Social Screening: A Cornerstone of Socially Responsive Investing

By Stefanie Haug and Jane Chase from SRI World Group, Inc.

When you want to put your money where your values are, choose the proper screen. Here's how.

How do you find the investment vehicle that matches your social values? It's easy to become confused by all the choices out there. Much has been written about how to select the best financial vehicle and assess its appropriateness to your goals. When you evaluate an investment vehicle's social dimension, one good place to start is the social screening process. Social screening is, after all, what puts the "social" in socially responsive investing.

First, a word about terms. While the common phrase is "socially responsible investing," we prefer "socially responsive investing." That's because we do not see ourselves at Walden Asset Management as in the business of determining which company is responsible or not. Instead, we research and identify companies that are responsive to social issues that are of concern to our clients.

Socially responsive investment (SRI) money managers will concur that financial considerations are paramount in managing any portfolio. The bottom line is that SRI vehicles attract investors because they can bring financial rewards. This does not imply that SRI is a "guaranteed" way of becoming a millionaire à la the TV game show. However, studies to date have shown that socially screened portfolios do not negatively affect financial returns. (See "Socially Responsible Investing" in Lohas Journal, March/April 2000, for an introduction to SRI.)

A true win-win opportunity, SRI provides investors with more than just comprehensive management and financial returns. It's a way for investors to integrate their money with their values. Socially engaged investors want their investment managers to constantly monitor portfolio companies' social conduct. Thus, social screening, like financial screening, is an integral part of any SRI investment decision-making process.

However, applying screens is, by definition, a subjective process. Most social screening decisions involve weighing incomplete, complex and sometimes contradictory data. It is difficult, for example, to find reliable information on a company's record regarding human rights and labor rights.

Ultimately, it is important to ascertain whom the issues affect. Our firm assesses the impact of a company's policies and practices on four key constituencies:

Customers—through the safety and quality of a company's products and services;

Employees—through its employee benefits, workforce diversity, workplace safety and labor relations;

Communities—through its reinvestment, public accountability and local impact; and

Natural Environment—through its consumption of resources and its generation of wastes.

With this analysis complete, SRI investment managers have the tools to customize clients' social objectives and apply social screens accordingly.

Not all social screens are created alike. How and what SRI investment managers screen varies greatly. Out of three main types of social screens, many SRI investment vehicles focus on exclusionary screening. Exclusionary screens eliminate companies that conflict with the values of the investor, leaving those that meet the investor's standard of social responsiveness. Exclusionary screens often make the loudest statement of a clients' social position: The company either passes the screen or not. The absoluteness of the exclusionary-screened investment vehicles makes them most appropriate for clients whose social values are the strongest. However, while exclusionary screens make a social statement, they typically do not promote social change in the manner that other social screens do.

One of the most successful SRI initiatives, the movement in the 1980s to divest from companies doing business in South Africa, is a key example of the power of exclusionary screening. In that case, investor activism became an important catalyst for change; the activists' investment decisions influenced public opinion and changed policy.

However, it's more common for clients who want to encourage long-term social change in a proactive manner to look to two other types of social screening: shareholder activism screening and positive screening. These screening methods are at the heart of socially responsive investing.

Typically, SRI investment managers run into companies that have mixed records. They may recommend these companies to investors who want to engage in corporate dialogue and bring about changes in the ways the companies act through shareholder activism.

With all activism initiatives, coalition building and collaboration are key. Today, more and more SRI investment managers are involved in shareholder activism campaigns. Most recently, social interest groups and SRI investment managers, Walden included, successfully encouraged Home Depot (NYSE:HD), in light of a series of discrimination charges, to report publicly on its diversity policy. This is just one example of collaboration at work.

However, not every initiative is resolved quickly, if at all. The importance of shareholder activism is that it is another vehicle for social change, one that supports the efforts of activists, unions, local nonprofits, interest groups, the media, and political organizations. What is unique to SRI investment managers is the access they have to companies and the capacity to collaborate with the many social-interest groups. SRI investment managers can facilitate dialogue and encourage change.

Positive or affirmative screening looks to identify companies that are socially proactive in their products and services and processes. Progressive, innovative companies may offer valuable solutions to our most challenging social problems. Positive screening involves finding companies that are truly leaders and innovators, particularly those that are in the business of solving social problems.

These proactive companies share some similarities. They tend to be smaller companies, particularly in high-growth industries. Why? Younger companies don't have the pollution track record that larger companies now have, and they have come on line with newer, cleaner and more efficient machinery and systems. And yet, socially proactive companies are more than regulatory-compliant; they can be proactive in both their products as well as their processes. Often such companies are manufacturing products, such as fuel cells, that offer a solution to environmental ills. Many proactive companies realize that successful business depends not only on machinery but also on people. Among proactive companies, equitable, fair labor practices, flexible office policies, and supportive benefit structures are the norm and not the exception. Some proactive social companies can be financially intriguing as well.

The social research process is only as effective as the investment team. Just as a money management company has more than one financial analyst, many SRI investment managers have social research teams that help deliver comprehensive coverage of issues, unbiased decision making and more effective implementation of clients' social interests.

And just as financial analysts have their Bloomberg database, social researchers subscribe to databases and use software that provide raw data on government-tracked compliance standards and qualitative company reviews. Many have developed proprietary research culled from primary research, community connections and years of social research and activism experience. This experience is indispensable.

It's worth remembering that neither social nor financial research is a hard science. Ultimately, the choice of an SRI investment manager rests on the trust you place in their management style, process and integrity.

At the end of the day, socially responsive investing makes good sense. SRI can make money work for clients and their financial goals as well as for the betterment of society. Talk about getting more bang for the buck!

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