Stocks With Scruples

For those of you already familiar with the basics of socially responsible investing, feel free to skip down to the performance table for May and the month's news highlights. If you're just learning about the world of SRI, then you're right where you should be!

Socially responsible investing isn't about whether you sit around with friends and gab about your stock picks. Nor is it about whether you've thought long and hard about each investment decision prior to executing a trade: Of course you've done that! It's also not about whether you file your brokerage statements away in a neat and timely fashion. Each of those things may be deemed "social" or "responsible" -- perhaps even admirable -- but it's not what the investment world means when it talks about SRI.

SRI refers to blending one's financial decision-making with one's perception of its impact on society. Naturally, this notion is jam-packed with personalized value judgments and not without a certain morally infused attitude. Well, so, too, are most of our daily activities. SRI can take various strategic forms. Some investors use screens to avoid what they perceive as "sin" stocks. Others may use their shareholder power to challenge management on current practices.

But you probably already knew all of that. After all, the Fool has covered the topic in articles and even argued about it in a Dueling Fools debate on socially responsible investing.

Why should I care?
Here's the scoop, and please don't take it too personally: It really doesn't matter how you feel about SRI. Like it or not, this way of investing has already made its presence known in the press and in the boardroom, on campus and in congregations, through a larger number of tailored securities products, increased shareholder activism, and greater corporate acknowledgement. According to the Social Investment Forum's fifth biennial report on investment trends, which was released in January, SRI investment assets have grown faster since 1995 than all managed assets in this country -- more than 258%. That report documents an 18.5% increase in SRI mutual funds and a 16% rise on social and corporate governance resolutions over the past two calendar years.

At first blush, it's hard to deny the allure of potentially saving the world while also reaping investment returns. But questions and conflicts abound, whether or not you believe that any inherent rapaciousness of capitalism can or even should be tamed for the greater good, or whether you're simply mesmerized by the slick PR brochures portraying a company's integrity.

You can judge for yourself the movement's impact through our monthly reports highlighting performance and interesting developments.

Profiting my portfolio as well as my soul?
Some may say you can't put a price on virtue. Sure you can. Many general indices in this arena use a blend of exclusionary factors to bar companies involved in such businesses as alcohol, tobacco, firearms, gambling, and military contracting, and then further evaluate candidates on issues including product and workplace safety, environmental impact, diversity, and community relations. Here are a few performance yardsticks:

  • The KLD Broad Market Social Index -- consists of all companies of the Russell 3000 index that meet research firm KLD Research & Analytics' criteria.
  • The Calvert Social Index -- begins with the 1,000 largest U.S. companies, which asset-management firm Calvert subjects to a screen and begins paring down the list.
  • The Domini 400 Social Index -- includes about 250 S&P 500 companies, 100 additional companies providing industry representation, and another 50 companies with strong characteristics, all selected by KLD Research & Analytics. This index, established in May 1990, is the benchmark for measuring the impact of SRI on financial returns, because it was the first to subject portfolios to multiple screens.

For an overall view:

Total Returns

Index

% Change, May

% Change, Year to Date

Broad Market

3.49

8.40

Calvert

3.27

7.50

Domini

3.20

7.71

Russell 3000

3.64

9.16

Russell 1000

3.60

9.27

S&P 500

3.49

8.77

Sources: Bloomberg, Calvert Group Ltd., KLD Research & Analytics.

For the second consecutive month, neither SRI-inclined investors nor other folks had much to complain about. Both SRI and general indices performed solidly, as equity prices marched upward again. The slightly lagging performance of the SRI indices in May could likely be attributed to underexposure to the energy sector.

To learn more about selecting your own SRI-based portfolio, find out who's naughty and who's nice.

So what's been going on?
Last month's developments include the following:

  • Human Rights Watch published a report alleging that Wal-Mart (NYSE: WMT  ) exploits weak U.S. labor laws and stands out for the magnitude and aggressiveness of its anti-union practices. Separately, a fired marketing executive at Wal-Mart accused the company in a federal court filing of various ethical violations. The company denied the assertions.
  • The grassroots Western Shoshone Defense Project presented a petition to Barrick Gold at its annual shareholder meeting, protesting the company's plans to mine in important Western Shoshone spiritual areas and its lack of dialogue on the topic.
  • Ethiopian government officials and Starbucks (Nasdaq: SBUX  ) announced an agreement in principle to sign a licensing, marketing, and distribution agreement that recognizes the importance of Ethiopia's specialty coffee names.
  • Harrington Investments, a California-based SRI advisory firm, successfully defeated Yahoo! (Nasdaq: YHOO  ) , which tried to keep a shareholder resolution for creating a human-rights board committee off the ballot at the company's June annual meeting. Separately, Yahoo! launched Yahoo! Green, an online education program offering environmental news and tips to combat climate change, as part of its effort to fight global warming.
  • Shareholders of Berkshire Hathaway (NYSE: BRK-A  ) voted by a 53-to-1 margin against an investor proposal calling for the firm to divest its $3.3 billion stake in PetroChina (NYSE: PTR  ) because of its controlling company's business relationship with Sudan.
  • PepsiCo joined the U.S. Climate Action Partnership, a coalition of business and non-governmental organizations calling for national legislation to reduce greenhouse gas emissions.
  • IBM began a $1 billion-per-year investment program aimed at doubling the energy efficiency of its computer data centers and those of its corporate customers.
  • Indigenous communities in Peru filed a class action lawsuit in a California court against Occidental Petroleum, alleging that oil production that the company engaged in between 1975 and late 1999 damaged their health and killed a boy.
  • Unilever banned super-skinny models and actors from its advertising, stating that it's joining the global fight against eating disorders. Separately, the company announced plans to source its entire tea supply sustainably and will begin certification of its East African tea producers to Rainforest Alliance standards.
  • JPMorgan Chase (NYSE: JPM  ) began to make its analysis on climate change as it relates to financial markets publicly available on its website.
  • Industry leaders at the annual meeting of the World Diamond Council called for more to be done on safeguarding human rights in Africa, keeping gems out of the hands of criminals and terrorists, and addressing issues of child labor and work conditions, while citing progress in curbing the use of diamonds to fund wars in Africa.
  • Fidelity Investments cut its holdings in PetroChina and Sinopec amid calls to divest from companies linked to Sudan. It declined to say whether it was bowing to pressure from human rights groups.
  • Staples (Nasdaq: SPLS  ) became the first national retailer to offer computer and office technology recycling in stores on a daily basis.
  • Nike announced that it will resume soccer ball production in Pakistan with a new vendor committed to workers' rights.
  • Institutional Shareholder Services, a leading provider of corporate-governance and proxy-voting services, introduced the availability of its global "Sustainability Risk Reports" database, which profiles companies using more than 400 environmental, social, and governance factors.

Social responsibility reports
These voluntary documents, often called sustainability or citizenship reports, have become increasingly popular. According to the Social Investment Analysts Research Network, about 40% of the companies in the S&P 100 Index now submit reports that document a company's progress on such topics as environmental and labor practices, human rights, philanthropy, and product responsibility. The documents can usually be found on the issuing company's website.

For a more detailed examination of sustainability reports, check out "A Bottom Line With a Human Touch."

Anything more to say?
Join the Fool's Socially Responsible Investing discussion board to weigh in with your views on the topic, and keep reading the Fool to stay on top of events.

Starbucks, Yahoo!, and Berkshire Hathaway are Motley Fool Stock Advisor recommendations. Wal-Mart and Berkshire Hathaway are Motley Fool Inside Value picks. Unilever and JPMorgan Chase are Motley Fool Income Investor picks. You can check out any of our investing services with a free 30-day trial.

Fool contributor S.J. Caplan is often social, if not always responsible. She completed the World Bank Institute's course on corporate social responsibility and does not own shares of any company mentioned in this article. The Motley Fool's disclosure policy is socially responsible.


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