Investors should have learned many painful lessons from the financial crisis. Yet short-term speculation seems to remain very much in fashion, and critics still speculate on the death of long-term buy-and-hold investing. Fools, don't believe the hype.
Instead of giving up on the long-term view, investors should focus on stocks whose stellar business practices will help them endure for decades to come. The basic principles of socially responsible investing (SRI) can help you identify great companies that focus on doing the right thing -- and reduce their long-term risks in the process.
SRI is A-OK
Socially responsible investing looks beyond stocks' potential for high financial returns to also weigh how those businesses change society for the better. According to the Social Investment Forum, the trade association focused on SRI, such investors "can put their money to work to build a more sustainable world while earning competitive returns both today and over time."
Several studies and data confirm that socially responsible investments can outperform the market over time. As of Dec. 31, 2009, the first SRI index, the FTSE KLD 400, had generated a 9.51% return since its creation in 1990, versus an 8.66% return for the S&P 500. The Social Investment Forum also revealed that last year, two-thirds of 160 SRI funds bested their benchmarks. In 2009, large-cap SRI funds outperformed the S&P by six percentage points on average.
An uncertain social scene
Of course, it's not always easy to determine which companies best fit socially responsible criteria. That broad umbrella can include anything from ethical governance to social activism to environmental consciousness. Investors should decide which priorities matter most to them, since many organizations use different weighted criteria to draw conclusions about which companies represent the gold standard in this regard.
Corporate Responsibility Magazine has long compiled a list of "Best Corporate Citizens," weighing environmental, human-rights, employee-relations, governance, philanthropy, and financial factors. The top five corporate citizens for 2010 seemed like surprising selections: Hewlett-Packard (NYSE: HPQ), Intel (Nasdaq: INTC), General Mills, International Business Machines (NYSE: IBM), and Kimberly Clark.
Meanwhile, a few companies well known for pursuing social benefits didn't score as high as you might think. Some didn't even make the list: Google (Nasdaq: GOOG) and Whole Foods Market (Nasdaq: WFMI) were nowhere to be found.
Social responsibility makes common sense
The past several years have shown how badly antisocial behavior can hurt investments. Goldman Sachs (NYSE: GS) and BP (NYSE: BP) are both enduring government probes and scrutiny, and their falling market caps reflect their increased risk and uncertainty. Furthermore, the financial crisis most certainly proved how bad things can get for investors when corporations forget their long-term responsibility to all stakeholders. The crash ultimately destroyed several long-established Wall Street firms, taking shareholders' stakes with it.
Investors should take a hard look the companies vying for their money, weigh the socially responsible factors that matter most to them, and invest with those principles in mind. Companies that treat their employees well, conduct their businesses in an environmentally sustainable way, and have solid corporate governance policies will face much less risk and uncertainty, and enjoy much greater staying power, over the long haul. In this respect, social responsibility is just common-sense capitalism.
Check back at Fool.com every Wednesday and Friday for Alyce Lomax's columns on corporate governance.
