Who's Naughty? Who's Nice?

Santa's got it easy. He has his list and checks it twice, trying to determine who gets the newest Tamagotchi and who gets the lumps of coal -- which, come to think of it, isn't quite such an unwelcome gift anymore, with the way coal prices have risen in recent years. But what's an investor to do to figure out which publicly traded companies' behaviors merit any extra holiday gelt or pension pennies?

These days, it's not as hard as it used to be to discern the naughty from the nice in the corporate world. If headlines blare with words of scandal and fraud, that's one way to surmise that you might wish to steer clear of a particular company's stock. Checking your account statement can also quickly provide one measure of how jolly you feel toward your investments. But when you've been preaching to your kids lately that the holidays should not be just about trinkets and baubles, perhaps you want to think along the same lines when making your investment decisions.

Shiny dividends and capital gains are nice, but you may wish to consider incorporating more of your personal values (other than wealth accumulation, of course) into your portfolio. That method of investment, in which you blend your financial needs with your perceived view of your investment's impact on society, is generally referred to as "socially responsible investing" or "SRI," a style that's gaining increasing attention. (Just last week, the Fool ran an SRI duel that laid out both sides of the argument.)

An interesting aspect about SRI is that it can mean different things to different people. What one person may find sinful, another may find quite appealing or, at least, not so dreadful. An increasing number of indices, funds, and asset managers are springing up in an attempt to guide you toward portfolio panacea -- or at least their versions of it. But are their values yours? Who better, after all, to choose investments that reflect your own values than yourself?

If you do choose to go solo, how do you come up with your own list of deserving companies? Well, for starters, you can refer to your favorite Fool investment newsletter for potential investment ideas. As you screen that newsletter's list, omit any company that you know is primarily involved with any sector or industry toward which you have any aversion. Then, most importantly, like any Foolish elf, take the time to read the company's own literature, which often is readily available on its website. In the company's annual report alone, you may be surprised to uncover secondary business lines or practices that make you uncomfortable.

If corporate-governance matters concern you, pay attention to the structure of the board of directors and the various voting rights of capital classes. A check of recent shareholder resolutions may also point out areas of concern to you. And finally, check to see whether the corporation issues a "sustainability report," a document that focuses on such issues as environmental and labor practices, product responsibility, human rights, and community donations.

You could then even further vet your potential investments against such SRI-flavored indices as the Domini 400, the Calvert Social Index, or the Dow Jones Sustainability Index. Each of these indices employs its own selection criteria. Other particularly valuable informational sources for the socially responsible investor include the Social Investment Forum (www.socialinvest.org), a national nonprofit organization that promotes SRI, and the Interfaith Center on Corporate Responsibility (www.iccr.org), an international coalition of faith-based institutional investors committed to SRI and shareholder activism.

Ultimately, you are your own best judge as to the kinds of ethical tradeoffs you may be willing to make in pursuit of the best return. After all of your homework is done, you may come away with a list of glittering prospective investments that neatly fit your criteria. More likely, you'll have seen that the even the most initially sparkling entity often contains a blemish or two once its packaging is fully unwrapped. But at the very least, your research will have made you better informed and all the more well-equipped to make your investment decisions.

Stay tuned to the Fool to bring you continued insights into the world of socially responsible investing. In the meantime, may your investing be merry and bright!

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Fool contributor S.J. Caplan worries about the working conditions for all those elves toiling away in Santa's workshop.


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