Can a Value Investor Make Money with a Socially Responsible Investing Strategy?


Socially Responsible Value Based Investing

Although the concept has only been around since the 1970’s, Socially Responsible Investing or “SRI,” AKA “Ethical Investing” is gaining popularity. According to Encyclopedia Britannica, “at least 10 percent of total investments were placed in SRI strategies in the United States in 2012.”

Because value based investors hold their stock picks longer than growth investors do, they have a better opportunity to build socially responsible portfolios. There are two ways to build social responsible portfolios. The first is to include stock in companies that are more socially responsible than others like green energy companies, and the second is to consciously avoid investing in companies that may do harm to the environment or society in general.

What is Socially Responsible Investing?

According to this article in Forbes Magazine, Socially Responsible Investing (SRI) is considered “sustainable”, “socially conscious”, “mission,” “green” or “ethical” investing.

SRI Managers may invest in companies whose values are consistent with their own such as consumer orientation, religious beliefs, human rights or what is called “Environmental, Social, and Governance (ESG). They also may invest in companies hoping to influence companies into changing practices and policies through “shareholder advocacy.” They may invest in communities that are underserved by traditional financial institutions – this practice is called “community investing” and may focus on supporting companies involved in low-income housing, affordable heal care and education.

Finally, portfolio managers may develop “exclusive strategies” where they avoid investing in companies that do not align with their personal or corporate values systems.

Where to Start

One very positive way to approach socially responsible investing is to choose companies that have outstanding reputations in “corporate responsibility. For example, here is a list of fifty companies who are known for their stand on environmental issues and other areas of public concern.

The list includes well-known companies like PepsiCo, Suncor Energy, and Kellogg Foods who work hard to protect the environment, human and natural resources and renewable energy.

In 2014, Kellogg announced a global commitment to use only palm oil that is traceable through its supply chain to ensure it is sourced from plantations that uphold the company’s commitment to protect natural resources and human and community rights.

More on Inclusive Social Portfolios

Some of the more popular sectors included in an inclusive portfolio are:

  • Clean Technology or “Cleantech” includes energy (biodiesel, clean coal, fuel cells, wind, and solar energy), water, and wastewater, advanced materials, energy efficiency and manufacturing, transportation and agriculture.
  • Low Income Housing
  • Affordable Education
  • Health care and food companies

Most stock screening programs allow managers to select companies by industry so managers could screen for companies in green energy or solar energy or waste conservation. Michael Bluejay offers a free service that specifically screens for socially responsible companies. The Bluejay website also has additional information and resources available to the socially conscious investor.

Knowing what to buy and when to buy are two very different things. Like any other value investing strategy, be sure to evaluate the fundamentals of the company and consider the intrinsic value vs. the current stock price when deciding when to buy.

Exclusive Portfolios

The exclusive strategy specifically avoids stocks that do not align with the manager’s social, political, or religious convictions. For example, during the 70’s and 80’s, the late Nelson Mandela suggested the use of “negative screening” to exclude companies that supported apartheid in South Africa.1

Many exclusive screens, for example, will avoid military and defense companies, companies engaged in pornography or the sale of alcohol, tobacco companies, pharmaceuticals, and oil and gas companies.

Also called “restrictive screen,” these screens can be fine-tuned to avoid certain companies like railroads that rely on coal. Managers may want to avoid companies that outsource their manufacturing to countries with poor child labor laws or to countries with poor environmental controls.

Easier Ways to Build SRI Portfolios

Screening for and buying stocks in companies that meet your criteria is time consuming. There are a number of socially responsible mutual funds available here:

More Information on SRI

Making Money with SRI Strategy

Whether you choose an inclusive, exclusive, or restrictive strategy, there are many ways you can augment your value-based portfolio with socially responsible stocks. According to this recent article, you can also make money using this strategy.

The Dollars and Sense of SRI

The intangible rewards of being a do-gooder are a priority for SRI-oriented managers, but returns are equally so. Recent research has found that investing in companies with solid ratings in environmental, social and governance areas actually can be as good as or better for your bottom line than conventional investing.

Another article in CNBC news states that socially responsible investing has evolved to mean sustainable, responsible and impact investing. It's about investing to do more than just make money . . . <investors> want to make money, but we also want to have a positive impact on the world as we're making money."

The Value of Newsletters

Because SRI is a new field, newsletters can be a very valuable source of information about the concepts in general, evolving strategies, and ways to decide which companies may or may not fit your strategy.

Most experienced investors subscribe to multiple newsletters. If there is a single place in the world where multiple opinions count, it is the stock market. For every opinion, there is a contrary view. A constant flow of diverse opinions helps you make good decisions.

There are many different kinds of newsletters available, and investors must decide which is most appropriate to their investment style. . . Multiple, independent and often conflicting sources of information are important if an investor is to reach the best conclusion as to the future course of the market and their investment portfolio.

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