Fund managers have a number of socially responsible investment strategies to choose from. Depending on what clients demand, funds can be very strict on environmental and social criteria or just apply them loosely as an add-on to traditional financial criteria.
 | The badEach fund applies different restrictions, but the majority shuns investments in alcohol, arms, pornography, and nuclear energy |
Negative screening
Negative screening is about getting rid of the “bad ones”, the polluters and exploiters. If a company is involved in alcohol, weapons, gambling, or nuclear energy, it will simply not be selected for the fund. This technique is used by so-called "dark green" funds that employ very strict screening procedures. Most funds, however, tolerate a certain percentage of “sin stocks” in their portfolio or accept companies, such as supermarket chains that only derive a fraction of their profits from alcohol sales. The problem with negative screening is that simply limiting the number of stocks to choose from also limits the fund's ability to perform.
Positive screening
Funds using this strategy want to pick out the "good guys," instead of just avoiding the bad ones. If a company meets a number of requirements it will be added to the portfolio. For this purpose, funds usually consider practices related to the environment, the workplace, good corporate governance, community engagement, and product integrity. These themes are then broken down into dozens of specific sub-categories. The Allianz Global Sustainability fund, for example, works with about 90 different criteria.
In some cases, fund managers are not implied in selecting relevant criteria. Screening criteria for the Pax World Fund are chosen by the board of directors. Fund managers then utilize professional screening services, company documents, media reports, and public records to make their decision. The strategy is focused on long-term growth, but studies about whether this is successful are not unanimous.
Best of class
The most flexible SRI investment technique consists of choosing best-practice companies. Basically, any business sector can be chosen. The investor screens the market, for example the oil industry, and tries to define trends, potential environmental risks, and business opportunities. In a benchmark, companies in the industry will be measured against these criteria. The top performers will then be integrated in the fund. Critics like Thomas Donaldson from the University of Pennsylvania say that defining procedures and appointing sustainability executives does not ensure good behavior will come out of the process: "It just means you have the process."
Thematic investment
Thematic funds like the Allianz RCM Global EcoTrend fund usually hold companies representing new and innovative industries, such as alternative energy or pollution management. Their shares tend to be more volatile, because of the smaller size of companies, but they may also yield very high long-term returns.
In a way, environmental theme funds go beyond the scope of SRI, because their ethical or social aspect is rather a by-product than an initial objective. Driven by the motivation to make profit, these funds are based on the idea that environmental technologies are a promising growth market.
editor: Thilo Kunzemann
publishing date: March 16, 2007
