What Is Socially Responsible Investing?

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BERLIN – As popular as socially responsible investing may appear right now, it’s not really new. Throughout this country’s history, there have always been investors who have guided their decisions by the values they hold near and dear. Back in the 1750s, for instance, Philadelphia Quakers shunned profiting from the slave trade; in the 1960s, some investors avoided companies that profited from the war in Vietnam. If these investors’ finances suffered because of those choices, they chalked it up to the cost of aligning their investments with their values.

In recent years, however, so-called socially responsible investing has entered the financial mainstream, and a broader framework, known as values-based investing (VBI), has emerged.

Today, VBI accounts for some $5 trillion invested globally, according to Jose Rasco, Investment Strategist in Merrill Lynch’s Investment Strategy Group. In addition to traditional socially responsible investment funds, VBI proponents invest in companies dedicated to everything from alternative energy to promoting small businesses in impoverished countries.

Besides mutual funds that help clients screen companies according to their values — a traditional option for socially responsible investing — VBI investors can now choose from such investment vehicles as stocks, bonds, private equity and exchange traded notes.

As its popularity and prevalence have grown, VBI has lost its original image as a form of investing likely to compromise one’s portfolio even as it soothed one’s conscience. Increasing evidence suggests that companies that make ethical and environmental concerns a priority can do at least as well as their competitors financially.

A Merrill Lynch study comparing companies on the basis of ethical standards and financial performance found a correlation between corporate governance and returns — especially among companies known as stable, reliable performers with relatively low volatility. The findings were based on data collected between 2002 and 2007. “What we found was fascinating,” Rasco says of the study. “Globally, among stocks with low volatility, higher-ranked VBI companies performed better than lower-ranked VBI companies. This was consistent across all the global geographic regions.”

While there was no discernible advantage for investors taking a values-based approach among more speculative, higher-volatility stocks, the study suggests that investors seeking the comfort of stable performance in the current economy may well be able to satisfy both their ethical and financial goals.

There’s a promising degree of overlap between the type of large-cap, high-quality, dividend-paying stocks our strategists favor and the universe of VBI stocks,” Rasco says. “According to a 2005 Wharton School study, the U.S. companies that rated high on VBI issues consistently demonstrated high dividend yield and low volatility.”

As with any form of investment, of course, the return rates and risks of different VBI investments vary, and many financial advisors may recommend that investors consider them as an overall part of a balanced portfolio, helping to diversify and compensate for any potential risks they might represent. But as these investments become increasingly competitive with non-VBI counterparts, it seems only logical that more and more investors are considering and implementing VBI as a working part of their investment strategies.

If you are interested in aligning your investments more closely with your values, talk with your financial advisor about ways to evaluate your options.

(A Merrill Lynch Senior Financial Advisor. She can be reached at 410-213-8520.)

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