Please ensure Javascript is enabled for purposes of website accessibility

2014 Is The Year To Build Your Socially Responsible Investment Portfolio

By Jay Jenkins – Jan 23, 2014 at 5:03PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Investing in companies that support social causes you believe in is your opportunity to do good by doing right. Here's how to get started.

Image Source:

Here at The Motley Fool, we advocate investing in companies for the ultralong term. We seek to fundamentally understand an investment from the ground up, and invest in those companies that offer prospects for sustained success over 20-30 years.

With this extremely extended time horizon, your investment portfolio -- the businesses that you own -- will grow with you over your lifetime. Decade after decade you and your companies will navigate a changing world, one that hopefully improves with time.

Enter socially responsible investing
Through this lens, your investments are not just a source of retirement income. They are an investment of your capital in the future -- your future and that company's future. 

Economically this is obvious: you invest in companies you think will consistently make money in the future, companies that will appreciate in value. But in the context of the future, these investments can also represent what you believe in socially, ethically, environmentally, and any number of other dimensions.

This is not about joining Greenpeace or investing in well-intentioned but otherwise unprofitable businesses. It's about choosing investments where doing right is a competitive advantage.

The tendency for most investors when considering socially responsible investing is to automatically avoid the industries that exist outside of their own moral beliefs. Gambling, alcohol, tobacco,  firearms, or more recently legalized marijuana, come to mind here.

That is all well and good; those considerations will be driven by your personal beliefs. However, simply excluding industries you disagree with is not enough. Investing fundamentals still apply -- diversification, risk management, and business fundamentals must also be taken into consideration.

To build this portfolio, we'll need to find successful and socially responsible companies in a variety of industries that are making an ethical profit. This is a positive, proactive screen. It means looking for companies with high marks in:

  • Corporate governance
  • Community outreach
  • Product safety
  • Environmental impact
  • Worker/Human rights
  • Workplace safety
This list could easily be expanded, but these six bullets are a great place to start. Ask yourself, "How does this company treat its stakeholders -- its shareholders, its employees, its customers, and its communities?"

Investing in socially responsible companies and funds shouldn't hurt investment performance

In a sense, we're all neighbors!

Image source:

The vast majority of people want to do the right thing. Its in our DNA. We are all pre-programmed to behave in ways that support our families, our friends, our communities, and our society.

A good socially responsible investment will do these things, but it must also profit.

One measure of socially responsible investing in terms of pure economic return is the KLD 400 Social Index, a fund that invests in 400 U.S.-based companies with high ratings in environmental and social impact and corporate governance, as well as avoiding businesses in tobacco, alcohol, firearms, and nuclear power.

According to data from MSCI, the KLD 400 Social Index has returned 17.65% annualized over the past five years, including a 27.65% return over the past 12 months.

DSI Chart

DSI data by YCharts.

This performance slightly trails the Russell 3000, but outperforms the Dow Jones Industrials by 20% and the S&P 500 by nearly 7%. Impressive long-term numbers from a diversified and socially responsible selection of companies.

Here's an example from my portfolio 

Image Source:

In the post-financial crisis era we live in, the entire banking industry is at best mistrusted and at worst vilified. American Banker published an article this month that exactly captured the current populist suspicion of the whole industry. Writer Katya Grishakova said:

I don't like to be hustled....I'm generally suspicious of any banking innovations. Any creative banking is an automatic blinking red light in my book. New products and services rarely are directed at making my life easier. Instead, they are meant to improve a bank's bottom line at my expense.

The unfortunately reality is that, yes, some banks did behave abhorrently. We shouldn't have trusted them. These institutions took advantage of individuals, business, municipalities, each other, and the system in general in the name of making a buck.

But that doesn't mean banking as a whole is bad. 

Banks offer products that protect customers from inflation, help them save and invest, and provide access to capital to buy homes or go to college. These are all noble enterprises. With proper management, banks will predictably profit year after year -- many times with a healthy dividend to boot.

I personally believe in this traditional, simple form of banking -- it's the grease on the gears of local, national, and international economies. Would I invest in a complex megabank that has repeatedly been fined billions, admitted defrauding millions, robo-signed foreclosures, or otherwise behaved unethically? Absolutely not.

But I'll certainly invest in the simple, old-school banks that accept deposits and lend money. That's a good business that will last for generations. And it's also a business that helps my community. It's a business I believe in.

Getting started in 2014, the year to make money in businesses you believe in
The best way to begin building your socially responsible investment portfolio is simply to add a step to your existing investment process. When you find a company that has the financial performance, products, market position, and competitive advantage to be a winner, take a little time to investigate its corporate practices. Search the Internet for the company's name and terms such as "environmental impact," "lawsuit," or "workplace practices."

There are also numerous mutual funds and exchange-traded funds available on the market that can give you immediate and diversified exposure to companies already vetted by professionals. A word of warning here, though: many of these funds carry higher fees than other fund options.

Doing your own homework can save you a pretty penny and ensure that your investments align perfectly with your beliefs, not those of a faceless fund manager hundreds of miles away.

Remember, Fools, buying shares in socially responsible companies is a long-term approach to your investing. It's about doing good by doing right. It's about using your investment capital to help shape the future. These companies conduct business with ethics, with consideration for their communities, and without destroying the environment.

And, just as importantly, they make money!

Fool contributor Jay Jenkins has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.