The Dow Jones Industrial Average has set dizzying record highs lately, but some might be surprised to learn that another Dow Jones index, which tracks socially conscious companies, has also shown excellent growth.
The Dow Jones Sustainability World Index, which tracks stock prices of the world's most environmentally and socially conscious large companies, rose 14 percent in the first three quarters of 2006, close to this year's 15 percent growth in the traditional Dow index.
These robust results suggest investing with one's conscience is good business.
It is also an increasingly popular investment strategy, according to Steven Zahn-Cantelmo, financial consultant with A.G. Edwards & Sons in Madison. He said about 10 percent of investments in the United States are now based on conscience, rather than simple calculations of profit. This investment practice—known as socially responsible investing—has boomed in recent years.
Tom Eggert, senior lecturer at the UW-Madison School of Business, sees SRI as a virtuous cycle. As SRI becomes more profitable, Eggert said, demand increases for SRI stocks, thus increasing their value.
Although SRI is frequently associated with environmental sustainability and political causes, Eggert said SRI can mean different things to different people.
Despite the growing popularity of SRI, however, the UW System—which controls about $400 million in bequests and endowments—doesn't emphasize social responsibility in most of its investment decisions, according to Douglas Hoerr, Director of Trust Funds for the UW System.
""Our desire is to make a sound investment return at a reasonable level of risk,"" Hoerr said. ""For an investment manager, I don't think [SRI] is really at the forefront.""
Although SRI has been widely associated with recent concern about sweat shops, it is not a new thing, according to Zahn-Cantelmo. SRI was practiced by Quakers and Methodists, who withheld money from companies involved in slavery even before the United States was founded.
In the early 20th century, investors who didn't want to invest in gambling, tobacco or alcohol—the so-called ""sin stocks""—represented another wave of SRI, Zahn-Cantelmo said.
The UW System has a few investment policies that embody the spirit of SRI, but some of them are not very effective, according to Hoerr. For example, a policy from 1971 encourages the System's portfolio companies to be environmentally conscious. However, according to Hoerr, it's really never been a policy with a lot of teeth to it.
When ""egregious things"" happen that are beyond shareholder influence, however, the UW System is more active, according to Hoerr.
For example, the Board of Regents instituted a policy in 1978 that prohibited racial and other forms of discrimination in its investments and compelled the System to divest its South African holdings.
In August, the UW System passed a resolution to divest holdings in companies that might contribute to genocide in Sudan.
With SRI becoming more influential, Eggert sees it as ""the evolution of investment theory."" He said investors are not just trying to maximize return on their investment, but are ""[sending] a signal to certain companies that they appreciate and approve of what they're doing.""
Some investors choose to practice SRI by investing in individual companies directly. However, others do so through mutual funds.
Pax World and Dreyfus Third Century, founded in the early 1970's, were the first funds established to practice SRI, according to Zahn-Cantelmo. He said such funds design their portfolios to fit specific emphases—for example, environmental sustainability or fair labor practices. The funds then screen—either positively or negatively—for non-financial factors that fit their goals.
""[A fund might say] we're not going to invest in alcohol. We're not going to invest in tobacco. We're not going to invest in companies that, for example, pollute or produce weapons,"" Zahn-Cantelmo said.
Conversely, a fund might do a positive screen to find ""the best of breed""—companies that meet certain positive criteria.
Zahn-Cantelmo thinks most funds are reliable in screening their portfolio companies.
""The level of scrutiny that [mutual funds] have been placed under by the activist community is pretty high,"" he said. ""It's in their interests both financially and philosophically to go out and follow the charter that they were started with.""
Although 40 percent of the UW System's holdings are in mutual funds, Hoerr said the System doesn't make a special attempt to invest in SRI focused funds.
Despite the UW System's relative de-emphasis of SRI, the Board of Regents established a policy in 1997 to hold an annual public forum to review investment decisions. SRI issues frequently arise at the meetings.
At this year's forum in November, Palestinian representatives tried to persuade the Board to divest holdings in companies that supply the Israeli Defense Forces. For now, the Board has taken no action. According to Hoerr, ""It's not very clear cut that any kind of divestment would be effective.""
