As scandals on Wall Street continue to frighten investors, so-called socially responsible investment funds are becoming more popular, according to data provided by fund researcher Lipper of New York.

This year alone, investors have socked $650 million into the funds, which are known to screen companies based on social factors, such as racial diversity, environmental impact and accountability to investors. By comparison, the products suffered outflows of $5 million during all of 2001, Lipper said.

The Social Investment Forum of Washington, a not-for-profit group dedicated to educating the public about social investing, said that assets in socially responsible funds, also known as SRI products, increased 3% between January and June of this year. Assets in U.S. diversified funds, meanwhile, withered 9.5%.

SRI funds have remained a tiny niche in the mutual fund business; Lipper says the products make up only 0.4% of all mutual fund assets. However, the sector's rise in assets is a stark contrast to the entire industry, which suffered net outflows of $45.8 billion in June, the worst month ever for net flows.

Executives at SRI firms said investors are responding to a spate of scandals involving the likes of WorldCom and Enron that has plagued Wall Street since late last year. For decades, SRI companies have been saying that corporations should be more accountable to investors. Now that those messages have become front-page news, executives say, investors are paying closer attention.

In June alone, SRI funds saw net inflows of $47 million, compared to $13 billion in net redemptions in U.S. diversified funds.

"SRI funds are starting to see a spike," said Anita Green, the director of research for PAX World Funds, an SRI firm based in Portsmouth, N.H. "The SRI industry sprang up from individual investors. They are looking for someone to take the lead on this."

The products have been helped as well by a cultural shift in the U.S. after the terrorist attacks of Sept. 11. In the shock of the attack's aftermath, more investors became interested in investing their conscience, said Val Dingle, a VP of marketing at Citizens Funds in Portsmouth, N.H.

"After that horrific event, people started realizing there's more to life than just money," she said. "Going forward there will be a larger group who value not just wealth but also the quality of life."

Executives concede that SRI cannot totally eliminate the possibility of investing in a company that engages in fraud, but they say that by pressuring firms to more transparently disclose their financial conditions, the prospect of investing in a fraudulent company is diminished.

Still, SRI companies, which serve a role of both money manager and activist, say the recent scandals represent an opportunity to finally realize the corporate reforms for which they have been lobbying for years.

"There's a lot of excitement right now," Green said. "Yes, we have always been advocating for better transparency and better exposure within the corporations. Yes, we have jumped up on our soapbox a little bit. But we've taken the message to the SEC and the NYSE. We're looking at the legislators and the regulators. We're taking our message there, and we're asking for reform."

Indeed, as scandals and reform efforts have unfolded, the firms have been hammering at lawmakers and regulating bodies. In many cases, the companies have issued statements of support or opposition to legislation taking shape in the wake of the scandals.

For example, Citizens Funds has vocally criticized the Bush administration for not pushing for more radical reforms that would limit conflicts of interest among consultants that audit companies.

Pax World, meanwhile, released a statement last week applauding a New York Stock Exchange committee for its proposed corporate governance reforms. But it also said the reforms didn't go far enough. "Pax World is calling on the NYSE to require the disclosure of social and environmental risk, the expensing of options and election of auditors at annual stockholder meetings," the company said in the statement.

And last month, TIAA-CREF of New York, which offers the Social Choice Equity Fund, released several statements lauding an SEC decision to require approval from existing shareholders for corporate-issued stock option plans.

To be sure, news of these scandals will eventually disappear from the front pages of The New York Times and The Wall Street Journal. What happens then? Will investors lose interest in SRI products?

"Eventually [the scandals] won't be on the front page, but we're hoping to get these reforms in place, and when it does die down, you'll be looking at this as a real sea change," Green said.

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