Investing With Your Heart -- And Head

12/29/2014


If you form opinions based on the financial pages' biggest headlines, or based on the portrayal of investors in the movies or on TV, you may believe that investing and ethics don't mix.

However, more investors than ever are putting their money where their morals are. According to the Forum for Sustainable and Responsible Investment, at the start of this year $6.57 trillion was invested in the U.S. using some form of socially responsible investment (SRI), up 76% from two years earlier. That $6.57 trillion equates to one out of every six dollars managed by professionals in this country.


WHAT is SRI?

There is no universal definition of socially responsible investing (SRI), and investors' motivations can extend far beyond social concerns.

Common areas of focus include:

Green. This strategy focuses on companies that use or develop clean technology or maintain environmentally sensitive business practices.

Faith-based. Such portfolios tend to exclude industries connected with vices such as alcohol, tobacco, or gambling.

Socially conscious/corporate governance. This strategy avoids companies taking actions investors may consider unsavory or unethical, such as exploiting poor workers, doing business with repressive countries, or paying executives too much money.

With more than $6 trillion invested in socially responsible strategies and more than 1,100 institutions managing that money, many investors can find strategies that fit their moral requirements. An increasing number of money managers build environmental, social, and governance risks into their valuation models, using SRI as part of the investment process rather than the driving force.

If you like the idea of SRI but would rather not hire someone, you can manage your own portfolio in a socially responsible fashion, starting with the stocks in the table at below.


SRI matters, and recent history suggests it will only become more important in the U.S., in part because it seems to work.

STOCKS WITH HEART
Quadrix scores are percentile ranks, with 100 the best.
Company (Price; Ticker)
Quadrix
Overall
Score
Industry
Ameriprise ($137; AMP)
93
Capital mkts.
Cognizant ($54; CTSH)
96
IT services
EMC ($31; EMC)
84
Tech hardwr.
Foot Locker ($55; FL)
98
Spec. retail
Gilead ($89; GILD)
99
Biotech
Google ($539; GOOGL)
62
Internet soft.
Jones Lang ($151; JLL)
96
Real estate
Lam Res. ($82; LRCX)
97
Semicond.
Manpower ($69; MAN)
80
Prof. svcs.
Norfolk ($111; NSC)
70
Railroads
Skyworks ($75; SWKS)
96
Semicond.
SW Airlines ($41; LUV)
98
Airlines
Travelers ($106; TRV)
98
Insurance
U.S. Bancorp ($46; USB)
67
Banks
Utd. Rentals ($104; URI)
96
Trading cos.

A 2011 report by GMI Ratings found that SRI portfolios deliver similar returns to traditional portfolios and need not sacrifice diversification. GMI considered a collection of academic literature, including a paper that summarized 51 studies. A 2009 report by Mercer looked at 36 studies, of which 20 showed a positive relationship between ESG (environment, social, and governance) factors and performance, while only three showed a negative relationship.

SRI comes in different flavors (see the story at right for more). While you could probably find a money manager who aligns with your views, the Forecasts can help you build a socially responsible portfolio on your own; many of the stocks on our buy lists satisfy SRI criteria.

The nearby table lists 15 recommended stocks that qualify for the MSCI KLD 400 Social Index, a popular SRI benchmark that contains 400 U.S. companies with high ESG ratings. The KLD 400 Index excludes a variety of industries, including alcohol, tobacco, firearms, military weapons, gambling, and nuclear power.

There are some discrepancies between the sector exposure of KLD 400 and the S&P 500, most notably the SRI index's overweight of technology and underweight of energy relative to the large-cap benchmark. But despite its investment restrictions, the KLD 400 is well-diversified.


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