The concept of socially responsible investing, also called SRI, has been part of the investinglexicon for decades, spurred on by religious values (no alcohol, tobacco or gambling) as well as social movements like pacifism, civil and human rights, apartheid protests and concerns about health and the environment. What could be bad about that?

Yet, acceptance by financial advisors has been tepid. For years, the myth persisted that SRI funds underperform their mainstream counterparts while requiring additional research, making clients who request such investments a burden to service. Advisors tend to be ill-informed about SRI and fill such client requests with reluctance.

Then came the boomers, who subscribe to the philosophy that anything they buy-including investments—can and should be an expression of their identity. SRI would express their personal belifs while it built their wealth. Today, SRI mutual funds and ETFs are proliferating, even in the wake of a market downturn that caused them to lose even more than the market overall. In 2008, for instance, large-cap domestic SRI funds lost 37.90% on average, compared with the S&P 500's 37.00% drop.

What's more, SRI has evolved, taking on a new name as well. Now you'll hear about ESG—environmental, social and governance—as often as SRI. It's tempting. What's not to like about governance? Terms like "sustainability" and "ESG" enter our lexicon and urge us to reeducate ourselves about the efficacy and desirability of SRI investing.

The question facing advisors: Is now the time for you to join 'em because you can't beat 'em? To answer that question, we first have to explore recent advances in SRI investing.

DEFINITIONS

In general, "sustainability" means the tendency to endure without giving way or yielding. In an SRI context, sustainability means, very simply, the capacity of a natural resource to remain in existence. Fossil fuels cannot be sustained indefinitely, but solar power can. The ability for a resource to be recycled contributes to its sustainability.

ESG investments are made with the goal of positively impacting the environment, the social order and the company's own governance issues, such as executive compensation, board structures and actions that affect the interests of shareholders. By seeking out and investing in firms that have high standards in these areas, investors think they'll make more money over the long run. Ideally, these firms should be the fittest to survive and even thrive-they are adaptable and, by learning to minimize their environmental footprint, may have reduced their potential liability compared with traditional firms.

Are SRI and ESG the same thing? Daniel Nielsen, director of SRI at Christian Brothers Investment Services (CBIS), a nationwide firm managing $3 billion for Catholic institutions, says, "SRI and ESG are complementary. SRI is investing with one's values, screening out or not investing in certain companies or industries, or only investing in particular companies [because they exhibit desirable traits]. ESG is looking at the environmental, social and governance factors. It's simply an additional lens through which companies can be evaluated." Nielsen relies on sub-advisors for CBIS' SRI holdings-primarily Dodge & Cox, Wellington and Causeway-all of which have multiple SRI offerings.

Traditionally, SRI funds have exercised their responsibility through exclusion, avoiding any holdings in companies that act in a manner contrary to their investors' values. They typically screen out alcohol, tobacco, gaming firms, polluters and sometimes weapons manufacturers. Some religious funds screen out producers of birth control and abortion drugs; they may shy away from companies that offer family benefits to same-sex partners. Others shun companies that have been caught violating employees' rights.

"In the earliest stages, SRI meant focusing on excluding certain companies from portfolios because of specific business involvements," explains Paul Hilton, director of advanced equities research at Calvert Investments. "Now our mission is broader as we focus on the area of sustainability with an eye toward companies' long-term potential. We want companies that are demonstrating strong overall environmental, social and governance performance. We believe that these companies are better run, have less risk in their business and can deliver better financial performance over the long run. Ultimately, the focus on sustainability means we as investors are looking at a broader universe of potential investments in well-run companies, and that's going to be a positive for investors."

INSTITUTIONAL FOCUS

Peter Kinder, president of KLD Research & Analytics in Boston, offers another viewpoint. His firm's mission is to provide institutional investors with the research, benchmarks, performance analytics and consulting necessary to facilitate SRI. One of KLD's claims to fame is its creation of the Domini 400 Social Index in 1990.

"ESG came largely from the institutional side, which has been uncomfortable with terms like 'socially' and 'responsible,'" Kinder explains. "They wanted an acronym that stripped away the moral aspects of what we do and made it a function of data and information. Institutions are largely phobic about values, and there is a belief that you might violate your fiduciary duties if you applied moral as opposed to investment values to the process."

The notion that the ESG perspective is more of an institutional one is borne out by the fact that SRI specialty advisors we spoke with were less aware of ESG investing, favoring a straight SRI approach in many cases. Marjorie Bennett, of northern California-based Aegis Capital Management, has been specializing in SRI investing for 12 years now, primarily because her client base in Berkeley and Oakland demands it. "These clients gravitate in my direction," she says. "I discuss SRI investing with them, and they decide if they want to pursue it and how much they want SRI incorporated into their investment portfolios."

DOING THE RESEARCH

Discussions of SRI with clients often lead to the need for more and better research. Bennett says, "I might ask clients, 'What's important to you?' They'll say, 'the companies in which I invest should have a low carbon footprint.' I say, 'Tell me what that means,' and clients say, 'I don't want to invest in dirty companies.' This presents the need for new data gathering and reporting to identify companies in carbon-light industries that are also top performers."