Marc J. Lane

Article Summary:

Socially responsible investing is more than just excluding portfolios that don't meet socially responsible standards.

Socially Responsible Investing

The socially responsible (or perhaps more accurately - "principle-focused" - since who, after all, decides what is "responsible?") segment of the total U.S. investment pool is very significant: it is estimated that today it constitutes nearly $2 trillion of the entire $19.2 trillion in investment assets under professional management by major institutions such as pension funds, mutual fund families, foundations, religious organizations, and community development financial institutions, thus accounting for nearly one out of every nine professional managed dollars. Furthermore, since 1995, these assets have grown 40 percent faster than all professionally managed investment assets in the U.S. (Results through 2003, as reported in 2003 Report on Socially Responsible Investing Trends in the United States, Social Investment Forum.)

To many observers, the widely used term Socially Responsible Investing ("SRI") is largely confined to the negative process of excluding from an investment portfolio certain socially controversial industries, such as tobacco, alcohol, gambling, defense, and adult entertainment, along with industries associated with pollution or depletion of natural resources, such as mining, timber, and energy. While the conclusions of academic studies vary widely, there remains the very common perception that negative SRI screening may result in portfolios that are not sufficiently diversified, and which may underperform the general market.

We at Marc J. Lane Investment Management, Inc. believe strongly (and our research indicates) that it is possible for principle-focused (also known by such various names as mission-based, or values-based, in addition to socially responsible) investors to own stock portfolios consisting of companies whose business practices are highly consistent with the investor's core values and beliefs -without sacrificing either diversification or long-term performance - if the investor's true principles are first precisely ascertained, and the resultant portfolio is then assembled using highly refined positive screening techniques.

On the assumption that, as social investors gain insight and sophistication, they are less likely to rely primarily on negative screening by product or industry, we have introduced Advocacy InvestingSM, a combination of positive portfolio screening strategies that (after first screening for sound business fundamentals and corporate governance) seeks to identify companies whose corporate behavior can reflect and promote the investor's own beliefs and values. These may relate to such social concerns as a company's practices in the Environment, and a category we call Social Justice, consisting of Human Rights along with Diversity and Employee Relations.

The basic concept of Advocacy InvestingSM is that careful positive screening of management behavior may empower the investor, more than negative screening by industry could have done, to deploy capital in a way that actively reflects, promotes, and gives voice to the investor's principles, while maintaining acceptable levels of portfolio diversification and performance.

Advocacy InvestingSM begins with a very in-depth interviewing process to "drill down" to the investor's core principles. Following the fundamental screening process that we use for all portfolios, including rigorous criteria for sound financials and corporate governance, the remaining universe is then screened to reflect the investor's unique requirements for company behavior, and a complete portfolio is proposed. The recommendations are mutually reviewed, fine-tuned if necessary, and the implementation process is begun.

[Note: Our new academic study, Corporate Behavioral Screening: A New Perspective for Social Investors, analyzes the historical effect of "best of class" corporate behaviors on stock prices from 1995 through 2003. The press release "New Financial Study Shows Stocks Can Reflect Investor Values Without Sacrificing Performance" has appeared on numerous websites and newswires around the country, including those of Yahoo News, PR Newswire, Social Funds, CSRwire, Calvert Group, KLD Research & Analytics, and Institutional Shareowner.]

Marc J. Lane is a business and tax attorney, a Master Registered Financial Planner, a Registered Financial Consultant, and a Certified Investment Specialist. Marc is the author of 30 books on business organization, taxation, and personal finance. His practice areas include Individual Taxation, Corporate Tax Planning, Business Tax Planning, Estate Planning, Investments, Retirement Planning, Elder Law, International Trade, Business Law, and Wills, Trusts and Estates. Additional articles, case studies, and a free email newsletter are available at www.marcjlane.com.

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