Socially Responsible Investment

OVERVIEW

One feature of the U.S. economy is the growing importance of institutional investors, including pension funds, universities, and foundations. A September 2005 report by The Conference Board found that at the end of 2003, public sector pension funds alone had $2.27 trillion in assets, of which roughly $1.3 trillion was invested in stock. Public pension fund stock holdings totaled 9.7% of the stock market’s value in 2003, up from 7.6% just three years before. Foundations also have large asset holdings, which now exceed $500 billion, with $323 billion invested in the stock market alone as of 2003. University endowments also have significant asset holdings. A 2005 report of National Association of College and University Business Officers found asset holdings of $299 billion among the 746 schools surveyed, with $136.9 billion invested in the U.S. stock market.

Increasingly, institutional investors and other socially-minded investors have used their clout to influence the behavior of large corporations. Dr. Carolyn Kay Brancato, Director of The Conference Board’s Global Corporate Governance Research Center, notes that public pension funds “tend to be the most activist in demanding corporate governance reforms and will continue to have a profound impact on every company not only in the U.S. but also in global markets, since U.S. investors have tended to be out in front of global shareholder activism.”

Typically, socially responsible investing takes three different forms —screening, shareholder activism, and community investing. These different methods of social investing may be used separately or in combination with each other. While the community investing mechanism is most directly focused at building community wealth, all forms of socially responsible investing open up important possibilities for new funding streams for asset development.

The most common form of socially responsible investment is the screened investment account. These include both socially screened mutual funds and socially screened separate accounts managed for individual and institutional clients. Screening can be positive, meaning that the fund or account has a preference to invest in socially responsible companies. Screening can also be negative: the 1980s movement to disinvest or “divest” from companies doing business in apartheid South Africa (and which contributed to that regime’s demise) was one important factor that led to today’s socially responsible investing movement. Other examples of negative screens include bans on investing in certain industries (such as tobacco or defense) and bans on investing in companies with poor labor or environmental records. According to the Social Investment Forum, the number of dollars invested in screened assets has climbed from $162 billion in 1995 to $1.68 trillion in 2005.

Shareholder activism involves using stock ownership as leverage to introduce shareholder resolutions and otherwise act to influence corporate behavior. Measuring such activity is difficult since often the most successful interventions are the ones that work “behind the scenes” to effect change. Nonetheless, there has been plenty of visible activity as well. Shareholder resolutions on social and environmental issues climbed from 299 proposals in 2003 to 348 in 2005, a 16 percent increase. Social resolutions reaching a vote rose more than 22 percent from 145 in 2003 to 177 in 2005. Institutional investors that sponsored or cosponsored resolutions on social or environmental issues controlled nearly $703 billion in assets in 2005, a 57 percent rise over the $448 billion in assets counted in 2003.

The final form of socially responsible investing is community investing. This involves directly taking funds out of investments in multinational corporations and actively reinvesting them — through community development financial institutions or CDFIs — in local communities that face shortages of capital. Currently, the Social Investment Forum Foundation and Co-op America are leading a campaign to persuade social investment funds to dedicate one percent of their assets to support the growth of CDFIs. Due in part to this campaign, the amount of capital invested in CDFIs has increased from nearly $14 billion in Dec. 2003 to $19.6 billion as of Dec. 2005. The campaign effort aims to increase the size of CDFI asset holdings to $25 billion by the end of 2007.