Warren Buffett, when asked about his refusal to divest Berkshire Hathaway's controversial stake in PetroChina, acknowledged that he would, in fact, rule out certain investments because of ethical and social considerations. Partner Charlie Munger added, "There are some people that we won't deal with because of morals."

And they aren't alone. A staggering number of investors are including a company's social impact in their investing philosophies. According to the Social Investment Forum, the number of Socially Responsible Investment (SRI) funds has grown from just 55 in 1995 to 260 today. Investments that meet at least one of the SIF's three definitions of "socially responsible" currently account for $2.7 trillion -- nearly 11% of all U.S. investments.

It's not just ethically advantageous to invest with your conscience; it can be financially advantageous as well.

Bumping up your bottom line
The iShares KLD 400 Social Index (DSI) tracks the performance of socially responsible companies in a blend of industries. It includes a variety of market caps, but it explicitly excludes companies in alcohol, tobacco, weapons, gambling, and nuclear power.

With top holdings such as Procter & Gamble (NYSE:PG) and Johnson & Johnson (NYSE:JNJ), the index has outperformed the S&P 500 since its 1990 inception -- making it clear that socially responsible investments can compete with the market at large.

In a capitalistic system in which companies are paid to provide goods and services, it makes sense that, over the long run, companies that benefit individuals and society will tend to be rewarded for their efforts.

But even if you believe in investing in socially responsible companies, you're probably also supporting companies you wouldn't choose on your own -- without even paying attention.

Just for example
Tom Gardner, co-advisor of Motley Fool Stock Advisor, recently confided in me (Ilan) that he wouldn't feel comfortable investing his own money in Philip Morris parent company Altria.

Although reasonable people can -- and often do -- disagree about whether a given company is socially responsible, tobacco is one of the few sectors with wide agreement. According to the World Health Organization, tobacco use will kill 1 billion people over the next century, and business legends such as Michael Bloomberg, Bill Gates, and (by proxy) Warren Buffett recently pledged $500 million to promote antismoking efforts around the world.

Even so, many of us -- perhaps even you -- are invested in tobacco companies through broad-market index and mutual funds.

If you're invested in an S&P 500 index fund, for example, you're automatically a part owner of Altria, Philip Morris International, Reynolds American, and other companies you might find distasteful.

Doing well by doing good
If you want broad market diversification with socially responsible investments, consider large-cap SRI mutual funds. An extraordinarily large proportion -- 71% -- of the funds that have been around for 10 years or more outperformed the market during those trailing 10 years. Only about a quarter of all actively managed funds managed that feat.

For example, the Parnassus Equity Income (PRBLX) fund -- which promises "doing well by doing good" -- has outperformed the market by nearly 7 percentage points annually over the past 10 years. It has a yield of 4.4%, no load, and a maintenance fee of just 1%.

These are some of the fund's top holdings, as well as some reasons for the fund's interest:


% Net Assets

Socially Responsible Initiatives

Microsoft (NASDAQ:MSFT)


Establishing common supplier labor standards, incredible employee benefits, diversified workplace.



Google.org collaborates with experts to combat climate change, poverty, and emerging diseases.

Aflac (NYSE:AFL)


Cooperates with community involvement groups; CEO gave $10 million to Aflac cancer center and blood disorder service.



Imperfect but improving environmental record -- sets aside 3-7.5 acres of wetland for each acre disturbed.

Fund holdings as of Aug. 31, 2008.

Parnassus is only one of the SRI mutual funds available, and you could have done even better by selecting a few of the hundreds of outperforming SRI stocks.

A stock you can feel good about
Take, for example, Stock Advisor recommendation Whole Foods (NASDAQ:WFMI).

This is a business whose motto is "Whole People, Whole Foods, and Whole Planet." It contributes at least 5% of its after-tax profits to not-for-profit organizations, and it also supports food banks and local and organic farming.

For the second consecutive season, the Environment Protection Agency has named Whole Foods the Green Power Partner of the Year for its leadership in developing renewable energy capacity. Whole Foods has aggressively pursued alternative energy sources, and has now accumulated enough wind-based energy credits to offset 100% of the electricity used in all of its U.S. and Canadian stores.

But beyond its excellent record in social responsibility, it's the go-to name for local and organic food. It has parlayed a great customer experience into a durable brand with a fiercely loyal client base. Although it's taken a significant hit during this downturn, we believe Whole Foods is positioned for better-than-expected growth for the next five years -- making this an intriguing stock at today's prices.

The Foolish bottom line
Socially responsible investing doesn't have to come at the expense of your bottom line, but it will take some extra research on your part.

For some great investing ideas, consider checking out Stock Advisor. While Tom and his brother and fellow Fool co-founder David Gardner don't focus on SRI, a number of their picks are addressing some of the world's crucial challenges -- and benefiting customers, employees, and shareholders. You can find out what they're recommending with a 30-day free trial; just click here to get started.

Ilan Moscovitz owns shares of Google and Whole Foods. Wade Michels owns no shares of any companies mentioned in this article. Google is a Motley Fool Rule Breakers recommendation. Whole Foods, Aflac, and Berkshire Hathaway are Stock Advisor selections. Berkshire Hathaway and Microsoft are Inside Value picks. Johnson & Johnson is an Income Investor choice. The Motley Fool owns shares of Berkshire Hathaway. The Fool has a disclosure policy.