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Socially Screened Investments

03/01/01 04:01:23 PM PST
by Hal Masover

You really can do well by doing good.

According to economist Adam Smith, through our individual self-interest we make decisions that, taken as a whole, work to benefit the common good. This is what a market-based economy is all about, he explained. Unfortunately, it sometimes works out that the common good gets left behind in the zeal for profits. And that is why we have a regulated market economy -- one that is not completely free.

While many free-market economists rail against the regulations in place, the fact is that our system still works better than those that are left almost completely uncontrolled. In those economies, we see self-interest growing into extreme greed. We see corruption run amok as business finds ways to align itself with government, to the detriment of the general population.

Numerous examples come to mind: Indonesia, Russia, Poland. One might argue these economies are not really free, but that is because the greed of a few has resulted in the detriment of many. The US model of a regulated free economy certainly seems to be the best in the world at this time.

This model is still driven by self-interest, but with an eye toward the common good. Still, for many of us, it doesn't go far enough in that direction. While we enjoy the benefits of a market-driven system, we wish that factories would pollute less, that US multinational corporations would refrain from using sweatshop labor in factories abroad, and that corporate America would stay out of the influence-buying business. The motto of "Profit at any cost" is not in harmony with the ideals of most Americans.

Despite these desires, most Americans still choose their investments based strictly on returns, with little regard for how the companies they choose to invest in conduct their affairs, except that they be profitable. Before recent revelations, how many shareholders of Walt Disney & Co. were even aware that the company used sweatshop labor in third-world countries where children made the souvenir clothing sold at Disney's theme parks? How many investors cared that Ford Motor Co. was part of a consortium of energy and auto companies funding the Global Climate Coalition (GCC), a group established to fight the Kyoto climate treaty and the scientific consensus that the Earth is gradually warming because of greenhouse gas emissions from cars, trucks, factories, and power plants? (It is noteworthy that a coalition of Ford shareholders led by Progressive Asset Management, a brokerage that specializes in socially responsible investments, was able to get Ford to agree to withdraw from the GCC and that General Motors and DaimlerChrysler have subsequently withdrawn.)

While many investors may be personally concerned about such corporate behavior, historically, they have not considered such factors when choosing their investments. Even when they do, their attitudes tend to be derived from misinformation. Recently, a relative told me she had set aside money to be invested in socially screened investments. She expected them to return less than more traditional investments but looked upon the possibility of reduced return as the cost of "doing good" -- although a glance at a comparison would have told her that the socially screened investments do just as well as traditional investments, if not better in some cases.


Consider how much more she might invest in socially screened investments if she believed they performed as well as nonscreened investments. What if there was evidence that socially responsible investments had a strong history of outperforming the market averages?

Take a look at these facts:

1  The Domini 400 Social Index (DSI) is an index of socially screened stocks designed to mimic the Standard & Poor's 500 (Figure 1). Since it was started in the early 1990s, it has consistently outperformed the S&P, whether growth or value stocks were in vogue.

FIGURE 1: THE DSI VS. THE S&P. The Domini 400 Social Index (DSI) is an index of socially screened stocks designed to mimic the Standard & Poor's 500.

2  In the Morningstar mutual fund ratings universe, approximately 10% of all funds earn their highest rating, five stars. Approximately 5% are ranked in the lowest category, one star. Of the more than 175 socially screened funds tracked by Morningstar, 22% have achieved five-star ranking, while only 2% were ranked one star.

3  The larger funds have done even better. Of the 16 social funds tracked by Morningstar that have at least $100 million in assets, 11 are ranked five stars.

Given this information, for the 1990s it is fair to say that a mutual fund investor had a better chance of making an above-average return by investing in socially screened funds than in non-socially screened funds.


Social screening takes many forms. One of the criticisms of the practice is that there are no standards for how stocks are screened -- but that is as it should be, because personal values are -- well -- personal. The Social Investment Forum's website lists the various socially screened mutual funds and what they screen for. Typically, these funds screen out the stocks of those companies that have environmental or labor problems or are involved in the sale or manufacture of tobacco, alcohol, or firearms,
as well as a much longer list that includes whether a company is involved in genetic engineering or uses animals in its product testing.

While many of these concerns may have little if any economic impact, it is clear that some of these concerns are potentially expensive for companies. For example, environmental cleanup is quite costly. Labor problems can result in costly litigation and/or strikes. Thus, social screening filters out some potentially expensive problems. Further, those corporations that avoid these problems tend to be forward-thinking, well-run companies, as opposed to being short-sighted with emphasis so focused on the immediate quarter that they lose sight of the big picture.

Casual observers tend to ask if the way that socially screened stocks outperform other forms of stocks is related
to high-technology stocks' performance. After all, the social screening process does tend to favor new-economy companies over old-economy companies. To find out, Morgan Stanley commissioned Innovest Strategic Investors to study this possibility. Innovest isolated stocks by sector and reduced the number of social considerations to one, environmental. It then graded a universe of 60 stocks. It did not screen out any stocks but weighted the amount of money to be invested in each stock based on their ranking on environmental concerns. Stocks were rated from AAA to CCC. Dell Computer, for instance, was rated AAA while Gateway was rated CCC.

When the performance of the entire universe was compared, the environmentally adjusted portfolio outperformed the nonweighted portfolio by 1.9% per year. Interestingly, the difference in performance between the AAA stocks and CCC stocks was dramatic. From June 1998 to June 1999, Aaa computer stocks outperformed CCC computer stocks by 25%, while in the telecommuni-cation sector the difference was 44%. This study would seem to eliminate the new-economy explanation for the performance of socially screened investments.

Numerous other studies confirm the same thing. Investing socially may increase performance of a portfolio and is unlikely to harm performance. Given that, why invest any other way? Socially screened investments have a double bottom-line yield. You get a financial return and encourage those businesses that exhibit corporate behavior in line with your own values, both at the same time.


Why not let your investment dollars speak in order to effect a change? After all, in the investment world, you can vote early and vote often.

Hal Masover is co-owner of Iowa Progressive Asset Management (IPAM), a brokerage specializing in socially responsible investments. IPAM offers securities through Financial West Group, member NASD, SIPC, MSRB. Masover can be reached at 800 509-9096 or by e-mail at

Domini, Amy [2001]. Socially Responsible Investing, Dearborn Trade.

Moore, Sean M. [2001]. "Invest In Your Values With Socially Responsible Funds," Working Money, Volume 2: April.

Smith, Adam [2000]. The Wealth Of Nations, Penguin Classic; Andrew Skinner, ed.

Wherry, Rob [2000]. "The Cleans & The Greens," Forbes, June 12. In the Social Investment Forum, you will find a listing of all mutual funds that identify themselves as socially responsible along with their performance history, size, contact information, and social screening criterion.

Hal Masover

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