Dos and don'ts for the socially responsible investor

Want to 'do good' with your investment dollars? Know the pros and cons of SRI first.

Socially responsible investing (SRI) is commonly seen as a holistic approach to investing because it looks at financial, social, environmental and ethical criteria in choosing investments. An increasingly hot topic these days, it is by no means a black and white issue.

The Debate Rages On

Advocates of SRI

believe that it is quickly moving into the mainstream, and that the corporate "bottom line" is about to get a whole lot bigger. Companies will not only have to ensure they are doing well financially, but in order to remain competitive in the marketplace, and please shareholders (who are becoming increasingly concerned about what they invest in), they will be forced to look at the impacts of their actions on the environment and the communities in which they operate.

Opponents of SRI

claim that it restricts an investor's portfolio mix by limiting investment choices and is, therefore, more risky as a result. The screening processes that fund companies use to select socially responsible investments are often criticized as well.

Shareholder Advocacy

An important aspect of SRI focuses on the ability of investors to influence change through their shares in a company. Because corporations use a "one-share-one-vote" principle, each shareholder can have their say. They can write letters to management, attend the company's annual general meeting, vote and introduce shareholder resolutions.

SRI Mutual Funds

Because people have very different sets of beliefs, SRI fund managers must choose the right set of stocks to attract the greatest number of investors. To do this, each fund uses a set of "screens" or selection criteria. One fund might base its screens mainly on environmental aspects, while another might focus on human rights.

There are three ways SRI fund managers typically screen companies to build an appealing SRI fund. They might use one or a combination of the following selection criteria.

Negative Screening

Choosing not to invest in companies that act "unethically" or irresponsibly.

Positive Screening

Choosing to invest in or support those companies that do something to stop human rights abuses, help the environment, support their community, etc.

Community Investment

Investing money in community development or micro-enterprise initiatives that contribute to the growth and well-being of specific communities.

Dos and Don'ts for the Socially Responsible Investor

1. DON'T - Let your emotions be your only source of investment advice. Not all companies that "do good" are smart financial investments. Being a responsible investor means considering all the criteria - not just the social indicators but the financial ones as well (including fees). Always do your homework before making any new investment decisions.

2. DO - Be true to your own values and beliefs. What's important to you might not be important to your neighbour. Identify your top concerns and choose the fund that most closely matches your own value system.

3. DON'T - Put all your eggs in one basket. With SRI, you may find your investments have too much in common socially, ethically and financially. Be vigilant about diversifying your portfolio. There are many ways to invest in socially responsible companies, while minimizing financial risk.

4. DO - Consult with a qualified financial adviser. If you are considering SRI, seek out an adviser that specializes in these types of securities.

Visit the Investor Education Fund's website --www.investorED.ca -- for free, objective educational resources to help you make more informed financial decisions. The Investor Education Fund is a not-for-profit set up by the Ontario Securities Commission (OSC), the provincial investment industry regulator.