Financially sustainable meets socially responsible

When it comes to the important things in life, physicians in particular seem to "get" that there's way more to life than money. And some of the younger doctors I'm working with take that thought a bit further, extending it toward their investment philosophy. I'm talking about "socially responsible" investing or SRI. As a socially responsible investor, you're attempting to achieve your investment objectives without compromising your objectives as a person, a parent or a part of the planet.

The SRI Problem

I've emphasized the word "attempting" here because it's difficult to avoid socially irresponsible companies (I'll coin the phrase "SICks" for the sake of this post) while continuing to observe the tenets of sound investment strategy.

Screeing out timber harveters, oil producers, mining operators, and other "dirty" industries may leave you holding a portfolio concentrated in "clean" industries like software or real estate, but some of the cleanest industries have been the most volatile too.

Looking a tthe numbers, the mutual fund research firm Morningstar lists 85 publicly-traded mutual funds readily available to the public. But in the three years ended September 2007, these SRI funds underperformed the Standard & Poors 500 index by 1.37% each year on average, so being socially responsible has meant accepting lower returns. At the same time, the average SRI fund holds only 150 securities, compared to the more than 6,700 stocks available in the broadly-based Wilshire 5000 market index. Less diversification means more risk.

A Solution Emerges

Today, Dimensional Fund Advisors (the index and passive mutual fund management powerhouse based in Santa Monica, California)  launched two new funds to help socially responsible investors integrate their ecological and economic goals.

The DFA US Sustainability Core Equity Fund and the DFA International Sustainability Core Equity Fund begin with a very broad universe of stocks and then rank and sort those equities according to a score that measures the company's responsiveness to environmental issues. For instance, the funds consider each company's impact on:

  • climate change: how the company reduces greenhouse gas emissions, what climate solutions they use, how they report their impact on the climate, and whether the company's products and services have a beneficial impact on the climate
  • environmental vulnerabiltiy: how companies handle hazardous wastes, how they deal with regulatory issues, their toxic emissions, and potential for negative economic impact
  • environmental strength: what they do to prevent pollution, efforts at recycling, and other environmental initiatives

Unlike other SRI funds, these sustainability funds don't avoid SICks like oil producers. Instead, they might consider the oil producers as a group, and focus their investments on those companies which are better stewards of the environment. The result is an investment vehicle that allows for broader diversification, avoiding the risky sector bets that often result from more radical SRI screens.

While these new funds lack a long term track record, their siblings (the DFA US Core Equity Fund and DFA International Core Equity Fund) have achieved decent results while allowing investors to remain diversified during the choppy investment climate we've seen lately.

Not Perfect, But Getting Better

The reality is that we don't live in a perfect world, and there are no perfect investments. But by being conscious of the impacts we have on our worldsocial, financial, environmental, and otherwisewe may move closer to striking the balance between our needs and the needs of generations to come.