Expanding Dr. Yunus' Sphere of Influence

Principles and Principal

Socially responsible investing is no longer about just what you can’t buy. And that makes it a lot easier to make money.

Socially responsible investing is growing up.

For many years, individuals who wanted to invest with their consciences had limited options, and many resigned themselves to making smaller returns in exchange for putting their money where their values were.

But in recent years, building a well-balanced, profitable portfolio using a socially responsible investing, or SRI, strategy has gotten easier. Greater awareness about the environment and growing demand for these kinds of investments has fueled the growth of high-quality options, meaning it is now possible to build SRI portfolios with assets in a variety of classes, including large-cap and small-cap mutual funds, bonds, exchange-traded funds and individual shares.

“Gradually, the myths are starting to die out,” says Scott J. Budde, managing director at TIAA-CREF, a financial-services firm known for serving educational and other nonprofit employees. “The fact is you can get competitive returns with SRI.”

According to a report released in March by the Social Investment Forum, the national membership association for the social investment industry, SRI assets increased more than 18% to $2.71 trillion from 2005 to 2007, compared with a less than 3% rise for the broader universe of professionally managed assets. About 11% of assets under professional management in the U.S. “are now involved in SRI,” the group says.

Bruce M. Kahn, second vice president of wealth management at Citigroup Inc.’s Smith Barney unit in New York, says that while socially responsible investing traditionally was based on negative criteria — screening out investments connected to tobacco or firearms, for example — the latest trend is to screen in companies with strong environmental and management records.

The theory behind this “sustainable” investing approach is that those are the types of companies that will be more profitable in the long term, he says.

Competitive Returns

There are now 173 different socially and environmentally screened mutual funds in 358 different share classes, the Social Investment Forum says. And a study last year by consulting and investment-services firm Mercer, a subsidiary of Marsh & McLennan Cos., and the United Nations Environment Programme Finance Initiative found a growing body of research showing that SRI investments perform as well as or better than non-SRI investments over time.

That may be surprising to some individuals, say investment professionals such as Cheryl Smith, chairman of the board of the Social Investment Forum and executive vice president of Trillium Asset Management Corp. in Boston. Many investors make the mistake of judging SRI returns by looking at only one fund, she says, when they really should be looking at the profits on a well-balanced portfolio over time. Just as an investor would build a traditional portfolio with mutual funds, ETFs, bonds and stocks, the same applies to socially responsible investing.

“You can’t just take one fund,” says Ms. Smith.

Three Approaches

Paul A. Hilton, director of advanced equities research at Calvert Group Ltd., a Bethesda, Md., investment-management firm and the nation’s largest provider of SRI funds, says there are three basic approaches to socially responsible investing.

One of the oldest and most common is the use of positive or negative screens to include or exclude securities in a portfolio, depending on social or environmental criteria such as strong records on community involvement or safe products, he says.

A second part of socially responsible investing involves shareholder activism, whereby investors use their ownership to influence a company’s behavior. The third is community investing, in which individuals invest in certificates of deposit and other vehicles that are insured by the Federal Deposit Insurance Corp. but then lent to individuals in low-income communities.

Before selecting SRI investments “consider what is important to you from a values perspective,” says Trillium’s Ms. Smith. “What is it you do in life that you want reflected in your investments?”

People then need to determine their investment goals and risk tolerance, she says. Are they saving for a house, which is more short-term, or retirement, which could be decades away?

‘Green Washing’

Jon Ellenbogen, a financial adviser with Wachovia Securities in Washington who focuses almost exclusively on socially responsible investing, says getting the right allocation of investments is critical.

He also warns individuals about “green washing” — when a company appears to be more environmentally friendly than it really is — and to check fees on SRI products.

Mary Jane McQuillen, director of socially aware investment at ClearBridge Advisors, a unit of Legg Mason Inc., agrees that investors can’t just be driven by their values. “You or your adviser have to look at the track record, management team and investment approach” of any potential investment, she says.

Casey Neistat decided two years ago to move his assets into socially responsible investments. “Where the money is, is power,” says the 26-year-old New York filmmaker.

Mr. Neistat says he favors funds that invest in companies with good environmental records. He avoids funds with investments in China because of that nation’s ties to the government in Sudan, whose Darfur region has been the site of human-rights abuses.

Still, Mr. Neistat says he can’t afford to not make a profit. “I don’t see this as charity,” he says. “My gains have not dipped.”

Write to Jilian Mincer at jilian.mincer@dowjones.com