Want to be a Socially Responsible Investor? CFA Institute Offers Investors 10 Tips to a Socially Responsible Investment Strategy

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Source: CFA Institute

Charlottesville, Va.– A growing number of people are extending their social consciousness beyond driving hybrid vehicles or drinking fair trade coffee to pursuing a socially responsible investment strategy that reflects their values and core beliefs.

Socially responsible investing (SRI) integrates financial objectives with social and environmental objectives. SRI assets are growing at a faster pace than the broader universe of all investment assets under professional management, according to the 2007 Report on Socially Responsible Investing Trends (PDF) published by Social Investment Forum.

The same report found that SRI assets increased from $639 billion in 1995 to $2.71 trillion in 2007 – an increase of more than 324 percent. Social Investment Forum reported that from 2005 to 2007 alone, SRI assets increased more than 18 percent while the broader universe of professionally managed assets increased less than three percent.

As SRI’s popularity continues to increase, CFA Institute, the global association for investment professionals, has developed 10 tips for investors interested in developing a socially responsible investing policy. Five of these tips are highlighted below.

Tip #1: Define Your Goals and Objectives
SRI is a broad and growing field that means different things to different investors. “The first step in developing a socially responsible investment program is to ask yourself what you hope to achieve,” said Stephen Horan, PhD, CFA, head of private wealth and investor education at CFA Institute. “The answer should be based on your values and what you consider to be important.”

For example, you may want your investments to be compliant with the Shariah, the sacred law of Islam. Alternatively, you may wish to promote environmentally sustainable commerce, support companies that explicitly incorporate social responsibility into their governance systems, or avoid companies that engage in certain types of activities, such as weapons contracting, the sale of tobacco or alcohol, or gambling. Your personal goals can determine how you implement a socially responsible investment policy.

Tip #2: Decide on an Approach
Socially responsible investment techniques can be categorized into three general approaches. Horan noted that these approaches are not mutually exclusive; some funds use a combination of them.

The first approach, which is popular among mutual funds and investors in the United States, is portfolio screening, which can take two forms. Negative screening excludes some companies or sectors from the possible investment universe based on certain criteria relating to the company’s policies, actions, products, or services (such as eliminating companies that manufacture tobacco products). Positive screening specifically includes some companies or sectors in the investment universe based on the company’s meeting certain standards (such as seeking out companies with strong diversity programs).

A second approach, called best practices classification, chooses companies in a particular sector that rank high based on one or more environmental, social, governance, or ethical criteria as well as financial criteria.

A third approach is using shareholder status as an owner in the company to monitor management, initiate constructive dialogue about its business practices, and influence managerial behavior through proxy voting or direct engagement. Although this active approach may not be feasible for the typical investor, investors can choose investment managers, pension funds, and mutual funds that define their investment strategies by such advocacy efforts.

Tip #3: Be Aware of Fees
Expect to pay higher management fees for socially responsible mutual funds and ETFs. Annual expense ratios for SRI ETFs range from about 0.40 percent to 1.00 percent of portfolio value. These costs are substantially higher than for ETFs that track traditional broad market indices, like the S&P 500 Index, which have expense ratios that range from 0.08 percent to 0.40 percent. “Investment management fees are an important component of investment performance, especially over the long haul,” Horan said. “Only you can determine whether the cost differential, if any, warrants pursuing your SRI objectives.”

Tip #4: Diversify
The golden rule of investing is to maintain a well-diversified portfolio because diversification reduces risk without necessarily sacrificing return. This imperative applies to SRI as well. “A process of systematically excluding investments and even market sectors based on negative screens or focusing exclusively on certain sectors can inadvertently create an underdiversified portfolio,” Horan warned.

Research is mixed about whether SRI funds or indices are any less diversified or more risky than standard funds or indices, but socially responsible investors need to be especially vigilant about maintaining proper diversification. Failure to properly diversify has been the ruin of many investors and delayed many retirements.

Tip #5: Seek Advice from an Investment Professional or Trusted Source
There is much to learn about the world of SRI. Regardless of your particular goal or approach, SRI is still investing. It is important, therefore, to seek guidance from a well trained and trusted investment adviser. There are a number of reputable and applicable credentials that financial professionals in different disciplines may hold, but none is as rigorously focused on investment knowledge as the CFA designation. A CFA charterholder can help you navigate and implement your SRI goals as well as your other financial objectives.

“Investors who choose SRI add an additional challenge to the already complex world of investing,” Horan said. “But with proper advice and guidance, investors can pursue their social and financial goals simultaneously.”

Additional Resources:

• The Social Responsibility of the Investment Profession
• Environmental, Social, and Governance Factors at Listed Companies: A Manual for Investors
• Defining Your Investment Objectives (PDF)
• Private Wealth Management Educational Resources

CFA Institute
CFA Institute is the global association for investment professionals. It administers the CFA® and CIPM curriculum and exam programs worldwide; publishes research; conducts professional development programs; and sets voluntary, ethics-based professional and performance-reporting standards for the investment industry. CFA Institute has more than 95,500 members, who include the world’s 82,400 CFA charterholders, in 133 countries and territories, as well as 135 affiliated professional societies in 56 countries and territories. More information may be found at www.cfainstitute.org. (Bloomberg users can find CFA Institute at 497458Z).

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