A common apprehension about socially responsible investing (SRI) is that there is a premium that organizations have to pay for being socially responsible that inevitably lowers investment returns. If indeed this is the case, then SRI is nothing more than a niche market that will only appeal to investors with positive perceptions about particular companies, who are ready to accept lower returns for satisfying their concerns. On the other hand, if SRI generates higher investment returns, then it will be increasingly integrated into the investment strategies of organizations in order to boost returns.
Today, over 200 mutual funds are available for socially responsible investing and investors can create competitive portfolios that really reflect their social concerns. Organizations continue to attract responsible investors, who demonstrate zero tolerance for companies that are not socially responsible and screen them out of their portfolios. In doing so, they actually give a motive to organizations to become socially responsible in order to get a higher SRI ranking and be more competitive among companies in the same industry. Eventually, this enhances their profitability, while responsible investors average out risk by focusing on company screening.
One of the most widely used SRI benchmarks is the Domini 400 Social Index that tracks the performance of 400 public organizations that meet several social and environmental criteria. Also known as DS400, the Domini 400 Social Index is a market cap weighted stock consisting of 250 organizations belonging to S&P 500, 100 non S&P organizations that are included based on their market cap and 50 organizations that demonstrate 'exemplary' social and environmental records, according to the managing company, KLD Research and Analytics. Since 1990 that DS400 has been created, it has an annual average return of 11.01 percent which is higher than the average return of 10.57 percent of S&P 500.
Besides DS400, other SRI benchmarks are available to investors to enable them to compare SRI to broader based investing such as The Dow Jones Sustainability Indexes that include global, European, Euro zone, US and North American benchmarks, and track the financial performance of the leading sustainability driven organizations since 1999.
The Cleantech Index tracks the performance of 46 leading publicly traded companies in sectors such as transportation, alternative energy, energy efficiency, and environmental quality. In 2007, the average returns of the Cleantech Index were 42.9 percent, higher than the 10.6 percent of the NASDAQ Composite Index and the 5.5 percent of the S&P 500.
The Melvin & Company's Clean Energy Stock Index that consists of 62 publicly-traded clean energy companies reports an average annual return of 31.9 percent from 2002 to 2007, which is higher than the average annual return of S&P 500 (10.57) or even Russell 2000 (9.7) for the same period.
SRI indices outperform the markets outside the U.S. as well. In a 2007 study by AMP Capital Investors in Australia, the median SRI index has outperformed the S&P/ASX 200 index for the period 2001-2006. In the five years to 2006 the median SRI index delivered a return of 17.08 percent, while over one and three years, the median SRI index delivered 31.00 percent and 27.02 percent respectively.
Also, strong SRI returns have been based on the screening out of stocks and sectors based on social and environmental grounds. For instance, Australian Wheat Board declined 15.65 percent due to corruption scandal in one year. GICS Foods, Beverage & Tobacco sector, which includes numerous companies that can be excluded by investors, returned 2.99 percent, but underperformed the ASX 200 by 27.36 percent in 2006.
Socially responsible investing is a competitive approach that can provide high returns. Some SRI strategies have performed outstandingly over certain periods of time such as the clean energy sector that promotes environmental sustainability and remains attractive to socially responsible investors. Besides, an SRI portfolio can be customized to fit an investor's personal aspirations to create change, provided the investor screens out of the portfolio the companies that do not represent his personal values.
Conclusively, socially responsible investing does not diminish investment returns provided investors incorporate the right values in their portfolios. If responsible investors create SRI portfolios with values that can cause corporate changes, then these values are not hurting financial performance and can even lead to higher returns. Besides, invested money can be used either for building wealth or for changing the world. And this is an important consideration because it motivates investors in pursuing programs of socially responsible investing in the hope of getting investment returns that will be at least equal to those of their traditional investments.