- The Washington Times - Wednesday, May 10, 2006

The United Nations has quietly adopted a code of conduct for businesses worldwide to promote socially responsible investing.

The “Principles for Responsible Investment” provide a framework for avoiding investments in companies with poor records on pollution, labor relations or corporate governance.

The voluntary guidelines encourage investors to seek disclosures from companies about whether their policies encourage socially responsible behavior among employees and management. Corporations also are asked to report on their progress in complying with the principles, which were developed in the past year by a group of international financiers organized by the United Nations.

“With only rare exceptions, the financial community has not sufficiently recognized or rewarded corporate efforts to respond to environmental, labor or human rights challenges, even though such factors can be directly material to corporate performance,” U.N. Secretary-General Kofi Annan said when he announced the guidelines late last month.

About 160 banks, insurers and fund managers have endorsed the principles, including the California Public Employees’ Retirement System, the Teachers’ Retirement System of the City of New York and Amalgamated Bank.

“We also like the fact that the [Principles for Responsible Investment] are voluntary and suggest rather than demand actions,” said Anne Stausboll, chief investment officer for the California Public Employees’ Retirement System, the nation’s largest public pension fund, with assets of more than $208 billion.

However, the principles also raise questions about whether socially responsible investing means investors must sacrifice part of their savings to pursue ideals.

“Those sector biases might tend to make for uneven performance in the short term,” said Greg Carlson, a fund analyst for Morningstar Inc., a Chicago financial research service, suggesting that socially responsible funds rarely make the most money for investors.

The funds typically use “social screens” to rule out investments in alcohol or tobacco companies, military contractors or chemical companies with a history of environmental abuses.

Even General Electric Co. is excluded from some lists because of its defense business.

Nevertheless, the funds have plenty of customers among those who make morality the guiding principle of their investments.

The number of socially responsible funds has more than doubled in the past 10 years, from 51 in 1996 to 109 by this spring, according to Morningstar.

“I think it’s partially a reaction to the corporate scandals we saw during the bear market,” Mr. Carlson said, referring to corporate executives accused of dubious methods of maintaining profits while the stock market took a downturn in 2000.

Bethesda-based Calvert Group Ltd. is the nation’s largest manager of socially responsible funds. Other major investment houses for socially responsible funds are Domini and Citizens Funds.

Socially responsible large-cap blend funds, which include the largest corporations, reported an average one-year return of 11.18 percent, an annualized three-year return of 15.88 percent and an annualized five-year return of 4.18 percent, according to Morningstar.

Mainstream large-cap blend funds reported a 12.69 percent average one-year return, a 17.40 percent annualized three-year return and a 4.08 percent five-year return.

The Standard & Poor’s 500 Index showed an average annualized one-year return of 15.42 percent, three-year return of 14.68 percent and five-year return of 2.70 percent with dividend reinvestment.

Part of the problem in keeping up with the best mainstream stocks is finding highly profitable companies that fit the criteria of being socially responsible. Typically, they cannot be involved in the tobacco, alcoholic beverage or gambling industries; they cannot hold contracts with the military; they also must have good records for labor relations.

About two-thirds of the companies listed on the New York Stock Exchange could survive the Calvert Group’s social screens.

However, some of last year’s best-performing companies, such as oil giant Exxon Mobil Corp. or brewer Anheuser-Busch Cos., would be weeded out because of their environmental or health records.

Large corporations listed by many fund managers as socially responsible include software giant Microsoft Corp., household products maker Procter & Gamble Co., computer chip manufacturer Intel Corp., banking and securities firm Wells Fargo & Co. and telecommunications company AT&T; Inc.

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