Concerns about the environment were one of the founding motivators for socially responsible investing. Individual investors and mutual fund managers screen for incidences of environmental pollution, greenhouse gas emissions, deforestation and other corporate activities that can harm the ecosystem. Such behavior can lead to regulatory fines assessed against the company or lawsuits, in which it must defend its actions. Both are a drain on finances and can impact short- and long-term performance.
Socially responsible investors are concerned about universal health care and health care reform. They notice how responsive companies are to offering affordable health care plans for employees. While obviously a humanitarian issue, it’s also a valid bottom-line consideration. Employee medical benefits are important because the health of employees directly impacts a company’s profitability. Preventive care reduces health care costs by keeping insurance premiums down. A healthy workforce can also maintain a firm’s productivity level, while an attractive health care plan encourages valued employees to remain with a company and help maintain a high productivity level.
In Today’s global economy, socially responsible investors are interested not only in how a company treats its workers in the United States, but also in other countries. Very often labor laws overseas are not nearly as protective of workers as they are in the U.S. Corporations that take advantage of such laws by moving much of their operations overseas are not attractive to socially responsible investors. Many social activists look closely at the entire supply chain that a company uses to bring its product to the public. Activists have taken aim through shareholder resolutions, for example, at steel companies that purchase pig iron for their production which was mined by slave workers in the Brazilian Amazon.
Community investing is a popular SRI practice that can earn competitive returns while also helping communities in need. Socially responsible investors recognize the lack of affordable housing, available health care and well-paying jobs in many communities throughout the United States. By investing money with community development institutions or community development venture capital funds, they can help finance growth in distressed communities through microloans and training.
Product safety Socially responsible investors look for companies that have good practices of testing products and who consistently meet or exceed government requirements. From an ethical perspective, they want to support companies that care about the consumer and avoid those who think only about a profit. That attitude is in tune with their investing priorities. By exposing consumers to toxic chemicals, faulty equipment, substandard machinery or other hazards, companies run business risks that include the cost of recalls, damaged reputations, litigation, and loss of market share. When those negatives occur, stock values suffer.
Enron. WorldCom. Tyco. The rogue’s gallery of companies whose managers spent lavishly with corporate funds, lied to shareholders and ultimately saw the value of their stock plummet is long and painful to many. For socially responsible investors, there’s a direct connection between the ethics of directors and CEOs and the bottom line. Certainly the frequent downfall of a stock or even the collapse of a company – as was the case with Enron – after the mismanagement has been exposed makes the SRI case.
Socially responsible investors take issue with companies that have huge disparities between CEO compensation and that of the rank-and-file employees. For much of the past two decades the gap has been widening, as executives take home millions in salary, bonus and perks, while pay for middle managers or non-management personnel has been flat when adjusted for inflation. From the SRI viewpoint, this can undermine moral, prompt valued employees to leave and limit the growth potential of the companies in which they own stock. Firms that compensate their employees equitably from top to bottom are more likely to increase shareholder value.
Large, well-funded companies can wield an extraordinary amount of influence on elected officials, through lobbying and political contributions. Very often this activity goes unnoticed. Socially responsible investors are interested in the political activities of their companies, where those firms are spreading their influence and for what purposes.
Socially responsible investors argue that companies that discriminate in the workplace by race, gender or age are doing themselves – and society - more harm than good. A diverse workforce brings the value of different perspectives and points of view to the management and operations of a company. That diversity might lead to a better understanding of a firm’s customers and new opportunities in the marketplace. A more concrete concern for investors is the potential liability that a company assumes if it disqualifies employees for advancement or installs different pay scales based upon gender, skin color or age. Some discrimination judgments against corporations have reached into the hundreds of millions of dollars.
High performing and profitable companies treat their employees well in salary, benefits and their workplace environment. Those employees respond through commit to the company, motivation on the job and creative suggestions on ways to grow. Not only are unsafe work areas dangerous and demoralizing to workers, they can lead to investigations, fines and other penalties by federal regulators. The Occupational Health and Safety Administration investigates workplace accidents and conducts inspections of corporate facilities. The closure, even temporarily, of an unsafe facility can seriously impact a company’s bottom line – certainly not an attractive prospect for investors.