Does Social Investing Generate Higher Returns?

Editor’s note: This is based on the authors’ article, “The Wages of Social Responsibility,” copyright 2009, CFA Institute. Reproduced and republished from the Financial Analysts Journal, Volume 65, Number 4, with permission from the CFA Institute. All rights reserved.

Socially responsible investments have attracted much money, many investors, and many studies. We have studies of socially responsible mutual funds, socially responsible indexes, “sin” stocks, stocks with good and bad environmental records, and stocks with good and bad employee relations. But some parts of our knowledge are inconsistent with other parts and some gaps in our knowledge remain.

The Social Investment Forum, a national nonprofit organization promoting the concept, practice, and growth of socially responsible investing, describes socially responsible investing as “an investment process that considers the social and environmental consequences of investments, both positive and negative, within the context of rigorous financial analysis.”

Screening is the most prevalent form of socially responsible investing, followed by shareholder advocacy and community investing. Negative screening excludes or reduces the portfolio weights of companies with weak environmental, social, or governance records, and positive screening includes or increases the portfolio weights of companies with strong records.

Negative screens that exclude tobacco companies have been the most popular screens among socially responsible mutual funds, followed by screens that exclude companies associated with alcohol, gambling, and weapons. Negative and positive screens related to community relations come next in popularity, followed by screens related to the environment, labor relations, products and services, and equal employment.

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