Stocks With Scruples

Socially responsible investing isn't about whether you sit around with friends and gab about your stock picks. It isn't about whether you've thought long and hard about each investment decision before you execute a trade. (Of course you've done that!) Nor is it 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 it's 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 possesses a certain morally infused attitude. Then again, so 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 of that. After all, the Fool has covered the topic in many articles and has even conducted a debate on socially responsible investing.

Why should I care?
Please don't take this 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, and 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 other 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 whether you're simply mesmerized by the slick PR brochures portraying a company's integrity.

You can judge the movement's impact for yourself as you read through our monthly reports, which highlight performance and interesting developments.

Profiting my portfolio as well as my soul?
Some may say you can't put a price on virtue. Sure you can. 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. They 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 of the companies from 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, let's look at what happened in July.

As you can see, there's not too much one can say about July's overall lackluster market performance. Not much separated the performances of either the SRI indices or those of the general market. To learn more about selecting your own SRI-based portfolio, see "Who's Naughty? Who's Nice?"

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

• The Equator Principles, a set of voluntary best-practices guidelines for project financing, were revised to be more comprehensive and include stronger standards.
  
  
• Sustainablebusiness.com announced its 2006 SB20 List of public companies that contributed the most to sustainability practices. The list includes Energy Conversion Devices (NASDAQ:ENER), Green Mountain Coffee Roasters (NASDAQ:GMCR), Interface (NASDAQ:IFSIA), Maxwell Technologies (NASDAQ:MXWL), Novartis (NYSE:NVS), Ormat Technologies (NYSE:ORA), Philips Electronics (NYSE:PHG), SunPower (NASDAQ:SPWR), United Natural (NASDAQ:UNFI), Wainwright Bank (NASDAQ:WAIN), and Whole Foods Market (NASDAQ:WFMI).
  
  
• The Social Investment Research Analyst Network released its 2006 analysis of environmental and social reporting practices of companies in the S&P 100 Index. The study, conducted by KLD Research & Analytics, showed an increasing number of reporting companies, with greater adherence to external reporting standards.
  
  
• Financial-services organization TIAA-CREF released results of a survey on socially responsible investing, which showed, among other things, the need for more education about SRI strategies. Meanwhile, at its annual meeting, the company came under fire from activists who demanded accountability on corporate governance and SRI issues. A week later, the firm dropped Coca-Cola (NYSE:KO) from its Social Choice Account, citing that the company did not meet the SRI fund's criteria because of issues relating to marketing to children, overseas worker rights, and environmental matters.
  
  
• CERES, a coalition of environmental, investor, and advocacy groups focused on sustainability, admitted Dell (NASDAQ:DELL) to its roster, citing progress on the company's electronics recycling program and an overall commitment to social and environmental improvements.
  
  
• The United Nations Environment Programme Finance Initiative launched a report entitled "Show Me the Money," with help from 14 global investment companies, confirming the importance of SRI concerns in the international investment industry.
  
  
• The International Finance Corporation introduced a new sustainability web portal, www.ifc.org/sustainability, which explains their rationale for sustainability, describes their services, and highlights success stories.
  
  
• Wal-Mart (NYSE:WMT) announced that it is working with a non-profit environmental group to support the development of a new generation of fuel-efficient hybrid truck engines. The retailer operates one of this country's largest trucking fleets. In an unrelated move, the company also hired the public relations executive, Leslie Dach (who is largely responsible for combating critics) to an in-house position.
  
  
• McDonald's (NYSE:MCD) agreed to stop selling chicken fed from soya that was grown in newly deforested portions of the Amazon rainforest.
  
  
• BusinessEthics magazine announced that it will soon merge into The CRO, a new organization composed of corporate responsibility officers.

What others are saying

• The New York Times Magazine published an article titled "Capital Pollution Solution?" which examined the role of the Chicago Climate Exchange.
  
  
• The Wall Street Journal published an article titled "Socially Responsible Is in the Eye of the Investor," which discussed differing notions underpinning one's definition of SRI.

The Fool also published an article describing recent environmentally friendly strategies of Green Mountain Coffee Roasters, as well as those of its rival, Starbucks (NASDAQ:SBUX).

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. Companies submitting reports in July include Swiss company Holcim 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.

Starbucks, Whole Foods, and Dell are Stock Advisor picks. Wal-Mart, Coca-Cola, and Dell are Inside Value selections. Check out our entire suite of newsletters by clicking here .

Fool contributor S.J. Caplan is often social, if not always responsible. She completed the World Bank Institute's course on corporate social responsibility and owns shares of Google. The Motley Fool's disclosure policy is socially responsible.