New York City schoolteacher Steuart Osha tries to do her part for the environment. She drives a fuel-efficient car, uses energy-saving lightbulbs and buys mostly locally grown organic produce for her 4-year-old son, Pavan. Lately, as she awaits the birth of her daughter, she’s become curious about “green” investing. “Kids force you to think about the future,” she says. “It dawned on me that maybe we could invest in ways that help the planet, instead of contributing to the cycle of pollution and problems.” But where to begin? With her daughter’s birth around the corner, Steuart barely has time to figure out her maternity leave and investigate Pavan’s kindergarten options, let alone get a handle on socially responsible investing. So, here, we address her top queries.

Is socially responsible investing a passing fad, or does it have legs?

This approach aims to maximize financial returns while investing in ways that aren’t harmful to your neighbors or the environment. Though socially responsible investing (SRI) may seem fashionable these days, it’s actually been around since the early 1800s, when the Quakers refused to put money into enterprises or banks that supported slavery. “SRI is getting a lot of attention lately due mainly to the climate-change crisis and the profitability we’ve seen in many alternative energy companies,” says Jon Ellenbogen, a socially responsible advisor with Wachovia Securities in Washington, DC. “The generation that’s coming of age now is more aware of the social ills in the world and is acting in a more conscious manner.” According to Ellenbogen, the more socially responsible investing success we see, “the more people will be attracted to this style of investing for the long term.”

It may seem like the right thing to do, but will it cost me in returns?

Though socially responsible stocks have a reputation for poor performance, recent data show that these funds are now competitive with—and in some cases have even outperformed—the overall stock market, experts say. In fact, socially responsible investments rose to $2.7 trillion in 2007 from $639 billion in 1995, according to the Social Investment Forum, a membership association for SRI professionals and institutions. The number of SRI mutual funds more than quadrupled during that time, to 260 from 55. Many people who work in the field believe that these investments can be especially solid because the companies that qualify “are less susceptible to corporate governance scandals and other business costs that can arise from a lack of responsible environmental, social or corporate oversight,” says Stu Dalheim, director of shareholder advocacy for Calvert investment advisors in Bethesda, MD. As a result, he says, SRI funds tend to post higher long-term average returns. However, financial advisors caution that this style of investing has also had its share of bad years, and you need to have the right portfolio mix to cushion against the down times.  “We’ve found that some years, SRI slightly outperformed the overall market, and other years it slightly underperformed,” says Ellenbogen. “Getting the right asset allocation—U.S. stocks, international stocks, bonds, cash, etc.—is what really impacts a portfolio’s performance.”

Do socially responsible funds stack up against the so-called sin funds?

When selecting a socially responsible mutual fund, it’s key to know the business sectors the fund invests in and the method it uses to screen corporations. Negative screens, for example, exclude companies that develop products that investors may not wish to support—the so-called sin funds—such as tobacco, casinos, alcohol, weapons and nuclear energy. Positive screens recognize companies that engage in efforts such as conservation, civil rights, labor relations or animal rights. Like SRI funds, the sin funds outperform the market in some years and underperform in others. “Since George Bush has taken office, vice has done fairly well,” Ellenbogen notes. “But then again, so have [SRI sectors like] alternative energy and organics.” For example, the five-year average performance of the Vice Fund (VICEX) is about 20 percent; that of the New Alternatives Fund (NALFX) has been about 22 percent for the same period. Calvert, for instance, excludes companies that manufacture tobacco products and alcohol, and seeks to avoid investing in companies that produce, design or sell weapons that violate international humanitarian law. But, says Dalheim, these exclusions are only a piece of a broader approach that assesses corporate performance on a range of environmental, social and governance factors, leading Calvert’s socially responsible funds to invest in companies that usually have strong management structure and lower risk. Companies that pay attention to managing social and environmental issues, he notes, have the potential for better long-term financial performance.

Can how I invest influence companies to make changes for the better?

One of the challenges many investors have is understanding the long term versus the short term, says Amy Domini, founder and CEO of Domini Social Investments in New York City. “We enjoy eating things that we know are fattening, and it may take weeks before we see the results of those fattening things,” she says. “In the same way, the investments we make build the world we live in tomorrow. Investing with a conscience does make a difference.” Dalheim agrees, adding that if we commit our investments to the companies that address the most pressing environmental, social and governance issues facing their businesses, “we send a signal that investors care about how management addresses the risks and opportunities associated with challenging issues like climate change, product safety and workplace practices. We do this through stock selection and shareholder advocacy.” While the SRI industry has been spearheading this approach for years, mainstream financial firms have recently started to make the connection between financial performance and issues of sustainability or corporate responsibility. In terms of concrete changes, Ellenbogen says that over the past decade, socially responsible investors have accomplished impressive results: “We have gotten companies to treat workers more fairly, reduce their pollution levels and divest from oppressive regimes,” he says. “And we’ve gotten them to create greater diversity in the workplace. Creating change used to require more effort. Now, many companies want to be on SRI lists and want to know what they need to do to be included.”

$$$ Tip

To cushion against down years, socially responsible investors should have a portfolio mix of stocks, bonds and cash.

Online Resources

The Social Investment Forum promotes SRI and provides information to help you get started. socialinvest.org  Calvert’s “Know What You Own” service lets you run the holdings of various funds through the screens used by its Calvert Social Index. calvertgroup.com/sri_knowwhatyouown.html  If you’re interested in joining an investment club (many people find this a great way to learn about SRI), the National Association of Investors Corporation’s website can help you locate the right one. better-investing.org The Center for a New American Dream, which helps people consume responsibly to protect the environment, includes SRI info.newdream.org