Stocks With Scruples

If you're already familiar with the basics of socially responsible investing, feel free to skip down to the latest updates. If you're just learning about the world of SRI, read on!

Socially responsible investing -- SRI for short -- isn't about being social, or responsible, in your investing (although a little responsibility never hurt anyone). Instead, SRI involves approaching your financial decisions with an eye toward their impact on society. This notion is jam-packed with personal value judgments, and not without a certain moral attitude -- but then, so are most of our daily activities.

SRI can take various strategic forms. Some investors use screens to avoid what they perceive as "sin" stocks, while others may use their shareholder power to challenge management on its current practices. This should all be no surprise to you -- the Fool's covered this topic thoroughly in the past, including a Dueling Fools debate on the subject.

Why should I care?
Please don't take this too personally: It really doesn't matter how you feel about SRI. Like it or not, it's already made itself known in the press and in the boardroom, on campus and in congregations, and 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, released in January, since 1995 SRI investment assets have grown faster than all other managed assets in this country -- more than 258%. The Forum's report documents an 18.5% increase in SRI mutual funds and a 16% rise in social and corporate governance resolutions over the past two calendar years.

Saving the world while you make money sure sounds great. But SRI comes with a whole host of doubts and questions. Can capitalism's inherent rapaciousness really be directed toward the greater good, or are well-meaning investors getting suckered in by companies' slick, reputation-polishing PR? You can judge socially responsible investing's impact for yourself through Foolish monthly reports like this one.

How to measure a company's merit
Who says you can't put a price on virtue? Many general indexes in socially responsible investing use a blend of exclusionary factors to bar companies involved in businesses such as alcohol, tobacco, firearms, gambling, and military contracting. Then they 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 consists of the 1,000 largest U.S. companies, which are then screened by Calvert, an asset management firm.
  • 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 selected by KLD Research & Analytics. This index, established in May 1990, is the premiere benchmark for measuring the impact of SRI on financial returns, because it was the first to subject portfolios to multiple screens.

The latest updates
We'll start with a quick overview of these indexes' recent performance:

Total returns                          

Index

June returns

YTD returns

Broad market

-2.09%

6.13%

Calvert

-1.76%

6.64%

Domini

-2.16%

5.39%

Russell 3000

-1.87%

7.11%

Russell 1000

-1.91%

7.18%

S&P 500

-1.66%

6.96%

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

June took its toll on equities last month, as the second quarter ended with investors worried about higher bond yields and the subprime sector. Both SRI and general indexes endured losses.

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?
Here's a look at last month's developments:

  • A study by the Committee Encouraging Corporate Philanthropy found that corporate philanthropy increased an average 4.6% for top companies in 2006.
  • Coca-Cola (NYSE: KO  ) pledged to replace the water it uses in its beverages and their production, and launched a multiyear partnership with the World Wildlife Foundation to conserve and protect freshwater resources.
  • Gabelli Funds launched The Gabelli SRI Fund (FUND: SRIDX  ) , the firm's first SRI open-end investment vehicle.
  • Human Rights Watch called for the U.N. Security Council to create a mandatory Darfur Recovery Fund with Sudanese oil revenue.
  • Accounting firm Deloitte & Touche launched a corporate governance website.
  • Publisher Reed Elsevier announced that it would quit its profitable defense-exhibitions-sector business during the second half of this year, citing customer and author concerns.
  • Florida passed a law requiring its public pension plans to divest from companies that invest in Iran or Sudan.
  • A federal court ruled that Chevron (NYSE: CVX  ) can be sued in U.S. court for a subsidiary's alleged collusion with the Nigerian government in attacks that killed and wounded villagers protesting the company's practices.
  • Shareholders of Countrywide Financial rejected a proposal to give them an advisory vote on setting top executive pay. CEO Angelo Mozilo received total compensation of $42.98 million last year.
  • Calvert launched the Calvert Global Alternative Energy Fund (FUND: CGAEX  ) . It invests in companies that are alternative energy market leaders, as well as those building a significant presence in the sector.
  • Kellogg (NYSE: K  ) announced that it would stop advertising its products to children under 12, and stop using licensed characters or branded toys to promote foods unless they meet specific nutritional guidelines.
  • Citigroup launched a charitable fund through which individuals and organizations can make donations of at least $50,000 to microfinance institutions.
  • BHP Billiton (NYSE: BHP  ) outlined its new approach to climate change, and stressed that accelerated action was necessary to stabilize greenhouse gas emissions.
  • Starbucks (Nasdaq: SBUX  ) and Ethiopia settled their trademark dispute and signed a distribution, marketing, and licensing agreement aimed at helping Ethiopian coffee farmers receive a fairer share of profits.
  • The International Labor Rights Forum released a report supporting efforts by companies such as Bayer and Monsanto to eliminate child labor on cotton farms, but stated that much more needs to be done.
  • Google asked U.S. trade officials to treat Internet censorship as a kind of international trade barrier.
  • Pfizer said it would begin meeting with its largest shareholders regularly to discuss corporate governance issues.
  • Claymore Securities launched the Claymore/KLD Sudan Free Large-Cap Core ETF, which tracks the KLD Large Cap Sudan Free SocialSM Index, the first index tied to the issue of Sudan divestment.
  • Kohl's removed several lines of Daisy Fuentes brand clothing amid allegations of sweatshop conditions in a Guatemalan factory.
  • The U.S. House Financial Services Committee passed a resolution calling for increased diversity in the financial services industry.

What others are saying
Here are some of the more interesting articles published on topics of corporate responsibility last month:

  • BusinessWeek published an article entitled "An Olympic PR Challenge," describing the pressures felt by companies such as Coca-Cola, General Electric (NYSE: GE  ) , Johnson & Johnson (NYSE: JNJ  ) , and McDonald's by activists wishing to challenge China on a range of issues as it prepares to host the 2008 Summer Olympics.

Social responsibility reports
These voluntary documents, often called sustainability or citizenship reports, have become increasingly popular. According to the Social Investment Analysts Research Network, roughly 40% of 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.

Further Foolishness:

Starbucks is a Motley Fool Stock Advisor recommendation. Coca-Cola and Pfizer are Motley Fool Inside Value picks. Unilever and Johnson & Johnson are Motley Fool Income Investor picks. 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 owns shares of Google. She does not own shares of any other company mentioned in this article. The Motley Fool's disclosure policy is sociable and responsive.


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