Socially Responsible Investing
By: Jon P. Yankee, MBA, CFP®,AIF®
Clients of Fox, Joss & Yankeeoccasionally ask why we do not participate in what many people call "SociallyResponsible Investing" or SRI. Investors who practice SRI strive to make investment choices based - atleast partially - on whether the companies in which they invest have a positiveimpact on the world. Or, morepopularly, these investors try to avoid choosing investments in companies thathave a negative impact on the world. As investment fiduciaries for our clients, FJY's primary goal and ultimateresponsibility is to place our clients' interests above all otherinterests. It is in the context ofbeing a fiduciary that FJY has determined against making SRI part of ourinvestment philosophy.
When trying to define SRI, wefind it difficult to presume that we or any other advisor can completely andaccurately define this term in a way that is consistent for and relevant to aclient base as a whole. Forexample, which of our clients would want to avoid companies who do businesswith China because of China's controversial child labor laws? Which ones believe that investmentopportunities in the health care or medical research fields are worth theanimal testing that may be necessary for these companies to competesuccessfully? Should we avoidcompanies that compensate their executives "excessively"? How can an investment advisor makechoices among all of these "moral issues" and serve its clients in a consistentmanner?
FJY clients know that we take ourfiduciary responsibilities very seriously. We subscribe to the Uniform Prudent Investor Act (UPIA), asapproved by the American Bar Association, which states that "no form ofso-called ‘social investing' is consistent with the duty of loyalty if theinvestment activity entails sacrificing the interests of trust beneficiaries -for example, by accepting below-market returns - in favor of the interests ofthe persons supposedly benefited by pursuing the particular social cause." Our investment philosophy focuses onfinding the best possible investments for our clients and maximizing theirrisk-adjusted, after tax returns, in the context of an asset allocationstrategy. We have yet to find anycompelling evidence that SRI, especially given the higher costs associated withit, can achieve its goals without sacrificing returns.
As Jeremy Siegel pointed out inhis book The Future for Investors, between1957 and 2003 the S&P 500 returned 10.85 percent per year. If you had invested in every stock inthe S&P 500 during that period - except tobacco giant Philip Morris (nowAltria) because of a moral decision to avoid tobacco companies - you would haveended up with about five percent per year less than if you had invested in theentire index. The preponderance ofevidence still shows that security selection, whether using economic analysisor social screens, is NOT the bestway to achieve market returns over long periods of time. Our fiduciary duties to our clients requireus to put their economic interests above all else and to act as prudentinvestors - even when our clients may wish to follow their emotions or pursuesocial causes to the detriment of their investment portfolios.
Our recommendation is that FJY clientsconsider an alternative approach. By making direct contributions to worthy causes and charities, clientscan be assured that their donations are directed toward organizations thatpromote policies and programs in line with their own beliefs and principles.