Socially Responsible Investors -- A New Approach

Rather than boycotting, or screening out potential investment opportunities:

A new class of social investor doesn't believe in boycotting problem companies -- it's opting to reform them from within

Socially responsible investment managers are known for avoiding shares of companies that pollute the environment, deny health benefits to employees, or violate other ethical or environmental criteria. Yet Green Century Capital Management, which specializes in social investing, owns shares of ConocoPhilips and ExxonMobil. The Walden Social Equity Fund holds two oil companies, BP and Apache . And MMA Praxis Core Stock, a fund that follows Mennonite teachings, holds Wal-Mart Stores shares.

These stocks may not meet the typical screening criteria used by socially responsible funds. But for these managers, being shareholders allows them to lobby management to make changes. That's better, they say, than simply avoiding undesirable businesses or whole industries. "Our interest is not just in keeping our hands clean but [also] in making the world a better place," says Mark Regier, who oversees shareholder activism at MMA in Goshen, Ind.

Socially responsible funds are just a blip on the mutual fund radar, but they have a robust growth rate. Some 200 funds boasts assets of $37.4 billion, up 21% from a year ago, according to Lipper. The sort that invest in once-taboo companies make up just a small part of the social investing sector.

Investors don't necessarily surrender anything in performance to pursue nobler goals, but individual fund returns do vary. The Green Century Balanced Fund has a 24% a year average annual return for the three years ended Oct. 10, beating the Standard & Poor's 500-stock index by eight percentage points, according to Morningstar. Walden's fund, on the other hand, has been a laggard, with a 13% average annual return. By contrast, the Vanguard Calvert Social Index Fund -- a more traditional fund that screens out offenders -- is up an average 15% a year.

Managers of activist funds say sticking with problem companies allows investors to start a dialogue, bring resolutions before shareholders at annual meetings, and press management for improvements. MMA Praxis, for example, held on to Wal-Mart after the retailer was booted from the Domini 400 Social Index in 2001 over labor and human-rights conditions at some suppliers. "If you are concerned about the people who are hurt by Wal-Mart's policies, you will be doing absolutely nothing for them if you are not a shareholder," says Regier. Social funds, along with allies at pension funds and religious groups, filed almost 300 shareholder resolutions in the 2004-05 annual meeting cycle, according to the Interfaith Center on Corporate Responsibility.

... The Mennonite funds have also been active trying to raise coffee bean prices for individual farmers who produce a great deal of the world's coffee crop. Big coffee buyers such as Procter & Gamble have long relied on huge commercial outfits that paid the growers little. In a November, 2002 letter, MMA and others sought to persuade P&G to buy directly from small farmers. Less than a year later the company agreed to buy "fair trade" beans -- the term for coffee sold by farmers' nonprofit cooperatives -- for its specialty Millstone label.

Looking for potential 2005/2006 IRA investments? Check out the rest of the article.