October-December 2011

DHARMA AND THE MODERN WORLD: Finance

By Adrian Dec

What Is Socially Responsible Investing?

Socially Responsible Investing (SRI) is a very broad term which describes the action of making financial investments based on a set of predetermined ethical or morally based criteria. These criteria serve as the basis for filters which are used to sift through possible investment opportunities. Through this process of elimination, investments which do not adhere to one’s own personally held beliefs or convictions are removed from consideration.

Defined in this way, it becomes clear that there is no definitive or universal set of SRI criteria. Instead, each specific mix of investment filters is dependent on the beliefs and convictions held by the investor herself – with emphasis on those which she considers to be most important. Some common general themes for SRI investors include the natural environment, human rights, workers’ rights, animal welfare and religious convictions. Less obvious considerations (although no less important) might include corporate governance, commitments to using locally produced goods and services, and community or cooperate based banking practices.

Where Do I Start?

The first essential step is to make a list of precisely which issues or criteria are going to form the basis of your SRI plan.

As a start the list can be very broad, however the eventual aim is to formulate a set of investment criteria that will serve as a basis for filter rules that can be applied in a realistic and unambiguous way. Keep in mind: the longer and more detailed your list is, the smaller set of possible investment opportunities becomes. An example might be structured as follows:

* Must have a comprehensive commitment to positive environmental policies.

* Must be committed to providing a safe and healthy work environment for all employees in the organization.

* Must not operate within countries with human rights violations or corruption problems.

How Do I Proceed?

There are two basic methods by which a socially responsible investor can operate: engaging an investment adviser or through a self-managed investment portfolio.

Investing through an investment adviser is definitely the easiest way to start. Here, your list of investment criteria becomes the basis of your adviser’s recommended investment portfolio. The key here is to be as specific as possible so that any possible causes for misunderstanding can be minimized.

It is also important to be clear from the very beginning that you want to pursue an SRI strategy. Investment advisers also have their own opinions or prejudices around SRI. You may find yourself being steered away from an SRI plan for various reasons. First, there is the perception that investment returns from SRI strategies are generally below average and imposes too many limitations on the number of possible investment choices. However, this argument presupposes SRI investments abandon good investment principles, and that is simply not the case.

Some investment advisers believe that it is better to invest without restrictions, thus maximizing returns, and then donate a portion of your investment gains to charities. This is definitely an issue open to debate. The potential for good that can be achieved through direct giving is clear and transparent. However, if direct giving (to a Buddhist organization like the FPMT, for example) is the result of investment gains from stock investments in companies involved in armaments and munitions, or other obviously harmful industries, such direct giving becomes ethically questionable.

As SRI has become more widespread over the last few years, it is possible (and now relatively easy) to find financial advisers offering specialized advice to those investors specifically interested in adopting an SRI plan.

If you are looking to have a more hands-on approach, managing your own investment portfolio is definitely a serious option. Some homework is required to make sure the investments being chosen are actually operating in accordance with the principles they claim to represent.

This method of investing is best suited to people who already have some investment experience, or have a willingness to make an effort to bring themselves to a point where they are comfortable with finding different sources of investment information and have an understanding of how financial markets operate. Even so, there are ways of minimizing the work required to maintain a SRI portfolio. One way is to buy mutual funds, an investment which pools together money from a large number of people to buy different types of financial assets. The investors then share their returns across the pool in proportion to the amount of money each has invested. The main advantage is that a relatively small amount of money invested by one individual can share in the benefits derived from diversification across a large number of assets held by the fund. There are a vast array of mutual funds offering a diverse selection investment choices, particularly in “green markets” such as clean energy and sustainable farming.

Adrian Dec has worked in financial markets for over 17 years and been a student of Lama Zopa Rinpoche since 2001. He also serves on the FPMT Investment Committee.

Making financial investments of any type is inherently risky and this should always be taken into account before making important financial decisions.

Tags: business, finance, investing