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What is socially responsible investment?

Socially Responsible investment (SRI) is the combination of social and environmental considerations with traditional financial criteria in an investment policy. Social investment involves three main strategies: Shareholder activism, portfolio screening and community investment.

1^st Strategy: Shareholder Activism

Shareholder activism involves using corporate governance mechanisms to bring social and environmental concerns to the attention of corporate management. All shareholders meeting minimal share number and holding time requirements are entitled to present their proposal to management at the company's annual meeting. Proposals may be brought to vote directly at the meeting, or using the company's proxy statement. The later means enables other shareholders to vote on the issue and add their voices of support. While social and environmental resolutions tend to garner less than 50% of votes, shareholder resolutions are a powerful tool by which to bring an issue to the attention of other shareholders, and often bring sufficient pressure to bear on companies that management will sit down and discuss the issue of concern.

Over the last 30 years, shareholder activists have used their rights as owners to address many issues of concern, including human rights (such as the anti-aparthied movement in the 1980's), the environment, workplace conditions (for example, calling on companies to respect the principles of the International Labour Organization and adopt effective codes of conduct), and genetically modified organisms.

Religious investors were among the first to employ shareholder activism. More recently, mutual funds, private investment managers and institutional investors such as union pension funds have joined those who are voting their shares in favour of social and environmental resolutions, and have in fact begun proposing resolutions themselves.

2^nd Strategy: Social Screening

Screening a portfolio involves the application of social and environmental criteria when selecting stocks in the creation of an investment portfolio. There are two approaches to social screening, which may be combined or applied separately:

1. Exclusionary screens involve avoiding the stocks of companies based on either the products or services they produce, or in response to a poor record in pertinent areas of social and environmental performance. Social investors often avoid companies engaged in sectors such a military contracts, the production of arms, tobacco, oil and gas and nuclear energy. Companies operating in countries with poor human rights record and oppressive regimes, such as Burma and China, may also be listed as undesirable.

2. Investors may employ qualitative analysis to facilitate a case-by-case or best-of-sector approach to ensure the avoidance of companies with problematic records in the area of the environment, equal employment opportunity, worker rights, union relations and product quality. Quantitative screening may also involve a positive approach, allowing investors to include companies with superior records in areas such as charitable giving, community involvement and environmentally sustainable technology.

In their identification of top-performing companies, social investors often look for those whose records exceed both the standards set by law and the performance of others in their industry group. This process may allow for some flexibility. For example, an investor may chose to include in their portfolio a company with past environmental problems, but that is now showing a commitment to improve, along with a strong record in the areas of worker relations and community involvement.

To ensure limited risk and portfolio diversification, socially-oriented institutional investors may find it particularly hard to avoid exposure to certain sectors, even if, as is the case with oil and mining, there are greater environmental risks involved. This issue is addressed by employing a best-of-sector approach, in which, for example, an oil industry company with a strong commitment to reknwable energy and carbon emission reduction is selected over a competitor assuming a more environmentally egregious business plan.

3^rd Strategy: Community Investment

Recognizing that access to capital is a fundamental problem facing communities around the world, community investment involves directing capital towards under served regions and constituencies in both developed and developing countries. A community investment generally delivers a below market financial yield, but in turn provides a strong social return. A community investor may, for example, place a portion of their portfolio in an instrument that provides mortgages to low income housing projects, underwrites loans to help foster small business development and employment creation.

In general, community investment aims to development strong and healthy communities, by serving those areas traditionally ignored by mainstream capital markets, and thus provide the framework for an alternative financial system, with an alternative concept of return on investment. Quantifying the value of a social return is facilitated by the use of development indicators, such as quality of life rankings, and experience has shown that a small investment in an under served community can indeed have a significant positive social impact.

There are four principle types of community investment organizations: Community banks, credit unions and caisses populaires, community loan funds and micro-lending institutions.