What is Socially Responsible Investment, does it work, and how can I use it?
What is Ethical Investing?
Ethical investing (also known as Socially Responsible Investing) is the practice of investing money in a manner which earns a market rate of return, but also serves the social goals of the investor. As stated in a URJ resolution adopted in 1997:
“Socially responsible investing means the adoption of a “double bottom line.” The first is rate of return; the second is the accord between the values of the investing organization [or individual] and the entities in which it invests.”
Is Ethical Investing (EI) a Commonly Used Practice?
The answer to this question is a resounding YES.
The use of ethical investing has been growing by leaps and bounds in recent years. EI is like a freight train rolling downhill. More individuals and organizations are jumping on board, and the train is moving faster and farther than ever before. The facts are clear: almost 10% of all investments made in the United States consider the social aspects of the investments.* This totals over $2.29 trillion being invested in a socially responsible manner.*
Why undertake ethical investing?
Every person or organization possesses its own set of ethical and social goals. EI is a way of seeking consonance between those goals, whatever they are, and the investments that are undertaken. This is particularly so for Reform Jews, Reform synagogues, and Reform endowment funds because of our devotion to tikkun olam. Without using EI, an individual, synagogue or endowment could be supporting worthwhile social causes with one hand, while working in direct opposition to those causes with the other. For example, in January 2007 the Los Angeles Times published a study of the Bill and Melinda Gates Foundation, the largest private charitable foundation in the world. The study found that the Gates foundation gave away about 5% of its assets annually to fight against diseases, AIDS in Africa, pollution, etc. Yet, at the same time, the Gates Foundation was not using EI. Therefore, the foundation was investing 8 times the money it gave away in companies which helped to cause the very problems which the foundation was seeking to eradicate. This simply does not make sense.
For Jews, synagogues, and Jewish endowments it is possible that, without using EI, your investments could be helping to cause pollution and global warming, helping to fund the genocide in Darfur, or helping to cause poverty and community degradation, rather than fight them. It is also possible that your investments are working against the interests of the state of Israel rather than supporting Israeli economic development. You cannot tell without a review of your investments in light of your ethical goals.
The case for EI was very well summed up in the URJ’s 1997 Resolution:
“For the Reform Jewish Movement, devoted as it is to tikkun olam, socially responsible investing policies and practices are not an optional commitment. They are an organic expression of our core beliefs.”
Can Ethical Investing Achieve Market Returns?
Again, the answer is clearly YES.
A number of academic studies and return analyses have found that EI portfolios and non-EI portfolios have comparable returns.
The Social Investment Forum, a highly respected non-profit research group supported by many major national investment firms (see www.socialinvest.org) has funded a number of studies on SRI returns and has concluded as follows:
“Academic studies continue to explode the myth that social screening inevitably leads to lower financial returns or constrains investing options….socially screened portfolios perform comparably to their unscreened peers.”*
Similarly, the Los Angeles Times recently addressed the return issue as follows:
“In the 12 months that ended in November, several funds that consider the impact of their investments upon social welfare…performed in the top ranks of standard mutual funds in the same categories, according to SRI World Group.
”Broad indexes of stocks selected because of their companies' social concerns also have tended to keep pace with standard indexes.
“The Domini 400 Social Index is modeled on the Standard & Poor's 500 Index, a widely used measure of market performance. While results from the two indexes tend to leapfrog each other over short periods, from 1990 through November 2006 the Domini index has outperformed the S&P 500 by nearly 6%.” **
*2005 Report on Socially Investing Trends in the United States, The Social Investment Forum, p. 14. www.socialinvest.org/areas/research/trends/sri_trends_report_2005.pdf
**The Los Angeles Times, Jan. 7, 2007
What are the types of Ethical Investing?
Broadly, ethical investing falls into seven categories.
1. Negative screening. This is the oldest form of EI, originating in the early 1970’s. Under this method, the investor consciously decides not to invest in corporations whose activities or policies are considered to be immoral or socially detrimental. The most common negative screen occurs when an investor decides not to invest in tobacco stocks. Other common negative screens are pornography, environmental pollution, gambling, child or slave labor, and fostering the genocide in Darfur. An investor must determine which negative screens to use and invest in stocks or bonds which pass those screens, or invest in a mutual fund which uses those screens desired by the investor. Which mutual funds use which screens can be found at www.socialinvest.org
At present, one very prominent EI issue is Darfur divestment. The URJ has recently passed a resolution supporting divestment of companies which support the genocide in Darfur. For more information on Darfur divestment go to www.sudandivestment.org. To view the URJ resolution, look under 2007 resolutions at http://www.urj.org/docs/reso/
Additionally, there is a growing movement in the Jewish community to divest companies which do business in Iran, whose government has called for the destruction of Israel. See www.aipac.org.
2. Positive Screening. Under this method, the investor only invests in stocks or bonds which actively promote the investor’s ethical and social goals. For example, an investor could invest in a mutual fund which only contains stocks of companies which actively pursue friendly environmental policies. Likewise, there are mutual funds which only invest in companies that honor women’s rights in terms of pay, promotion and benefits. Other mutual funds only invest in companies which fairly treat gays and lesbians.
For Jews, synagogues, and Jewish endowments, it may also be appropriate to use positive screening to aid Israel. Under this screening strategy, a portion of your portfolio is invested in Israeli companies in order to support the Israeli economy. Your investment advisor may be able to suggest Israeli companies which fit into your portfolio. There are also mutual funds which contain portfolios of Israeli stocks.
There are over 200 “socially responsible” mutual funds in the United States. Many use positive screening to support various social and ethical goals. To review which ones support your goals, go to www.socialinvest.org
If you, your synagogue, or your endowment use an investment manager, there are some managers who specialize in socially responsible investing and would manage your funds and tailor your portfolio to your specific ethical goals, using both negative and positive screening.
3. Community Development Investing
Recently, "community investing" opportunities have proliferated across the United States and become a focal point of Reform Judaism's EI practices. These investments provide urgently needed resources to depressed communities and their people. Such investment programs range from support of micro-enterprises, to the development of affordable housing, to support for shelters and health centers, to the establishment of credit unions. Even modest funds devoted to community investing can have a significant impact since they often help leverage substantial additional funds.
One readily available option is to use the URJ’s Chai Investment Program (CHIP), which encourages economic development investing to aid distressed communities. The guide to CHIP investing is available at www.rac.org/pubs/guidemanuals/chip/
Also see the discussion of CHIP under fixed income investing below.
4. Shareholder advocacy activities.
Another way to practice EI is to attempt to influence corporate behavior on social issues by initiating and supporting shareholder resolutions and voting on proxy issues. The URJ is a member of The Interfaith Center on Corporate Responsibility (ICCR), a leading organization in the shareholder resolution process, which is instrumental in coordinating resolutions co-filed by different investors. See their website at www.iccr.org/
The Jewish Funds for Justice (JFFJ) is a non-profit group actively involved in encouraging shareholder activism. JFFJ operates the Jewish Shareholder Engagement Network which effects $1.3 billion in investments for shareholder advocacy purposes. Get more information about their programs at www.jewishjustice.org/jfsj.php?page=2.3 and at www.jewishjustice.org/jfsj.php?page=2.3.1
5. Fixed income EI.
Ethical investing involves not only stock investments but also fixed income investments. For example, under the URJ’s CHIP program, a synagogue, Jewish individual, or Jewish endowment can invest in a Community Development Financial Institution (CDFI) and receive a fixed rate of return. Some CDFI’s are banks that offer FDIC-insured CD’s at a market rate, with the proceeds used for community development. When you get your CD from such a CDFI bank, you can earn a market rate of return and help community development both at the same time, with no lesser return and no greater risk than you would get from a CD elsewhere. For a discussion and list of CDFI’s, see the CHIP program brochure at www.rac.org/pubs/guidemanuals/chip/
Of course, a fixed income investor can purchase Israeli bonds to support the State of Israel. Another way to practice fixed income Jewish EI is to use Israeli banks operating in the U.S for your banking needs. In particular, such Israeli banks often offer FDIC-insured CD’s at market rates of return. Using an Israeli bank for your CD investments is no different than using another American bank, except that you are simultaneously helping an Israeli company and therefore the Israeli economy.
EI investments can also be made in the area of corporate bonds. For example, you can avoid the bonds of the egregious companies that do not pass your negative screens, while purchasing bonds of companies passing your positive screens.
If you currently invest in municipal bonds, you could consider publicly traded and rated bonds that fund entities in consonance with your ethical goals, such as local school boards or water or reclamation projects. Bonds are also often available that support hospitals and similar healthcare entities. You should note, however, that sometimes such bonds are more appropriate for individual investors than synagogues or endowments because of their tax advantages for individuals.
This is one of the newest forms of EI. Microfinance involves financial institutions that make very small loans (e.g $50 to $100) to the impoverished in underdeveloped countries. These loans are used to begin small business activities such as leasing a small patch of land to grow crops, buying a few chickens, or buying a sewing machine to make items to sell at the local market. The payback rate on these loans is well over 90% and millions of people worldwide have used these loans to rise from poverty. In 2006, Muhammad Yunuus of the Grameen Bank in Bangladesh won the Nobel Prize for his efforts in fostering microfinance.
The Nobel Committee said in its citation. "Lasting peace cannot be achieved unless large population groups find ways in which to break out of poverty….Microcredit is one such means. Development from below also serves to advance democracy and human rights."
Investment by Americans in microfinance institutions is still in its infancy, but there are certain investments available which allow synagogues, endowments, and individual Jews to participate in the fostering of microfinance to fight poverty in the world.
Using microfinance to support the poor in Israel is also getting increased attention by Jewish philanthropists and institutions.
7. Other methods.
There are a number of other ways in which Reform Jews can practice Ethical Investing. These include social venture investments, pooled loan funds (such as the one offered by the Jewish Funds for Justice), and (for Jewish foundations) program related investments. Talk to your investment professional or contact the RAC to determine if any of these other means are appropriate for your particular situation.
How do I begin to use EI?
If an investor can invest assets in a way which serves its ethical and social goals, while continuing to earn the same or better return, then EI makes sense. If this is the case, why doesn’t every Jew, synagogue and Jewish endowment use it? The answer to this question is straightforward: while the concept of EI is both intriguing and compelling, the process of actually undertaking EI is more difficult. Often, synagogue members or a Social Action Committee will approach their synagogue board or synagogue endowment and suggest the use of EI, but will have only limited success. Some investment advisors, trustees or Board members may strongly resist efforts to undertake EI because (1) using EI requires additional analytical work for them or (2) they erroneously believe that EI will limit returns. The synagogue board or endowment trustees should weigh the potential benefits of EI against any legitimate concerns raised by board members, trustees or investment advisors. Also, there are many investment advisors who actively practice EI and can be very helpful in answering questions about an EI program.
While all boards and endowment trustees have a fiduciary responsibility, there is no question that the consideration of social goals is allowed by that fiduciary responsibility. Also, (depending on the wording of your mission, by-laws, trust documents, and prior board resolutions) in some cases your fiduciary responsibility may actually mandate the consideration of ethical and social goals.