Environmental and human right issues have sparked a renewed interest in socially responsible investing (SRI), and, as a result, assets in these funds will reach $2.5 trillion this year, up 10% from $2.3 trillion in 2005. Over the last decade, assets in SRI funds have grown 12.3% on average per year.
This is according to a recent report on socially responsible investing by Boston-based research firm Celent.
"We are seeing more interest in the area than ever before," said Paul Hilton, director of institutional and socially responsible investing marketing at Calvert Funds of Bethesda, Md. The general public is more conscientious about issues such as genocide in the Darfur region of Sudan and climate changes, he said.
People are increasingly aware and concerned about global climate issues, and there has been an increased interest in companies with clean technology, said Steven Fahrer, financial consultant and principal of the New York office of Progressive Asset Management, adding that the interest will most likely continue.
"It is easier to participate in SRI today than it was five years ago, and more advisers are selling SRI funds," he added.
The three main areas of SRI are: screening, shareholder advocacy and community investing. The most common is screening, which involves excluding or including companies in a portfolio based on social or environmental criteria. Sixty-eight percent of SRI funds employed screening in 2005, the report states.
Twenty-five percent of SRI funds undertook shareholder advocacy efforts in 2005, calling on firms to implement stronger socially responsible policies. Around 350 socially responsible shareholder resolutions are proposed each year, and in 2005, 42% of such proposed resolutions were based on political contributions, 35% on climate change, 32% on equal employment opportunities and 25% on global labor standards.
Shareholder advocacy is the most compelling SRI criteria to clients, especially when success stories are relayed to them, Hilton said. "It resonates in a way nothing else does," he said.
Calvert examines companies it feels will be positioned well for long-term growth and are viable, Hilton said. In the future, companies will need to assess and manage their risk and come up with strategies to deal with issues such as environmental changes, as they continue to become more important to investors, he added.
Community investing strategies only embodied 1% of SRI in 2005. The strategy, which involves contributing a small percentage of a fund's money to underdeveloped communities, is expected to develop and attract investors in the coming year.
Community investing is expected to reach $35 billion in 2011, Celent states. The area is gaining in popularity, as it helps disadvantaged communities and has a real grassroots impact, Hilton commented.
Investors are willing to accept lower returns because they feel good about their investments, he noted. Investors know that their money is being leveraged to help start new businesses or build houses, Hilton said.
More institutional money is expected to pour into SRI funds, and "large amounts of institutional money will make a big difference in this area," he said.
There is also a debate in the industry regarding the amount of money that community investing funds give back to the community. Typically, it's only 1%, and some believe it should be increased to 3%.
An area of community investing that will see growth is microfinance investing, or investing in small banks, as it is a very sophisticated activity that leverages the tools of Wall Street, said Jeff MacDonagh, SRI portfolio manager at Domini Social Investments of New York.
The report also highlights differences between U.S. and European SRI principles. "While the areas have the same roots, their strategies differ slightly," said Perrine Forina, an analyst and author of the report.
"One crucial difference between the two sides of the Atlantic is government involvement. The U.S. government does not support corporate social responsibility (CSR), while European governmental organizations promote CSR at both the European Union level and national levels," according to the report.
SRI in the U.S. has grown because retail investors want to align their values along with their financial investments, Fahrer said. In Europe, where there are more institutional investors, SRI has grown principally because the government supports and implements guidelines for SRI in pensions, he noted.
Another difference is that negative screenings have been more common in the U.S. than in Europe. Tobacco, alcohol, gambling and weapons are commonly used screens. In Europe, "investment fund managers tend to avoid moralist positions and to apply pragmatic criteria to their investments, emphasizing the equal importance of financial, social and environmental aspects," the report states.
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