Socially responsible investment is an emerging trend in
financial markets. The concept has rapidly gained acceptance
with mutual funds and ETFs specifically designed to meet such an
investment need (
ETFs vs. Mutual Funds
This has largely happened because people are not only concerned
about their future in a portfolio sense, but are also worried about
the future of the environment and corporate practices as well.
Apprehension about misuse of natural environments has not only led
to greater awareness, but also the need to do something, and to do
something about it now.
Socially responsible investing provides a platform and an
opportunity to the investor to fulfill their financial needs, and
at the same time, to consider the impact of corporations on
Approaches involved in Socially Responsible
Investors involved in socially responsible investing necessarily go
through the process of screening which involves both positive and
negative screening of investments. The procedure entails extensive
evaluation of company compatibility with various criteria. These
range from environmental concern to animal rights, and weapons
manufacture, to employee benefits.
Negative screening generally excludes those investment avenues
and companies whose policies and practices are considered harmful
for the social environment. Generally companies involved in
manufacture and sales of products like tobacco, alcohol, gambling,
and arms and ammunition, are filtered out in socially responsible
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While negative screening filter out companies that are not
otherwise 'good' for society and environmental and social
advancement, positive screening includes companies that positively
contribute to, and benefit communities and natural environments.
Additionally, this definition can also include firms that are
taking a proactive approach to their environment, either by
donating more, using sustainable practices, or are promoting human
rights both at home and abroad.
Shareholders are the owners of the company to the extent they
invest in the company. Many investors who believe in social
investing utilize their rights in the company to advocate their
concern, whether it be related to wages or any other socially
This group express themselves through dialogue with company
management, shareholder resolution, - or divestment to opt out.
These means of approach can thereby represent three levels of
engagement (or the decision of not wanting to). There is one
ultimate objective, - of making management and other stakeholders
aware. In this instance, the stakeholders could be customers or
employees, vendors or even communities and other stockholders.
Community investing is third way of socially responsible
investment. Though traditional lenders do not provide loans to
those on low incomes, non-profit institutions like community
development banks and credit unions support are known to support
them by providing loans to finance small business or to buy a home.
Community investing is by far the most well-known way of socially
responsible investing (see
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Socially responsible investing has gained popularity. Quite a
few serious investors have adapted to this manner of investment as
it aims to positively impact society and provide long term
competitive returns. Socially responsible investing is widely
practiced, with more than $3 trillion in assets under management,
according to the 2010 Report on Socially Responsible Investing
Trends in the United States.
Some also believe that consumers may be more drawn to these
companies thanks to their more progressive platforms. Thanks to
this, there is a growing belief that these companies could
outperform their less forward looking peers, making firms that are
socially responsible interesting investment choices.
Due to this, ETFs could be solid picks in the current market,
especially for those looking for a broad swath of companies that
possess socially responsible attributes. For investors seeking to
make a play on this segment of the market, we have highlighted five
quality options that could help to accomplish goals in this corner
of the space:
Global Echo ETF (
GIVE is the most recently launched ETF in the category giving
investors a new way to play the space. The fund is an actively
managed ETF with an emphasis on sustainable long term capital
appreciation as it invests across a variety of asset classes.
Market trends may not hamper the performance of the ETF either,
as it seeks to keep very little correlation with the broad based
equity, as well as bond market indexes. These include the S&P
500 and Barclays Aggregate Bond index.
The fund has assets under management of $5.2 million and trades
with a paltry daily average volume which could suggest wide bid ask
GIVE seeks to invest its asset base in a range of asset classes
under different strategies. These include equity securities, fixed
income securities, depository receipts, and alternative investments
(long/short hedging strategies).
It also includes other ETFs in its portfolio along with other
synthetic instruments. Asset allocation includes cash 23%,
fixed-income 22%, domestic equities 30%, foreign equities 19% and
short exposure 6%.
The fund charges investors a hefty expense ratio of 1.70%
annually, but donates 40 basis points out of that to the Global
Echo Foundation, a charitable organization that works for a variety
of social and economic issues (
Guide to the 25 Cheapest ETFs
). Thus, the product allows investors to directly impact a charity
and invest at the same time with a single ETF.
MSCI USA ESG Select Social Index Fund (
Investors seeking to invest in the large cap equity companies
with a view to social responsibility, can look to KLD. The ETF
picks only those companies that have positive environmental,
social, and governance characteristics relative to their
The fund manages an asset base of $189.5 million and provides
good liquidity with volumes at levels of more than 250,000 shares a
day. The asset base in invested in total holdings of 147
Company specific risk is low in the ETF, as just 25% of assets
are invested in the top 10 holdings (
Three ETFs with Incredible Diversification
). Among individual holdings, International Business Machine Corp
takes the maximum share of assets with 3.56%. This is closely
followed by Apple and Starbucks. For this exposure the fund charges
an expense ratio of 50 basis points annually.
Among sector holdings, Information Technology gets the first
priority with 23.6%. Financials and Consumer Discretionary have
shares of 17.06%, and 12.87% in assets, respectively.
MSCI KLD 400 Social Index Fund (
DSI ETF provides exposure to those U.S. equity companies that
have positive environmental, social and governance characteristics.
The fund manages an asset base of $171.8 million and trades with
the volume of 4,200 shares a day. DSI charges an expense ratio of
50 basis points from the investor.
The overall basket of securities in the fund consists of nearly
396 companies with Information Technology (24.9%), Health Care
(14.6%), and Consumer Staples (13.5%), accounting for the top three
The fund appears to be well spread out as it invests just 27.9%
in top 10 holdings. Among individual holdings, Microsoft Corp takes
the top spot, followed by International Business Machine Corp and
Johnson & Johnson with, respectively, 3.87% and 3.30% of the
Pax MSCI North America ESG Index ETF (
Another fund which investors can consider for exposure to
socially responsible investment is NASI which tracks MSCI North
America ESG Index. The Index is a free float-adjusted market
capitalization weighted benchmark designed to measure the
performance of equity securities in the North American market.
This includes both firms in the U.S. and Canada, and in total,
consists of just under 350 components. Much like the other funds on
the list, this focuses on firms with high environmental, social and
governance ratings relative to their sector and industry group
peers of 16 as rated by MSCI ESG Research annually (
Alternative ETF Weighting Methodologies 101
Company specific risk is not much of an issue in the fund as
just 4.4% of its asset base is invested in the top 10 holdings.
From individual company perspective 3M Co, ACE Ltd and AFLAC Inc
take the top three positions.
The fund charges 50 basis points of expense ratio annually. This
makes it a relatively cheap choice in the segment, although that is
also probably due to its more domestic focus.
Pax MSCI EAFE ESG Index ETF (
The fund is much like its counterparts on the list but has a
more European focus thanks to tracking the MSCI EAFE ESG Index. The
benchmark consists of equity securities of issuers in Europe,
Middle East and the Pacific regions that meet specific
environmental, social and governance criteria developed by
The fund manages an asset base of $9.1 million and trades with
the volume of 8,500 shares a day. EAPS provides exposure to 142
stocks including top weights to Vodafone, HSBC Holdings, and
The fund charges an expense ratio of 55 basis points annually,
making it a decent choice for investors looking for more global
exposure in a socially responsible way.
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ISHARS-KLD 400 (DSI): ETF Research Reports
PAC-ME ESG IDX (EAPS): ETF Research Reports
ADVSR-GLBL ECHO (GIVE): ETF Research Reports
ISHARS-USA ESG (KLD): ETF Research Reports
PAX-MSCI NA ESG (NASI): ETF Research Reports
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