Socially Responsible Investing
(Executive Summary)


"Socially responsible investing" (SRI) is a method of investing that is best known for screening stocks for their social or environmental characteristics, as opposed to their financial performance. Thus, an SRI investor can avoid buying and supporting companies that are felt to harm whatever social values held dear by the investor. Or, the investor can get rid of those already owned a process known as divesting.

Much less known is another SRI strategy called "shareholder advocacy" or "shareholder activism." This strategy involves leveraging equity in a company to influence its social behavior. An SRI investor may own many shares, or buy only a nominal amount just to be able to introduce shareholder resolutions aimed at changing a company's social or environmental policies and actions.

A third SRI strategy is community investing, in which often lower-than-market returns are offered to make funds available to help the "poorest of the poor" in areas such as affordable housing, small business, and community development. This segment of SRI is relatively minuscule.

These three strategies have evolved and are often treated as one. However, although the rationale underlying the three strategies share certain commonalities, they are in no way a prepackaged whole which must be embraced as one indivisible unit. For example, an SRI investor may choose only to screen and divest stocks without engaging in shareholder advocacy or community investing. That is, if an SRI investor uses any one strategy, he or she is not obligated to engage in any of the other two strategies.

Engaging in SRI, in any of its three expressions, is beyond reproach for any individual investor. In fact, it is an individual right to choose that is not subject to any other person's criticism or control including the government's.

However, the appropriateness of institutional investors engaging in SRI is debatable. Social screening of stocks for ownership is, above all, a political act. Mandating institutions, particularly public or quasi-public retirement trust funds, to adopt SRI strategies would be a radical act. Such a mandate would not only usurp trust fund boards' right to independent action, but would also confer upon them perhaps unintended public policy-making powers that not even legislative nor executive branches may wield.

With respect to public retirement trust fund boards, the question of fiduciary duty and responsibility also arises. Money in such trust funds must be used for the ultimate benefit of beneficiaries. Although there are some indications suggesting SRI investment strategies cause no significant harm (nor outperform non-SRI investment significantly), the evidence is far from conclusive.

Accordingly, the Bureau recommends that the Legislature refrain from mandating the Employees' Retirement System or any other public institution to adopt either social screening or shareholder advocacy as investment strategies. As community investing is already practiced in some form by the ERS, there appears no need to legislatively mandate the ERS to do so.