Investing February 3, 2010, 10:10PM EST

Social Investing Gathers Momentum

Niche no more: Socially responsible funds are putting up impressive performance numbers—and their reach is spreading

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(This story has been corrected to show in the 13th paragraph that the Social Choice Account has a 60/40 equity/fixed income split and exposure to international stocks instead of the Social Choice Equity Fund in the 14th paragraph. The former 14th and 15th paragraphs have been combined.)

Despite evidence that nearly two-thirds of 160 socially responsible mutual funds offered by member companies of the Social Investment Forum outperformed their benchmark indexes and beat the Standard & Poor's 500-stock index in 2009 by significant margins, most institutional investors remain convinced that socially responsible investing (SRI) means giving up some return on investment.

The funds' solid track record—and some recent actions by U.S. securities regulators—may give a fresh boost to the SRI approach.

On Jan. 27 the U.S. Securities & Exchange Commission approved a standard that requires public companies to weigh the impact of climate-change laws and regulations when deciding which information to disclose in corporate filings. The SEC said companies should also consider international accords, indirect effects such as reduced demand for goods tied to greenhouse gas production, and physical impacts such as the potential for increased insurance claims in coastal regions due to rising sea levels in their assessments.

Meg Voorhes, research director of general programs at the Washington-based Social Investment Forum, which counts 22 fund outfits among its members, expects the standard to give investors a better basis for comparison for companies' environmental risks, and may also provide a better way to assess management and to engage with them about the risks they're taking, she says.

The results of a December 2009 survey of 40 investment consulting firms showed that nearly 90% of the firms believe client interest in SRI would increase over the next three years, driven in part by climate-change regulation and retail customers' growing interest in green investing.

Institutional Investors See "Trade-Off"

While SRI has been gaining in popularity among retail investors, institutions such as pension funds generally have much longer investment time horizons that cause them to focus on different risk-adjusted returns, says Matt Moscardi, manager of investor programs at Ceres, an advocacy group that works with companies to address sustainability challenges.

"A lot of SRIs don't meet some of [the institutions'] criteria," he says. "At a $100 billion-plus fund, it's harder for them to get interested in an SRI fund because there's still a perceived trade-off between returns and doing the responsible thing."

Bozena Jankowska, manager of the Allianz RCM Global Ecotrends Fund (AECOX), thinks it's important that institutional investors first be clear on the distinctions between ethical, or faith-based, funds; SRI funds; and funds based on a theme such as clean energy. Faith-based funds, by excluding companies tied to abortion and contraception, and SRI, by screening for objectionable environmental, social, and governance (ESG) practices, tend to restrict the pool of investable companies, she says.

"Sustainability investing provides a much broader universe because its approach is best-in-class stocks," she says. "It's a far more pragmatic approach that focuses on …how [companies] are adapting their business strategies to social and environmental changes to give them ongoing license to operate and get market leadership ahead of the competition."

Public Pension Plans Offer SRI Options

Public pension plan managers, after taking significant losses in the 1980s and early 1990s on investments designed to save jobs or promote homeownership, now "go out of their way to make clear that they are no longer willing to sacrifice returns for social considerations," according to an August 2007 report by the Center for Retirement Research at Boston College.