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Mellody: There are three main types of screening used to determine whether or not a company is deemed socially responsible: negative screening, positive screening and restricted screening. A negative screen excludes companies from investment because of their involvement in undesirable sectors. For example, a fund manager could decide that they will not support companies involved in, or invested in, the manufacture of firearms. A positive screen seeks out companies for their positive actions, such as the production of green energy, including wind or solar power, or companies that work to encourage economic development in underserved communities. The restricted screening process is more nuanced. Because many corporations become highly diversified as they grow, it can be challenging to exclude companies out of hand for some of their holdings. With this method, investment in a company is allowed even if a small part of the corporation’s activities may be in a less than desirable sector because the amount is so small relative to the rest of the company’s holdings.

Tom: Ok! How do socially responsible investments compare to regular investments?

Mellody: The good news is that numerous studies have found that socially responsible investments are competitive with their peers. A look at the FTSE KLD 400, an index of socially responsible stocks created in 1990, showed that the fund generated annual returns of 9.51% through 2009, compared with the 8.66% return achieved by the S&P 500 over the same period. Socially responsible funds performed well even during times of economic turmoil: large-cap SRI mutual funds outperformed the S&P 500 by 6% in 2009.

However, there are some areas of concern. Some SRI funds have higher fees associated with the additional costs of SRI screening. You also need to consider that your options for investment funds will be much more limited in scope if you want to pursue a socially responsible investment strategy. Third, know that not all of these funds will perfectly match your values. And finally, these investments may not be the right ones for you, depending on your financial goals. In many cases, if getting the best long-term results for your money is your goal, you may want to look elsewhere.

Tom: So, who should go this route?

Mellody: I believe everyday investors should start out with value in mind, in order to make sure you are getting a solid portfolio with long-term gains. Ultimately, your investments are there to make sure you are financially prepared for retirement and other financial goals. However, if your portfolio is large enough, it is certainly something that you can work with your financial advisor to pursue.

MONEY MONDAYS: Socially Responsible Investing – A Primer  was originally published on

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