Can one invest with a sense of social responsibility and still do better than the market averages? That is the question answered in a new article in the American Association of Individual Investors (AAII) Journal, "Does Social Investing Generate Higher Returns?" by Meir Statman and Denys Glushkov (in AAII's April, 2010 issue, Vol. XXXII, No. 4, pp. 13-16). Social investing involves favoring in one's investing approach the shares of companies that get high marks for such social responsibility themes as "going green," avoiding "sin" (for instance selecting for companies not engaged in gambling, the promotion of smoking, military support, or bad environmental policies as means to their primary profits), doing good for one's community, or encouraging of positive employee relations. Typically it also means not investing in or disfavoring the shares of companies that do "sin" in various ways from a social responsibility standpoint. There are mutual funds that focus mainly on one or another form of social investing. The individual investor may also make her or his stock selections based on socially responsible criteria.
Since we all like to think of ourselves as good people, who would not want to be a social investor if the returns are as good or better by doing so? It turns out, though, per the AAII article, that things are a little more complicated than that. If one screens only for one criterion of social investing, for example focusing on companies that have good records for employee relations, the stocks of corporations like Starbucks that consistently in the past have been scored superior in terms of employee satisfaction, the returns do tend to be better than, say, the record of the S&P 500 Index. But if several socially responsible criteria are added into the mix and one screens out the companies that do not measure up, alas, the returns are often significantly lower than a major market average like the S&P 500.
Also, there are any number of combinations of criteria that can be used for the selection or rejection of socially responsible vs. socially irresponsible companies' stock. One person's socially responsible corporation, perhaps a start-up enterprise that turns guns into plowshares (the metal blade portion of a plow), may be lauded by some but decried by others, i.e. folks who believe more people ought to own guns. A nuclear plant utility might be considered good by those who believe we cannot reach state, national, or global green energy targets without a substantial portion of our electricity coming from the nuclear option, while others, maybe remembering Three Mile Island, Chernobyl, or that we still have no practical means of dealing with nuclear waste, might believe investments in nuclear utilities are about as responsible as a deal with the devil.