Student Funds Get Responsible

A new breed of student-run investment funds looks for social returns along with dividends

by Alison Damast

Student-run investment funds at business schools typically have had one goal: to teach students how to make money. Now a new generation of business-school students is giving that old-fashioned model a face-lift, aligning their investments with socially responsible business practices.

It's a movement that's quickly gaining steam. Students and faculty at Columbia Business School and the University of California, Berkeley's Haas School of Business launched funds this fall directed solely toward socially responsible investing. The funds are an extension of a flurry of new electives, specialized research institutes, student clubs, and internships focused on social and environmental issues (BusinessWeek.com, 10/10/07).

This new breed of student-run funds has taken a variety of forms, from funds that invest in mainstream index funds to nonprofit arrangements aimed at helping "micro" entrepreneurs.

Students are clamoring to apply their new knowledge in this field to the financial markets, says Rich Leimsider, director of the Center for Business Education in New York, part of the nonprofit Aspen Institute. "It is definitely a new concept for business-school students to be doing this, " Leimsider says. "This is obviously a real-life example of putting your money where your mouth is."

Haas Fund Eschews Blanket Restrictions

Among the most high-profile of these funds is the Haas Socially Responsible Investment Fund, launched this fall with a seed gift of $250,000 from Haas alumnus Charlie Michaels. The school has since managed to raise a total of $1.3 million for the fund, which will be managed by four MBA students and two master's in financial engineering students.

The idea emerged from a discussion between Michaels and Haas professor Kellie McElhaney in which they both lamented the way most socially responsible investment funds are run. Typically, these funds screen out entire industries such as tobacco, alcohol, or firearms from their investment portfolios, a move that can have a significant impact on returns and could eliminate some companies that integrate socially responsible activities into their operations, said McElhaney, a professor of corporate responsibility and the director of the Center for Responsible Business.

Michaels and McElhaney decided to create a fund that would not impose those blanket restrictions on categories, but rather encourage students to make more significant investments in companies closely aligned with the philosophy of the fund. "We were trying to get away from the negative screening process of eliminating an entire industry," McElhaney says. "We wouldn't screen out a tobacco company, but we'd take a shorter position on tobacco than an energy company that more closely matches our criteria."

Putting Ideals into Practice

Most of the students running the fund were required to take a class in socially responsible investment techniques, offered by the school for the first time this semester. They spent the past few months developing their investment criteria and plan to evaluate firms on their social, environmental, and financial performance. By January, they expect to start investing in companies.