommend an advanced tax and estate planning expert be contacted for further information since Wells Fargo Advisors Financial Network LLC (WFAFN) does not provide tax or legal advice. Any opinions are those of Mitchell Kauffman and not necessarily those of WFAFN. The information has been obtained from sources considered to be reliable, but Wells Fargo Advisors Financial Network does not guarantee that the foregoing material is accurate or complete.  Prior to making a financial decision, please consult with your financial advisor about your individual situation.  Investment products and services are offered through Wells Fargo Advisors Financial Network LLC (WFAFN)/Member SIPC. Kauffman Wealth Management is a separate entity from WFAFN.

Written By

Mitchell Kauffman, Managing Director

Certified Financial Planner™

Mitchell Kauffman provides wealth management services to corporate executives, business owners, professionals, independent women, and the affluent. He is one of only five financial advisors from across the U.S. named to Research magazine’s prestigious Advisor Hall of Fame in 2010, and among a select list of 100 over the past 20 years.

Inductees into the Advisor Hall of Fame have passed a rigorous screening, served a minimum of 15 years in the industry, acquired substantial assets under management, demonstrate superior client service, and have earned recognition from their peers and the broader community.

Kauffman’s articles have appeared in national publications, and he is often quoted in the media. He is an Instructor of Financial Planning and Investment Management at the University of California at Santa Barbara and Santa Barbara City College.

For more information, visit www.kauffmanwm.com or call (866) 467-8981. Kauffman Wealth Management and serves clients from two office locations: 140 South Lake Avenue, Suite 307, Pasadena, CA 91101 and 550 Periwinkle Lane, Santa Barbara, CA 93108 (by appointment only).   Investment products and services are offered through Wells Fargo Advisors Financial Network LLC (WFAFN).  Kauffman Wealth Management is a separate entity from WFAFN.


1 Brainy Quotes http://www.brainyquote.com/quotes/quotes/s/sidneyshel361892.html

2 “The Fund Route to Sin Stocks,” by Thomas M. Anderson, Kiplinger http://www.kiplinger.com/article/investing/T041-C000-S002-the-fund-route-to-sin-stocks.html Feb.2008

3 “History of Socially Responsible Investing in the U.S.” by Melissa D. Berry http://sustainability.thomsonreuters.com/2013/08/09/history-of-socially-responsible-investing-in-the-u-s/ 8/9/13

4 “SRI Funds – Definition” by Kent Thune, http://mutualfunds.about.com/od/typesoffunds/a/Sri-Funds-Definition.htm

5 “A Short History of Socially Responsible Investing” by William Donovan, About Money http://socialinvesting.about.com/od/introductiontosri/a/HistoryofSRI.htm

“Socially Responsible Investing: What you need to know” 4/24/13 http://www.forbes.com/sites/feeonlyplanner/2013/04/24/socially-responsible-investing-what-you-need-to-know/

7 “SRI Basics” by Forum for Sustainable and Responsible Investment http://www.ussif.org/sribasics

8 “Socially Responsible Investing,” by Allison Hughey and Pamela Villarreal, National Center for Policy Analysis http://www.ncpa.org/pub/ba657, 5/11/09

9  “The Shortcomings of ‘Socially Responsible’ Investing” by James Osborne, http://www.basonasset.com/the-shortcomings-of-socially-responsible-investing 12/14/12

10 “The Issues with Socially Responsible Investing,” by Larry Swedroe, CBS News Moneywatch http://www.cbsnews.com/news/the-issues-with-socially-responsible-investing/ 9/20/11

11  “The Price of Sin: The Effects of Social Norms on Markets,” by Harrison Hong and Marcin Kacperczyk from Princeton University and New York University, respectively, Journal of Financial Economics http://pages.stern.nyu.edu/~sternfin/mkacperc/public_html/sin.pdf, 4/8/09

12 “Investing with Purpose: The Evolution of Socially Responsible Investing.” By Amy Domini, Huffington Post http://www.huffingtonpost.com/amy-domini/investing-with-purpose-th_b_4251242.html 11/16/13

13 “Corporate Social Responsibility;” Small BizConnect funded by NSW Government http://toolkit.smallbiz.nsw.gov.au/part/17/84/366