Socially responsible investing is no longer solely the province of college professors who want to save the world. It's evolving and going mainstream in a big way. And a growing chorus of non-idealistic institutional investors has decided that it's not just noble, it's good business. Advisors need to know about the trends that have intertwined under the broad umbrella of SRI investing in order to help clients interested in going down this path.

Hedy Ratner, founder and co-president of the Women's Business Development Center, a non-profit group in Chicago dedicated to empowering women and minorities, wanted her personal investments to match her organization's values. "I believe that to put your money where your mouth is, you invest your money according to the principles and values that dictate your behavior," she says.

So when it came time to create a pension for her employees, as well as her own personal portfolio, she wanted to invest in companies that have a good track record in workplace diversity and labor relations. She also writes letters to their managements to encourage progress. Her list of investment guidelines for her advisor, Marc J. Lane Wealth Group, includes companies with a diverse board of directors, including women and minorities, employment of people with disabilities, good employee benefits including child and elder care, plus non-discriminatory policies for gays and lesbians. "Our goal is not just to have a safe and secure pension... this can also be a way to significantly change business and social policies."

Welcome to the new generation of socially responsible investors. In the past, they may have focused on shunning gun makers and tobacco companies, or maybe they invested in windmill farms. But today, their strategy is becoming much broader. It pushes the idea of sustainability, not just in the narrow environmental sense, but also in the sense of a company's long term potential to compete and succeed.

Unlike the old school of socially responsible investing (SRI), the new wave is being pushed by some decidedly non-idealistic investors who are responding to a slew of research and a growing conviction that SRI investing is simply good business.

Paul Hilton, director of Advanced Equities Research at Calvert Investments, sums up the evolving strategy: "In the old days it was all about exclusions and our job as analysts was to find the baddies. Now we're finding which companies are better positioned, which meet positive criteria, which have better risk profiles. People realize that investing in companies with better performance in issues of environmental, social and corporate governance (ESG) will help them identify companies with better financial performance, either because of less risk, or because they're better managed."

Others in this industry take it a step further, arguing that a company's ESG record is just as material as its financials. Further, they say that examining both is nothing less than an investment manager's fiduciary duty to his clients.

To illustrate the size and growth of this no-longer small niche, consider these numbers. SRI investments in the U.S. alone account for $2.7 trillion (about the size of the United Kingdom's entire economy and an increase of 324% from $639 billion in 1995.) In that same period, all assets under professional management climbed 259% to $25.1 trillion from $7 trillion. Another 2.7 trillion euros is invested overseas.

The lion's share of those assets are in institutional accounts, but the number of SRI retail mutual funds has grown as well, increasing 81% in the last decade to 152, with assets climbing by 73% to $29 billion, according to Morningstar. By comparison, in that time the total number of mutual funds has climbed 31%, and their assets have grown 47% to $6.07 trillion.

THEN AND NOW

Despite the impressive growth, the knock against SRI has long been that investors had to settle for lagging returns in exchange for assuaging their consciences. So-called "sin stocks," including purveyors of tobacco, alcohol, gambling and defense contractors, were banned from portfolios on moral or ethical grounds. And shutting out entire industries hurts performance, the critics said.

But the idea that SRI means only screening out offensive companies is changing. Instead, a more inclusive SRI approach is rapidly taking its place alongside the exclusionary style of the past, says Mary Jane McQuillen, a director and portfolio manager in the Socially Aware program at ClearBridge, a unit of Legg Mason with $45 billion in assets under management.

Formerly Citigroup's asset management unit, ClearBridge has "sustainability researchers" with expertise in ESG issues working on its fundamental research team. Every stock is reviewed for its investment thesis and its sustainability profile. That means the sustainability of not only earnings growth, but also the environment, workplace and corporate governance, McQuillen says.