Changing the world, one investor at a time

An increasing number of venture capital and private-equity funds are financing startup companies engaged in solving social and environmental problems. Bio-fuels and other alternative energy sources, an area of strong interest for values-based investors, attracted more than $70 billion in investments in 2006, a 43% increase over the previous year.3 “You can certainly hit a home run when your personal values dovetail with a strong market interest,” Wolfe says. Yet timing the market with values-based investments is as difficult as with traditional



investments. Because of the risks, “you wouldn’t want to put all of your money into this space,” Jed Emerson says. “You have to think like any other investor in terms of your risk tolerance, the returns you are seeking, and your investment horizon.”

SRI funds, among the earliest and still the most prevalent type of values-based investing, now seek out companies whose practices they admire rather than simply filtering out those regarded as social pariahs. In 2005, investments in SRI funds totaled $179 billion, an 18.5% increase over 2003 and a fifteenfold increase from the $12 billion invested in 1995, according to the Social Investment Forum.4

The rapid expansion of interest in SRI funds and other types of values-based investing owes itself not just to increasing social awareness on the part of investors, but also to the realization that such investments can produce competitive returns. A growing body of academic research supports that view — with some caveats. For example, a 2005 Wharton School study found that SRI-focused index funds, which seek to match the overall performance of the market or a market segment, fare about as well as index funds as a whole. Yet Robert F. Stambaugh, a Wharton School finance professor and co-author of the study, warns that investors who drift from indexing in search of higher-performing funds are likely to be disappointed: “If you are not a market index investor, the cost of imposing a social investing screen can be significant.”5

And a 2002 study by the Netherlands’ University of Maastricht found that more than 100 U.S. and European SRI funds performed just as well as their non-SRI counterparts from 1990 to 2001. The study also found, however, that newer, less time-tested SRI funds don’t perform as well as older, more established ones.6

Still, both these and other studies suggest that values-based investing, once widely viewed as an automatic money loser, has come of age as a means for investors to manage risk and bolster their own financial portfolios, even as they do good things for the world.
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