An English instructor confesses to Pennywise her sneaking suspicion that "this whole retirement thing is designed by the government to provide constant cash to big business."
Asset diversification, she fears, may not just distribute risk but "hide who you are supporting." She wishes to find a way "to get out of investing in businesses that are interested in shipping their manufacturing overseas, or in finding ways not to give their employees health care or retirement." While she holds the CREF Social Choice Account in her retirement plan, she is not certain that its "ideas of socially responsible investing would be the same as mine" and seeks a way to invest directly in church building, university expansions, or other worthy loans.
The short answer is that, yes, Virginia, there are ways to invest directly in human-scale community-development projects. But first let's explore the modalities of morality and money.
The idea of bringing our investments in line with our values is, perhaps, natural for higher education, where people tend to be motivated by service and knowledge-seeking more than financial gain. Scholars may desire to avoid the blatant contradiction of profiting from the evils they speak against. If you deplore Dow's production of napalm in your course on the history of the Vietnam War, warn of climate change in Biology 101, fault I.G. Farben in your Jewish-studies seminar for creating Zyklon B, or strive to avoid animal cruelty in your psych lab, you might want your retirement accounts to square with your pronouncements.
The financial-services industry has an answer: "socially responsible investing." That approach has grown from a niche associated with Methodists and hippies in the 1970s into a large-scale business. According to a 2007 report by the Social Investment Forum, roughly 11 percent of assets under professional management —$1 of every $9 —may be categorized as socially responsible investing. Many fund companies, such as Pax World Management Corporation, Calvert Investments, Sentinel Investments, and Domini Social Investments, offer extensive socially responsible options. In short, social responsibility is now highly lucrative: clean lucre, if you will.
Pennywise is not keen on the phrase "socially responsible." It sounds too sanctimonious, and I tend to subscribe to the Stones' old line that every cop is a criminal and all the sinners saints. I personally would prefer "socially conscious investing." That phrase better describes the rationale without the self-congratulation. Anyway, truly history-making social changes come not from retirement-plan choices but from disruptive popular mobilizations like the Montgomery Bus Boycott and the movement that compelled divestment from South African apartheid. Be that as it may, "socially responsible" seems so prevalent a phrase that it's likely to remain dominant.
One purely fiduciary objection to such investments is the claim that they perform more poorly than investments unfettered by exogenous criteria. Because environmental, human-rights, or good-governance standards diminish one's investment universe, one line of thought runs, they harm one's returns. Defenders of socially responsible investing respond that it actually leads to superior corporate performance because of increased worker satisfaction, competitive cost advantages from environmental shrewdness, and lesser costs from lawsuits over racial and gender discrimination or corporate malfeasance —all beneficial to productivity, the bottom line, and shareholder value.
It is almost impossible to gauge such claims empirically. Compare the Domini 400 Social Index to the Standard & Poor's 500 Index, for example, and you will find that the Domini list has slightly outperformed the S&P 500 since 1990. But that is to compare apples and oranges, since the Domini list includes small-cap stocks that would boost the return of any fund, whether socially responsible or not, over the large-cap S&P.
Some studies claim socially responsible investing outperforms the general market, while others say it underperforms. In the end, there seems no meaningful statistical proof that socially responsible funds, taken as a whole, function any differently from the general market.
One factor, however, is worth bearing in mind: Socially responsible funds tend to require active management, which can add to their fees and expenses. Someone must do the research on companies' behavior in specific areas, from animal testing to nuclear power, and cull out the offenders. The resulting expense ratios can be pricey. Some people may be perfectly willing to pay that price to obtain a better world, or at least a cleaner conscience. Others may not.
To know whether a fund matches your values requires that you examine the screening standards by which socially responsible funds eliminate securities issued by objectionable companies. Their filters can be Islamic principle, respect for gay and lesbian rights, or any of infinite criteria.
The CREF Social Choice Account illustrates how screening may never satisfy the hard-nosed critic. Its mission statement vows to "seek out companies that are: strong stewards of the environment; devoted to serving local communities and society in general; committed to high labor standards; dedicated to producing high-quality, safe products; and managed in an ethical manner."
Accordingly, the CREF Social Choice Account possesses bonds issued by the Red Cross and the Salvation Army and holds no Wal-Mart stock. But it also owns shares in Weyerhaeuser, a lumber company that has cut down ancient forest, not to mention shares in McDonald's, not revered for its impact on health and the environment. In regard to "high labor standards," the Left Business Observer has described McDonald's as "one of the most doggedly anti-union companies on earth." The single largest holding in the CREF Social Choice Account is U.S. Treasury Bonds, which may sound innocuous except that the federal spending they sustain includes, of course, nuclear-weapons procurements, not to mention the Iraq war. CREF's Social Choice Account is hardly the only socially responsible financial instrument to manifest such contradictions.
For my Michigan interlocutor, who seeks to deploy her resources positively rather than apply a mere negative screen, let me offer another socially conscious fund: CRA Qualified Investment (CRAIX). This taxable bond fund is best held in a tax-advantaged account such as an IRA. It is sold by Schwab, Fidelity, and other brokerage firms.
The mission of CRAIX is to allow underdeveloped communities and the poor to have access to the capital so often denied to them. It invests in affordable housing and health care, job creation, and revitalization of distressed areas. One set of bonds owned by the fund is for a project that converts abandoned schools into affordable housing for seniors. It also holds securities made up of 30-year, fixed-rate loans to creditworthy —not subprime —single-family homebuyers of low and moderate income. (There is a financial, as well as moral, advantage to that kind of loan, because the default and prepayment risk is low for creditworthy, low-income borrowers.)
CRAIX's three-year annualized rate of return is 5.53 percent, with an expense ratio of 0.98 percent. That makes it a more costly fund than Vanguard's Intermediate-Term Bond Index Fund, which boasts a three-year annualized rate of return of 5.88 percent and an expense ration of 0.22 percent. Indexing often beats active management. Still, as the asset base of CRAIX expands, its expense ratio may drop, and for socially conscious investors —especially those who aspire to put their money to constructive use, not merely to do less harm —CRAIX is an intriguing bond option.
Investing at least a portion of your portfolio in a socially conscious manner is a nice way to give a little back. Just make sure you don't give too much back. Beware of sabotaging your returns by paying exorbitant expense ratios that line the pockets of money managers while only marginally benefiting the causes you favor. At best, socially responsible funds may help you invest a little less damagingly. They are never a vehicle for purity.