The Evolution of Socially Responsible Investing

Today, socially responsible investing still only represents a small portion of all investments. However, the numbers are continuing to grow. In 2005, an SRI Trends Report from stated that $2.29 trillion (up from $2.16 trillion in 2003) in total assets were under management using one or more of the three socially responsible investing strategies – namely screening, community investing, or shareholder advocacy.

The Basics: What is Socially Responsible Investing?

Socially Responsible Investing (SRI) refers to the type of investment practice whereby investors attempt to align social and environmental concerns with their financial goals. Investors achieve these goals by utilizing three main investing strategies - namely through investment screening, community investment, and shareholder advocacy.


“Screening” refers to the positive and/or negative screening of potential investments. Negative screening, itself, is an investment strategy whereby companies that conduct business in an undesirable environmental and social manner are avoided as potential investments. Some examples of companies that are often avoided within an SRI portfolio include companies with poor environmental track records or companies that profit from the sale of military weapons, tobacco and/or alcohol.

Conversely, with “positive screening,” investors actively seek out companies that are in line with their specific environmental and/or social principles. Some of the issues that companies may be positively screened for include climate change, energy use, recycling, hazardous waste disposal, environmental management systems, and other related topics of interest.

“In the 2003-2005 period, environmental issues were the 6th most popular screen used by mutual funds, based on mutual fund assets,” comments Fran Teplitz, the Director of SRI at Co-op America. “For institutional investors during this period, the environment was the 4th most popular screen, based on institutional investor assets”.

Community Investing

Another increasing popular form of SRI involves investing in communities. Essentially, this investing method directs money in the form of credit and capital to communities, small businesses and individuals who would not otherwise qualify for loans from the more traditional lending institutions.

More specifically, money is directed to four main areas ”“ namely small business, affordable housing, micro-enterprise, and community development. Borrowers also usually receive business and/or to technical training to ensure their success.

Although the repayment rate is 99 percent, this type of investment does boast of loan loss reserves and shared loss arrangements for investors. Thus, this type of SRI has the greatest positive social impact in that disadvantaged communities are helped directly.

However, community investment can also help the environment directly.

“For example, Eco-Deposits at ShoreBank Pacific is a community-investing bank with a focus on supporting environmentally sound projects,” informs Teplitz.

Lastly, shareholder activism is another example of an effective SRI strategy. In this approach, shareholders who are unhappy with the way their particular company conducts business, can put pressure on the organization to change its unwanted practices.

One of the methods in which shareholders can make their opinions known is by taking part in company proxy votes. Often shareholders do not take part in these types of votes as they do not believe that they are well versed on the issues. Consequently, the unmarked votes are often voted in alignment with the management’s point of view - which in turn may be against the shareholders’ personal values.

Next, if a company is behaving in a manner in which shareholders disagree, shareholders should engage in active dialogue with the management of the company. If the dialogue does not result in a fruitful resolution, shareholders can then propose a resolution to be voted on at the next annual shareholder meeting.

“Shareholder action can make companies more responsive to changing external conditions such as the environment, adding to long-term profitability and sustainability,” says Andrika Boshyk, the Assistant Director of the Social Investment Organization. “When investors align their interests with other major stakeholders, such as environmental advocates, a powerful coalition is formed that can serve to reform corporations.”

Lastly, shareholders can engage in divestment ”“ a process whereby shareholders sell off their stock to rid themselves of association with that particular company. However, this process is not always the most effective method as individuals who are not concerned about environmental or related issues will hold on to their shares in the corporation.

What are the Origins of Socially Responsible Investing?

Although not formally given the name, “socially responsible investing,” this type of investment practice has been around for some time. For instance, history tells us that the Islamic, Jewish, and Christian religions have embraced economic actions that coincided directly with their beliefs. In the 1500s, groups such as the Quakers in the US colonies engaged in an early form of social investing ”“ again, by using their core principles as an economic guide.

Most people attribute the rise of today’s SRI to the 1920s time period. During this decade, some churches encouraged individuals not to invest in companies that made money through gambling, tobacco, and alcohol ”“ and voila! The Pioneer Fund was born in 1928.

Fast forward a few decades to the 1960s, and it was the Vietnam War, the civil rights movement, and environmental issues that caused individuals to think about their investment practices in a thoughtful manner.

However, one of the more popular success stories with respect to SRI in the last 20 years was the end of Apartheid in South Africa. This feat was brought about in large part because investors chose not to invest in South Africa under the current unacceptable social conditions.

“For many years, environmental issues have been a concern of investors as have other social issues such as tobacco, gambling, alcohol, labor rights, and human rights. The catastrophes at Chernobyl and Bhopal, and certainly the Exxon Valdez oil spill, galvanized many investors to call on corporations to improve their environmental conduct,” concurs Teplitz.

Changes throughout SRI’s History

Socially responsible investing began as mainly a ”˜negative screening’ activity whereby investors would avoid companies that were actively involved with activities the investors considered to be undesirable. However, nowadays, there is more of a shift towards ”˜positive screening’.

“SRI investors generally stayed clear of companies that made more than five percent of revenue from tobacco, alcohol, and nuclear or military weapons. The mainstream investment community is (now) examining the opportunities associated with sustainability promoting companies, technologies and investment funds. This ranges from clean-tech, to renewables and ecosystem services,” Boshyk told

Other changes in socially responsible investing can be attributed to the general growth of the industry. For instance, there now are a variety of SRI investments that are being offered and the number of social and environmental issues that are being addressed have increased as well, Teblitz points out.

SRI Today

Today, socially responsible investing still only represents a small portion of all investments. However, the numbers are continuing to grow. In 2005, an SRI Trends Report from stated that $2.29 trillion (up from $2.16 trillion in 2003) in total assets were under management using one or more of the three socially responsible investing strategies ”“ namely screening, community investing, or shareholder advocacy.

In fact, “one out of every ten dollars under professional management in the US being involved in some form of SRI,” remarks Teblitz.

Furthermore, in the same year, there was an 18.5 increase in the number of socially screened mutual funds and other pooled products over 2003. Additionally, there was a 16 percent increase in the number of shareholder resolutions that dealt with the topics of social and environmental issues.

Perhaps most impressive though, is the fact that community investing increased to 19.6 billion dollars in 2005 ”“ up from $14 billion dollars only two years earlier ”“ a 40% increase!

Why is Socially Responsible Investing Becoming More Popular?

There are many people nationally and internationally today who wish to “make the world a better place”.

“Over the past three decades, socially responsible investors have forced companies to reduce pollution, provide for safer workplaces, observe international human rights standards, and become more accountable to society,” observes Boshyk.

Since it is a proven fact that socially responsible investing does cause companies to perform in a more environmentally and socially desirable manner, it is no surprise that individuals are seeking out this type of investment practice.

However, there are some people in society who believe that individuals must sacrifice financial return if they wish to remain true to their personal beliefs. However, this statement is simply not the case in today’s financial environment.

“Academic studies in the US and abroad have concluded that there is no statistically significant difference in terms of financial performance between SRI and conventional investing. Many investors, both individual and institutional, seek to align their values or their mission with their investment holdings,” Teblitz points out.

Lastly, companies and individuals are recognizing that companies that employ sustainable practices are more viable for the long term than companies with less than stellar environmental track records. As a result, individuals and companies are investing in these types of companies as not only are they environmentally progressive, but the companies are financially progressive as well.

“Environmental and values-based investment is not only profitable, but also is filled with opportunity, which makes it an attractive investment,” concurs Boshyk.

SRI in the Future?

With respect to the future of SRI, this type of investment practice is looking to become a much more mainstream financial offering.

“The Social Investment Community believes that the integration of environmental considerations into financial stock analysis will become a standard norm in financial analysis, seeing as it presents financial opportunity and ROI (return on investment) over the long-term,” notes Boshyk. “SRI will be recognized simply as another 'layer' to financial analysis and will help investors make informed, intelligent as well as ethical investment decisions.”

Consumers can already see the beginnings of this type of mainstream investment behavior today as the more traditional investment companies are now beginning to offer socially responsible investment options in addition to their current financial management strategies.

Furthermore, individuals can expect to see more attention being paid to environmental issues as shareholder advocacy increases in popularity.

“SRI's focus on environmental issues is likely to grow as pressures on the environment grow, with a continued strong and growing emphasis by investors on the need for corporations to address climate risk,” explains Teblitz.

Overall then, as consumers realize that companies and organizations with good management and a sustainable vision are also highly attractive investment opportunities, the socially responsible investment sector will only continue to blossom in future years.

Larisa Redins is a freelance writer based in Toronto, Ontario, Canada.