The concept of socially responsible investing (SRI) has been around for hundreds of years. From the Quakers (aka, the Religious Society of Friends) prohibiting members from participating in the slave trade in 1758 to the exclusion of “sin stocks” in the 1920s to supporting the civil rights, environmental, social, and anti-war movements in the 1960s to the modern day focus on Environmental, Social, and Governance investing practices—which takes a holistic view that helps stakeholders understand how an organization manages risks and opportunities related ESG criteria—investors have been looking for a way to both achieve reasonable returns while at the same time reflecting their social, political, and/or religious expectations and beliefs.

In 1928, the Pioneer Fund (PIODX) was the first publicly offered socially responsible mutual fund in the U.S., which screened out tobacco, alcohol, and gambling investments. Since then, and with the rising popularity of ESG accounting standards and declarations, responsible investment (RI) practices have continued to evolve. While in the beginning virtually all SRI portfolios were constructed using negative screens to avoid investments contrary to defined ethical guidelines, many of these portfolios underperformed their benchmarks. Many “sin” stocks and related industries the portfolios had excluded often did very well during certain market rotations. Even though some investors were willing to accept underperformance from their portfolio so they could sleep well at night, most still wanted a reasonable return.

Today SRI is often referred to as socially conscious, ethical, green, mission, religious, sustainable, impact, or ESG investing, all having strategies that screen out weapons manufacturers, gambling establishments, tobacco companies, abortion-related securities, pornography, etc., or that screen in best-in-class shareholder-friendly companies. Whatever their cause, SR investors seek two things: reasonable returns and targeting special social causes.

There are three basic methods to select a company for inclusion into an RI fund. The first, as mentioned earlier, is the negative screen. The second method is the positive screen, where the fund manager chooses companies that engage in a particular activity: corporate social responsibility, development of solar power, promotion of women in the workplace, or some combination of attributes. The third method is a restricted screen in which a manager may select a firm that, because of its diversified structure, might have activities in a less-than-desirable sector, but the rest of the firm’s activities are acceptable to the manager. This last method may also include investing in organizations that have a tilt in the right direction, that is, organizations that have made strides to improve their greenhouse gas emissions or that have reduced their dependence on coal.

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