Ethical investing, sustainable investments, green investing and socially responsible investments have been words that barely existed 10 years ago. Even today, investors have a hard time knowing the difference between all these social investing terms. While qualifying green investments may seem a little bit easier, describing what is ethical or not, even socially responsible, is a bit harder. I noticed substantial interest from my tobacco industry stock review a couple of months ago.
This is why I have decided to write a 4 article series about building a socially responsible stock portfolio. This series will answer the following ethical investing questions;
– What is the definition of socially responsible investments?
– Which kind of companies qualify under ethical/socially responsible investment rules?
– How can we build a dividend paying socially responsible investment stock portfolio?
– Does socially responsible investing pay compared to a regular portfolio?
So let’s start with What is the definition of Socially Responsible Investments?
In order to get the best definition of ethical investing, I thought of starting my research by outlining the most known and reputable social investing indices in North America. Such investment are not only offered to ultra high net worth client but to any investors. Here’s the list of what I have found:
Dow Jones Sustainability Index
Created in 1999, the Dow Jones Sustainability Index follows several criteria before appointing their “sustainable investment” stamp on a company. Here are their criteria:
| Economic | Codes of Conduct / Compliance / Corruption&Bribery |
| Corporate Governance | |
| Risk & Crisis Management | |
| Industry Specific Criteria | |
| Environment | Environmental Reporting* |
| Industry Specific Criteria | |
| Social | Corporate Citizenship/ Philanthropy |
| Labor Practice Indicators | |
| Human Capital Development | |
| Social Reporting* | |
| Talent Attraction & Retention | |
| Industry Specific Criteria |
They divide sustainable investments into 2 categories: Corporate sustainability (long term company management approach creating a maximum value for the long term investor) and Sustainability investments (they are convinced that the corporation managed with a long term horizon are going to create or pursue a sustainable business model for investors).
Calvert social index is built through the analysis of the 1,000 largest US companies. They look at the following factors (from the website):
- Products: Are the company’s products safe, useful and beneficial? Does the company produce firearms, tobacco, alcohol, pornography, casino games or military weaponry?
- Environment: Is the company in compliance with government regulations? Is it working to reduce its impact on the environment?
- Workplace: How does the company rate on labor relations? Does it treat employees fairly, offer reasonable benefits, and provide a safe workplace?
- Integrity: Does the company have good community relations? If it’s a bank, does it provide credit without discriminating against people in its service area? If it’s a natural resources extractor, do they deal fairly with indigenous people? Companies with overseas operations, such as footwear and apparel manufacturers, are included as well.
Calvert looks at both sustainable and responsible investing in their choices. They review companies’ behavior on a annual basis.
FTSE KLD 400 Social Index
Along with social requirements, the FTSE KLD 400 Social Index also include other restrictions:
– Market capitalization
– Earnings
– Liquidity
– Stock price
– Debt to Equity Ratio
As you can see, it is one thing to be socially responsible; it’s another to run a sustainable business generating profits for its investors! Once again, they look for relatively the same type of social criteria such as environment, employee relations, product quality and corporate governance (let’s bet that AIG is not part of the index).
LOHAS – Lifestyle of Health and Sustainability
I thought of including something heavier in term of social and ethical investing and I think I found it at LOHAS. They are probably the most selective social index in term of social investing but not in term of stock performance. Their main goal (and almost only focus) is to pick socially responsible and “green” companies. To be honest, I might not consider many stocks from this index in this upcoming series since they don’t offer much yield in terms of dividend payout!
So, What is the definition of socially responsible investments?
So before we continue with the series next week, we can resume socially responsible investing as choosing companies that:
– Operatee an ethical business (they don’t touch controversial fields and follow laws. They have a social consciousness while operating).
– Have ethical corporate governance (they are careful about how bonuses and salaries are distributed and how power is controlled within the corporation).
– Have a sustainable business model (they make sure that their business will be viable and profitable for several years ahead).
– Take care of their employees and society in general (they don’t just follow the working norms but they are pioneers in terms of workers’ benefits, employees’ care and consideration. They also act as a citizen in our society and try to give back to their community).
Do you consider social behavior before investing in a stock?
While no company is perfect, I always tend to try to make socially responsible investments. I wonder if this is part of your investing process to consider ethics or not?