Social investment

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Social investment or socially responsible investment is an investment philosophy which takes into account religious, political, or moral values as well as financial return. It is typically embodied in the form of mutual funds which select their investments subject to a "screen" which excludes companies which the fund managers see as socially harmful.

For example, Altria Group, Inc., is a major company, part of the Dow Jones index, and its stock has done very well over the last five to ten years, outperforming both the Dow Jones and S&P 500 indexes. Therefore, it forms part of the holdings of many mutual funds. But Altria (formerly Philip Morris), is identified with the promotion of tobacco smoking, and some investors would prefer not to be profiting from this activity. They might, therefore, be interested in mutual funds which screen out tobacco companies.

The first well-known social investing fund, Pax World Fund, was founded in 1971 by the Board of Christian Social Concerns of the Methodist Church, to "avoid investments in defense contractors and, instead, put its money into industries such as housing, health care, and pollution control."[1]

Social investing is an outgrowth of the social concerns of U. S. churches in the 1960s and 1970s. One motivation for the formation of social investment mutual funds is not simply that of offering an investment vehicle, but the hope that a mutual fund company, by pooling the investments of many individuals and small organizations, may become large enough to influence corporate policy in a way that small investors cannot.

Other well-known social funds include the Domini Social Equity Funds, the Calvert Funds, Vanguard's FTSE Social Index Fund, and TIAA-CREF's Social Choice. Like other mutual funds, some are actively managed (the fund manager picks specific stocks that he or she hopes will perform well), while others passively match one of the "social" indexes such as FTSE4Good.

There is great variation in the kinds of screening and selection processes that are used. Often the screening reflects a blend of political liberalism and some kinds of traditional social conservatism. For example, the Domini Social Equity fund

seeks to avoid securities and obligations of corporations that Domini determines derive significant revenues by manufacturing tobacco products, alcoholic beverages, or gambling equipment, or through ownership of gambling enterprises. The Fund will also seek to avoid corporations that Domini determines have a significant direct ownership share in, or operate, nuclear power plants, or are major military weapons manufacturers.

The Timothy Plan is an example of group of funds which "[avoid] investing in companies that are involved in practices contrary to Judeo-Christian principles and to "recapture traditional American values." It claims to be "America's first pro-life, pro-family, biblically-based mutual fund group."[2]

Social investment funds are controversial. There is debate on whether it is philosophically sound to allow religious or political values to influence what some think should be a purely financial decision, and there is debate about just how much an investor sacrifices financially by choosing such a plan. The expense ratios of these funds are often high; the Timothy Plan's Large/Mid-Cap Growth A fund, for example, has a 1.55% expense ratio.[3] During the internet boom, the social screens of some of these indexes tended to favor the environmentally "green" internet companies over the traditional smokestack industries. This fortuitously boosted their financial performance and gave the impression that an investor could easily "do well by doing good." Many of these funds have lagged since then.

Notes and references

  1. Fiske, Edward B. (1971), "Religion: Putting the Money where the Heart Is," The New York Times, September 5, 1971, p. E6
  2. The Timothy Plan
  3. TLGAX, Schwab website