How to invest with a social conscience: Some popular options
If you want to invest for the social good — or at least, how some professional money managers define the social good — there are plenty of options.
But the No.1 rule of socially responsible investing is the same as for any investing: Do your homework. Just because an investment meets socially responsible standards doesn’t automatically mean it’s a good idea financially.
“You can pick a bad investment just as well in socially responsible investing as in mainstream investing,” said Jed Emerson, chief impact officer at ImpactAssets, which advises investors on socially responsible strategies.
With that caveat, here are details on some popular ways to invest with a social conscience:
•Mutual funds. Dozens of funds invest in stocks using screens that evaluate companies by what’s known as ESG standards: environmental, social and governance. For most funds that has always meant no tobacco, alcohol, gambling or weapons companies. Beyond that, socially responsible funds can judge companies by a wide variety of factors, such as employee benefits, community impact and philanthropy.
In recent years, some of the most popular stocks with socially responsible funds have been tech issues, including Apple Inc. and wireless giant Qualcomm Inc. There’s a reason for that: With technology, “you can see the benefits of what they make” in society, said Amy Domini, founder of Domini Social Investments.
Just as important as the social standards a manager applies to a fund is whether he or she is a good stock picker in general — and whether the funds management fee is reasonable.
Among socially responsible stock funds, one is dominant: The Parnassus Core Equity fund, based in San Francisco, is by far the sector’s largest fund, with $11.3 billion in assets. It also has the best track record in the sector over the last 10 years, earning 10.4% a year. That beat the 7.9% average annual gain of the Standard & Poor’s 500 index.
For a full list of socially responsible funds, including performance data, go to: charts.ussif.org/mfpc/
If you save money via a 401(k) retirement plan, and socially responsible funds aren’t in the plan, you can petition the company to add social funds to the menu.
•Credit unions. Joining a credit union is a simple way to invest in a community — either a geographic community or a community of people with similar interests. That’s because credit unions are nonprofit and are owned by their members. Because of their nonprofit status, credit unions often pay better rates on deposits and charge lower rates on loans than banks.
•Microlending. Organizations such as Zidisha and Kiva provide small loans to people in the developing world with the goal of giving the borrowers and their communities an economic boost. Microlending is made simple for lenders and donors, but it’s complex under the surface and has fueled controversy over interest costs, transparency and other issues. Best advice: Read as much as you can on the Web about the pros and cons.
•Community investment notes. Pioneered by the Calvert Foundation in 1995, these notes allow investors to make loans of as little as $20 for specific causes such as affordable housing, education or entrepreneurs who are targeting social ills. These aren’t donations: The notes have specific maturities and pay set interest rates to the investors.
About $250 million of the notes are outstanding. They range in term from one year to 10 years. And given how low interest rates in general are, the rates paid on the notes are competitive with other investments. For example, a three-year community investment note now pays a 1% annual yield. By contrast, a three-year U.S. Treasury note yields 1.07%.
Justin Conway, vice president of investment partnerships at Calvert, said that about 60% of lending via the notes is done in the U.S. Historically the notes have a 100% repayment rate, Conway said. But it is conceivable that the notes could lose money, so investors need to read the details carefully.
•B Corporations. A small but growing number of companies have formally adopted a new business status: They specifically say that their mission is greater than simply maximizing earnings for shareholders. Instead, they also pledge to do right for their employees, communities and the environment. Legally, companies in many states (including California) now can change their status to a “benefit corporation.” A second option is to be certified a “B Corp.” by B Lab, a nonprofit group. B Corp. status isn’t a legal change, but a public pledge.
Among the companies that have become B Corps. are apparel maker Patagonia, e-commerce firm Etsy and King Arthur Flour Co.
The problem for investors is that almost all B Corps. are privately held. That means the only way to own a stake would be via a private equity investment. But this is a space to watch: It could become a broader public investment option in the years to come.
