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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 June 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. 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 they're 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 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, 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 in 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 you believe that any inherent rapaciousness of capitalism can or even should be tamed for the greater good, or are 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?
Who says you can't put a price on virtue? 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 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 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:

Index

August returns

YTD returns

Broad market

1.52%

4.08%

Calvert

2.03%

4.19%

Domini

1.78%

4.16%

Russell 3000

1.44%

4.95%

Russell 1000

1.36%

5.28%

S&P 500

1.50%

5.20%

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

Last month, equities managed to break their streak of subprime-induced losses, and SRI indices slightly outperformed the general market.

To learn more about selecting your own SRI-based portfolio, see the article "Who's Naughty? Who's Nice?"

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

  • Chase, a division of JPMorgan Chase (NYSE: JPM  ) , opened its first "green" banking branch in the U.S.
  • Tyco Electronics (NYSE: TEL  ) joined the Ethisphere Council, a group aimed at promoting best practices in ethics, compliance, and corporate governance.
  • The IFC and the U.N. Special Representative on Business and Human Rights launched a joint study on foreign direct investments and human rights, to be published in 2008.
  • The U.S. House Foreign Affairs Committee announced a probe into whether Yahoo! (Nasdaq: YHOO  ) lied during 2006 testimony over its role in a Chinese human rights case.
  • Mattel issued two recalls for millions of Chinese-manufactured toys because of various hazards.
  • GlaxoSmithKline (NYSE: GSK  ) allowed two of its patented drugs to be used to manufacture a generic antiretroviral for use in Rwanda.
  • A Chinese job applicant filed a lawsuit against the Chinese unit of Nokia (NYSE: NOK  ) for alleged workplace discrimination after discovering that he carried hepatitis B.
  • A federal judge ruled that a lawsuit claiming that Chevron (NYSE: CVX  ) violated human rights in Nigeria can proceed.  
  • China Labor Watch, a U.S.-based workers' rights group, issued a report alleging labor violations at eight Chinese plants that manufacture goods for companies including Disney (NYSE: DIS  ) and Hasbro.
  • A U.S. federal court ruled that Rio Tinto will get a new federal appeals court review regarding claims of human rights violations at a mine in New Guinea, which was closed in 1989 after armed attacks.
  • Coca-Cola joined the Business Leaders Initiative on Human Rights, a coalition of companies examining how to apply human-rights principles in a business context. 

What others are saying
These are some of last month's more interesting articles about corporate responsibility:

  • The Boston Globe published "Sudan prospering despite a decade of US sanctions." The booming Sudanese economy profits from Chinese investment, and from loopholes in the sanctions that allow companies such as Coca-Cola and PepsiCo to continue working with Sudanese partners.
  • Newsweek published "Teens at Work," describing labor practices employed by Wal-Mart in Mexico.
  • The New York Times published an editorial headlined "Unsafe Mining," calling on Congress to investigate mine safety standards and their enforcement.

The Fool also published "Saving Some Money and the Planet," which discussed the increasing green options for consumers.

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 S&P 100 Index now submits 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.

Last month, companies issuing reports included Baxter, Bayer AG, Enbridge, Ford, NEC, Timberland, and UPS.

For a more detailed examination of sustainability reports, see "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.

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