July 23, 2002
SRI Mutual Funds Will Endure the Crisis in Confidence
by William Baue and Mark Thomsen
Socially responsible mutual funds are different from other mutual funds, and those differences help
SRI mutual funds achieve competitive returns over the long term.
The recent crisis in confidence elicited by the string of corporate governance scandals from Enron
to WorldCom may inspire investors to seek investments that have demonstrable integrity. But
investors traditionally focus their attention on companies' financial performance and as a result
may overlook other potential indicators of integrity.
investment (SRI) mutual fund managers assess corporate social and environmental performance in
addition to financial performance. Robert Gynn is an editorial analyst at Morningstar, Inc., an
independent investment research firm. Mr. Gynn said that while all fund managers want to know
everything they can about the companies in their portfolios, SRI mutual fund managers generally
have a better overall picture of a potential investment.
"Managers who employ such a
filtering process, even before looking at the financial end of things, certainly have the
opportunity to see a potential investment from another perspective that can provide them with a
panoramic view of a particular company," said Mr. Gynn.
As is true for all investors,
socially responsible mutual fund managers are taking steps to avoid investing in companies with
questionable accounting practices. Pax World
Funds, for example, is now looking for much more transparency in company financial statements.
It is also supporting new and stricter regulations regarding transparency.
lobbying regulators, such as the SEC and New York Stock Exchange, and various members of Congress
for better disclosure in all areas," said Anita Green, director of social research at Pax. "Those
areas include accounting issues, executive compensation as well as environmental and social risk."
Studies continue to show that mutual funds that consider social and environmental factors
in the investment process generate competitive financial returns. According to research conducted
by Morningstar earlier this year, for example, 33.3 percent (15 out of 54) of SRI mutual funds
earned either four or five stars (a four to five star rating means a fund is performing better than
77.5% of all similar funds). When all mutual funds are considered, only 32.5 percent earned four
or five stars.
Socially responsible mutual funds can do well over the long term too. One
of the best known SRI mutual funds, the Domini
Social Equity Fund (ticker: DSEFX), has produced solid financial returns over the past decade.
A large-cap fund that tracks the Domini Social Index, the Domini Social Equity Fund has generated
annualized returns of 11.08 percent over the ten-year period ending June 30, 2002, according to
data provided by Weisenberger.
The Parnassus Fund (PARNX), which invests in small and medium cap
companies, stands out in terms of financial performance. The Parnassus Fund has generated
annualized returns of 12.30 percent over the ten-year period ending June 30, 2002. Jerome Dodson,
president of Parnassus and manager of the Parnassus Fund, believes that investing in good corporate
citizens makes sound financial sense.
"A company with an effective environmental
protection policy, for example, is less likely to be sued or fined by the government," said Mr.
Dodson. "Similarly, a company with good employee relations will have greater internal harmony and
be more productive as a business."
Different socially responsible mutual funds incorporate
environmental and social factors into the investment process in a number of ways. Many SRI funds
employ positive screens, which seek companies with exemplary social and environmental practices.
For instance, Portfolio 21 (PORTX)is a global
equity fund managed by Portland, Oregon-based Progressive Investment Management that chooses the
best practitioners of sustainable business strategies in different industry sectors.
goal of Portfolio 21 is to identify those companies that recognize the deepening ecological crisis
and are positioning themselves to benefit from a new approach to business," said Portfolio 21
cofounder Carsten Henningsen. "Today, we are only about 1 percent efficient on materials and
energy use. The huge gap between 1 and 100 percent comprises a tremendous investment opportunity."
One of the largest SRI mutual fund families, Portsmouth, New Hampshire-based Citizens Funds, performs a thorough
traditional financial analysis in between the two steps of the social and environmental screening
process it applies to all its funds. Citizens first employs exclusionary screens to separate out
companies that derive revenue from tobacco, alcoholic beverages, nuclear power, weapons
manufacturing, or gambling. Citizens also excludes companies that do not have at least one woman
or person of color on their board of directors. The second step, a positive social and
environmental screen, seeks to identify companies with useful products, a history of environmental
stewardship and a history of good employee and community relations.
The Green Century Funds, which offers the Green Century
Balanced Fund (GCBLX) and the Green Century Equity Fund (GCEQX), also uses positive and
exclusionary screens in its investment process. Green Century Funds is unique among SRI mutual
fund firms because it is wholly owned by nonprofit environmental organizations. So while earning
returns for investors, the funds also contribute profits from management fees to support groups
that advocate for a cleaner environment.
SRI funds can differentiate themselves from
other mutual funds in two other ways. One is shareowner action. Many SRI funds engage companies
in dialogue and sometimes file shareowner resolutions with the goal of helping companies improve
their social and environmental performance. A growing number of SRI funds are also allocating fund
assets to community investing. Community investing is investing in distressed urban and rural
communities that are often underserved by traditional financial institutions.
fund managersí panoramic view of the diverse factors contributing to corporate integrity has helped
SRI funds build a solid track record of competitive financial returns. The assessment of corporate
social and environmental performance, in addition to the traditional financial performance, make
SRI mutual funds well positioned to deliver competitive returns into the future.