Brian Hotchkiss likes his investments lean and green. The 48-year-old Boston entrepreneur shuns big oil companies and others he sees as polluters while seeking out businesses that promote alternative energy sources. He recently bought shares in Electrolux (ELUX), for instance, because the Swedish appliance maker sells a solar-powered lawn mower among other energy-efficient products. "I'm not at all methodical," says Hotchkiss, whose portfolio of 16 socially responsible stocks has gained 7% in two years. "I just look for companies with solid financial performance that are doing good things." Hotchkiss says he gets many of his ideas from investor message boards on Web sites such as TheMotleyFool.com and Morningstar.com.
At one time, investors such as Hotchkiss might have relied on socially responsible mutual funds. But now, many are practicing do-good investing on their own. That's because the Internet has made it much easier for them to check out companies' records on environmental, social, and ethical issues. Web-based investing services such as FOLIOfn also guide individuals in crafting diverse portfolios of socially responsible stocks.
The growing availability of separate accounts is also encouraging an activist approach. Geared to investors with $100,000 or more, these accounts are professionally managed stock and bond portfolios. Unlike mutual funds, however, investors can customize holdings to, say, avoid tobacco stocks or drug companies engaged in animal testing. "Socially responsible investors want control because no two people may look at a company in the same way," say Linda Descano, who helps manage $2 billion in socially responsible investments at Smith Barney Asset Management. Arnold Abens, an Edina (Minn.) financial planner specializing in socially responsible investing, says that Amazon.com (AMZN), like other Internet companies, passes most social screens. Nevertheless, a client recently directed Abens to dump his Amazon.com shares because the client, who is against abortion, learned that the online retailer makes donations to Planned Parenthood.
Another reason investors are trying their hands at socially responsible investing: It's profitable. Over the past decade, the Domini 400 Social Index, the industry's benchmark, showed an average annualized 14.02% return (through Mar. 31), vs. 13.27% for the Standard & Poor's 500-stock index. Assets in socially screened portfolios under professional management shot up 36%, to $2 trillion, from 1999 to 2001, vs. a 22% rise for all managed assets during that period, according to the Social Investment Forum, a nonprofit research group in Washington.
For decades, individuals had little choice but to turn to funds because social and ethical information about companies wasn't widely available. Calvert Group, Domini Social Investments, and other fund groups use their own analysts and research firms to examine companies' records on the environment, labor practices, and other social issues.
Now, a handful of Web sites give individuals access to this information. SocialFunds.com, for instance, provides data on some 1,800 large and midsize companies. However, SocialFunds and similar sites don't rate the companies, so you must sort through the findings on your own.
Consider General Electric (GE). SocialFunds.com offers a checklist of common social screens that tells you GE is involved in military endeavors but not alcohol, gambling, tobacco, firearms, or nuclear power. But if you check GE's 10K you'll see that the conglomerate provides support services to and makes parts for nuclear power plants. Why the discrepancy? Julie Gorte, director of social research at the Calvert Group, says that the "nuclear power" screen is typically applied only to utilities that generate electricity with nuclear power, not to companies involved in maintaining or building power plants. SocialFunds.com also provides articles on other social and environmental topics related to GE, including the company's continuing debate with the federal government over cleaning up PCBs in the Hudson River, and how its NBC unit dropped a scheme to run liquor ads under pressure from public advocacy groups.
Two other Web sites, CSRwire.com and CorporateRegister.com, give investors access to reports companies issue on how their businesses affect the environment and human rights. Some 600 U.S. and European companies issue these so-called "sustainability reports," including Intel (INTC), IBM (IBM), Ericsson (ERICY), and Conoco (COC).
What can you learn from these reports? In McDonald's' (MCD) first "social responsibility" report, issued in April, the fast-food giant notes that 40% of its packaging comes from recycled paper, and Calvert's Gorte says McDonald's is a leader in this area. A bigger issue for socially responsible investors are concerns about the conditions under which its livestock and poultry are raised. The company says in its report that it is helping to implement improvements on farm-animal welfare.
Read these reports with a critical eye. Common social reporting standards don't exist, so companies can say what they want. Gorte estimates that about two-thirds of the reports provide measurable information, such as how many workers have been injured in factory accidents or levels of toxic emissions.
A boon for socially responsible investors are Web sites that allow you to buy baskets of stocks. BuyandHold.com and Sharebuilder.com, for example, let investors assemble diverse stock portfolios with small amounts, say $500. FOLIOfn offers six preselected baskets of 30 stocks each screened for a variety of social issues. You can invest in these folios as is or customize them. The top performers are the Women Leaders folio, comprised of companies with the biggest percentage of women board members, up 28% for the year through Mar. 31, and the Minority Leaders folio, similarly made up of companies with the largest showing of minority board members, up 15%.
Boston entrepreneur Hotchkiss originally built a socially responsible portfolio from scratch at FOLIOfn two years ago with a $7,500 initial investment. Two months ago, he also invested in the Women Leaders folio. FOLIOfn charges $15 a month for one folio of up to 50 stocks, or $30 monthly for up to three folios.
When it comes to separate accounts, investors typically ask that their portfolios be free of tobacco companies, drugmakers that test with animals, or weapons makers, says Len Reinhart, chairman of Lockwood Financial Group, which recommends 55 managers for its $8.5 billion separate-accounts business. Reinhart estimates that $2.4 billion of that amount has some sort of social restriction, including $90 million under the direction of managers at Ariel and other firms that specialize in social investing.
For those investors who would rather leave the screening to mutual funds, there are dozens with different social objectives and plenty of solid performers, including funds offered by Vanguard and TIAA-CREF. The 74 socially responsible funds Morningstar tracks have returned an average 6.95% over the past five years, vs. 6.54% for the average fund. "As a group, socially responsible funds tend to be as good as or better performers than other funds," says Morningstar analyst Catherine Hickey. Some highly rated funds are Ariel Appreciation, Parnassus Income Equity, and Calvert Social Investment Equity.
Investors have learned that they need not check their values at the door to make money. But savvy social investing requires you to be as stringent in examining a company's financial record as its social record. Happily, the Web now gives investors lots of tools to do both. By Susan Scherreik