Social investors wish to change the world, but does it really work? Evaluating corporate social investment is complicated, but not impossible.
History
Corporate social investment has been practiced for almost 100 years. It accounted for $2.7 trillion of the U.S. investment market in 2007, according to the Social Investment Forum. Shareholders have always had the power to impact the strategic activities of an organization based on their beliefs, but traditional protesting has given way to boardroom demands.
Significance
Corporations understand the impact of social responsibility on their bottom line, and market their efforts through carefully crafted public-relations programs. Evaluation of their activities requires careful scrutiny to determine whether they are sincere and consistently implemented, or mere lip service to appease critics. Even the relative transparency of corporate social-investment activities is evaluated.
Function
Evaluation of corporate social investment ensures that the values of investors are reflected in the investments they choose. In essence, the will of the owners (stockholders) is imposed, instead of allowing capitalism to proceed unchecked. There is no one standard for evaluating corporate social investment. Mutual-fund portfolio managers have their own criteria for social investment, as do third-party analysts such as Morningstar. Each corporation acts according to industry norms and develops internal policies. Therefore, it is difficult to compare one company to another to determine which is more socially responsible. Fortune magazine produces an annual list of "most admired" companies, with socially responsibility as one of the criteria. The list is based on a survey of corporate executives.
Types
In the past, investors avoided tobacco, alcohol, gambling and weapons. With the increased focus on the environment, investors are also looking for firms with proven energy-sustainability programs and "green" research and building policies. Corporate scandals prompted the addition of more subjective evaluations of management "integrity" to the social-responsibility scorecard.
Corporate philanthropy is closely monitored. Many organizations cite their involvement in local communities through volunteerism, sponsorships and venture capital for underserved communities. On a national scale, giving to organizations such as the United Way has almost become a requirement for larger organizations.
Companies are also rated on product safety, their workplace environment and human-rights standards, both domestically and abroad.
Function
The starting point for most corporate evaluations is financial statements. All the social responsibility in the world becomes irrelevant if a company is unable to make a profit and return value to shareholders. Evaluators must carefully prioritize evaluation criteria. Few companies can be expected to meet all social-responsibility criteria at any given time. Management must mix social responsibility with shrewd business dealings to produce a profit. Look for evidence of spending on efficient equipment, environmental studies and salaries for quality compliance personnel. Management interviews will provide evidence of whether or not social issues are a priority. Ask about goals and strategies for ever-increasing "greenness." Are they built into the normal function of the business, or an after-thought? Are staff members implementing cutting-edge, high-impact solutions, or just exerting minimum effort? Ask for evidence that the programs are actually working. Compare the answers with industry standards.
Misconceptions
Social corporate investment is not always based on religious beliefs. The ethical nature of the social criteria appeals to a large number of investors, regardless of their religious affiliation.
Screening out risky companies using social-investment criteria creates an advantage in a downward-moving environment. The more conservative choices often perform better.
Potential
Instead of selecting individual investments, investors have poured money into socially responsible mutual funds where skilled portfolio managers evaluate companies. New mutual funds in this category are being created, but there has been a backlash due to low performance. Some mutual fund companies offer "vice funds," which have been hugely profitable.
