A growing number of people are investing to achieve change – change in the future of their communities, the environment and the world. As a result, socially responsible investing – reflecting all political spectrums – has become one of the most significant trends in the financial world.
Socially responsible investing (SRI) allows both individuals and institutions to use their investments to support social and environmental causes of their choosing while generally earning competitive returns. The number of investors following SRI principles continues to grow. Over the last 10 years, the amount of assets managed according to socially responsible criteria grew at a faster rate in the United States than the entire universe of managed assets. According to a 2005 study of SRI trends conducted by the Social Investment Forum, nearly $1 out of every $10 under professional management in the United States – 9.4 percent of the $24.4 trillion in total assets under management – followed some type of SRI criteria.*
Types of SRIs
Traditionally, SRI investors have focused on avoiding companies involved in the alcohol, tobacco or gambling industries. Today, SRI has vastly shifted from simple avoidance to active shareholder participation with the goal to change corporate policy. Ranging from “liberal” to “conservative,” SRI can take three forms: screening, shareholder advocacy and community investing.
SCREENING
Screening is the process of including or excluding securities from a portfolio based on social or environmental criteria. There are two types of screening: positive and negative.
Positive screening attempts to identify profitable companies with a history of excellent employee relations and community involvement, and environmentally conscious policies and practices. Respect for human rights and the production of safe, useful products are also often considered. Investors use positive screening when investing in industry leaders – despite the reputation of an industry as a whole – in the hopes that the general standard of business practices will improve.
Conversely, negative screening identifies companies with poor records in these areas. These companies are then excluded from an investor’s portfolio.
Shareholder Advocacy
Shareholder advocacy goes beyond screening. Shareholder advocates purposely invest in companies with poor social or environmental records and actively work with the company’s management to improve its practices. These activities include filing, co-filing and voting on shareholder resolutions that focus on social and corporate-governance issues. Shareholder advocacy methods generally intend to improve a company’s policies and practices, encouraging management to exercise good corporate citizenship and promote long-term shareholder value and financial performance. For example, shareholder resolutions implemented on social and environmental issues increased from 299 proposals in 2003 to 348 in 2005, a jump of more than 16 percent. Additionally, social resolutions reaching a vote rose from 145 in 2003 to 177 in 2005, a rise of more than 22 percent.*
Community Investing
This form of SRI provides investment capital to communities not served or underserved by traditional financial institutions. Community investing gives these communities direct access to credit, equity, capital and basic banking products they would otherwise lack. Community investing allows local organizations to provide financial services to low-income residents and supplies capital for small businesses and community services such as afford- able housing, childcare and health care.
According to the Social Investment Forum, assets in community investing institutions rose from $14 billion in 2003 to $20 billion in 2005, a gain of 40 percent. Community investing assets have nearly quintupled from the $4 billion identified a decade ago.*
WHAT’S BEHIND THE GROWTH?
• Performance. Many people assume that SRI results in underperformance. However, research has confirmed that, when properly managed, risk-adjusted and controlled for investment style, socially screened portfolios perform comparably to their unscreened peers.* But past performance is not an indication of future results.
• Information. Today, investors can easily access a wealth of information about SRI. Investors are better educated and informed about social and environmental issues. Also, SRI organizations are better able to provide more sophisticated information to a receptive audience. As a result, well-educated investors are able to participate in SRI.
• Corporate scandals. Corporate scandals involving accounting fraud and other issues have eroded trust in company leadership. These scandals have resulted in calls for reforms that require more transparency, stricter corporate governance and accountability, and greater disclosure of information.
• Sustainability. As the general public’s concerns about global warming, alternative energy sources, human rights, corporate scandals and other issues grow, new and expanded opportunities will be offered to socially aware investors.
As a firm providing wealth management services to clients in the U.S., UBS offers both investment advisory programs and brokerage accounts. Advisory services and brokerage services are separate and distinct, differ in material ways and are governed by different laws and separate contracts. For more information, please visit www.ubs.com/workingwithus.
