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October 22, 1998

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Subject: Re: Socially responsible investment club
Author: KellyFord

The question is how far does an investor go? Do you disqualify a company like Microsoft because it does business with China? Do you reject a company that sells items manufactured in China? If so, many US retailers ought to be disqualified. I doubt many quoted US companies these days are deliberately negligent in matters of the environment. How far do you go? Perhaps posters here would care to illustrate what they consider to be socially repsonsible investing?

Socially Responsible Investing is a catch-all phrase that incorporates many different styles and priorities of investing. The common element is that the investor takes into consideration both social and financial aspects of stocks, bonds, deposit accounts, etc. and the companies behind them when making investment decisions. Having read much of the literature and after disucssion with others, I can tell you that basically, there are three styles of activity in the SRI community: investing by avoidance, investment with activism, and socially focused investing. Most do not stick with only one of these styles, but rather mix and match to fit their own priorities. Here's each style in a nutshell:

1) Avoidance investing is the process of screening out companies and industries with which the investor desires no association. The issue of concern may be anything, but historically the issues that have generated the most interest have been tobacco, alcohol, gambling, weapons, labor, nuclear energy, and the environment.

In the perception of most non-SRI investors, avoidance investing is the only aspect of SRI, and it is easy for critics to find avoidance investing's weaknesses: "Results" are usually only a personal satisfaction, not real change. In the absence of a strong movement on a certain issue, avoidance investors will not affect the company one bit by refusing to be owners or lenders to the company. The one example that avoidance investing can point to as a possible impact issue is South Africa, where the divestiture movement was able to bring increased public attention on the injustice of the system that was in place there. On the other hand, avoidance investing may prove to be of financial benefit because it reduces the chances of losses due to companies being prone law suits, environmental mishaps, costly strikes, poor quality products due to unmotivated labor, etc.

  "...it is easy for critics to find avoidance investing's weaknesses: "Results" are usually only a personal satisfaction, not real change."

Your question of "How far do you go?" is a crucial one to be answered by avoidance investors. Critics of SRI often point out that every company has something that could be considered objectionable in its business. Certainly, if you screen for too many things too tightly, you end up with nothing to invest in at all! You have to find a balance in your social criteria where your social screens eleminate the things you truly want to avoid while leaving you with the flexibility to construct a well-balanced portfolio.

2) Activist investors seek to maximize their impact by being vocal shareholders. They take to hear that their stock is not just a piece of paper whose value fluctuates every day but a certificate of ownership of a corporation with all inherent rights and responsiblities. Activist investors will buy stock in a company, write letters, submit resolutions, vote proxies -- whatever it takes to get the message across to management and other shareholders that the company has an important social issue that needs to be addressed.

As I mentioned before, no company is socially perfect to everybody, so every company has issues that will attract activist investors. They may intentionally invest in a company that would not pass an avoidance investor's screens, such as a company with a very poor environmental record, in order to profit while striving for change on the inside. Or, they may stick to the companies that meet avoidance screens and work on the specific issues still facing those companies, figuring a company with enouch social conscience to pass the screening process would be much more open to discussion of issues that remain than one with a record poor enough to make it fail the screen.

The two main advantages of activist investing are that it does provide an opportunity for real results and it does not run a risk for the investor of screening out companies and limiting financial choice. The disadvantage is that doing it right takes time - and lots of it. Most individual investors would rather spend time with their family and in their community than dealing with complex social and corporate issues.

Many of the SRI mutual funds participate in shareholder activism. By investing in these, the individual investor gets both an avoidance and an activist approach. This allows the individual investor to do both without much time invested, and as the SRI funds grow they can be sure to have more clout as they promote their social agendas.

  "Many of the SRI mutual funds participate in shareholder activism. By investing in these, the individual investor gets both an avoidance and an activist approach."

3) Socially focused investing basically takes two threads: one dealing with targeting depositing and the other with targeted stock selection.

Many community development banks have sprung up that attract deposits from social investors and lend their funds specifically in lower-income or envrionmentally sensitive areas, where a healthy dose of capital is needed for the general social benefit. Investors may choose to deposit funds in banks and credit unions where they know the money will stay in their community and contribute to the local economy.

Positive screening in stock selection means looking for companies with outstanding histories in terms of their social relations. Companies with a truly happy workforce, quality products that help their customers' lives, healthy relations with the community, efficient and sustainable usage of environmental resources, and the like may very well be primed for outstanding financial success. Furthermore, by running positive screens, investors may buy stock and become activists to remind the company that shareholders value these social features of the company and want to see them continued as the company grows and prospers.

So each individual investor defines their own "socially responsible investing" with some combination of these strategies. Any SR investment club will need to go through these concepts and determine what its social and financial priorities are and the methods preferred to achieve those goals.

Kelly


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