No one would argue that Shelagh Kenney is socially unaware: She currently works as an attorney for a nonprofit anti-death-penalty group in North Carolina; in her previous job as an associate at a large Manhattan firm, she always made time for pro bono work; and she goes out of her way to buy groceries at independent health food stores to avoid patronizing large corporations. But until a couple of years ago, the 32-year-old Kenney had never considered investing based on her social values. That all changed with a phone bill.

At the time, Kenney was using the alternative long-distance carrier Working Assets, which donates part of its proceeds to good causes (we told you she was socially aware). Her bill came one day with information about responsible investing. Kenney had been socking away money in a couple of mutual funds and an IRA, but she never thought much about what companies the funds themselves invested in.

Now she found herself drawn to the idea of translating her social values into her investment strategy. She gradually started doing research on the Web and plotting a change in her portfolio. This spring, Kenney transferred much of her savings into a pair of mutual funds that screen out investments in companies with business practices that don’t square with her convictions. “I make those kinds of choices all the time in my everyday life,” she says. “It didn’t make sense to make money from companies I wouldn’t normally support.”

The ABC’s of SRI
Kenney is one of millions of investors who have recently developed an interest in socially responsible investing. Simply put, SRI is an approach that incorporates social and environmental factors into investment decisions. The movement got its start during the Vietnam War and gained widespread attention in the early ’80s, when socially aware investors sought to boycott South Africa’s apartheid policy by divesting from companies that did business in that nation.

SRI can take many forms, from influencing corporate policy through shareholder advocacy to offering capital for loans in low-income areas. But the most popular kind of SRI is screening, in which mutual fund managers or investment advisers eliminate stocks of companies with objectionable practices. That allows investors like Kenney to put money directly into the stock market with a clear conscience. The most commonly nixed firms: companies that market alcohol, tobacco, or weapons; do significant business in gambling or pornography; or seriously degrade the environment.

A Growing Practice
SRI has been gathering momentum big-time in recent years. In 1984, an industry survey conducted by the nonprofit Social Investment Forum determined that there were investment assets of $40 billion committed to SRI. In the forum’s latest survey, in 1999, that number had jumped to more than $2 trillion — a fiftyfold increase. Between 1997 and 1999 alone, money invested directly through screening skyrocketed from $529 billion to $1.5 trillion — a gain of 183 percent.

Is socially responsible investing fiscally responsible? There’s evidence to suggest it is. Take the Domini 400 Social Index. The Domini was created in 1990 to be an SRI benchmark comparable to the S&P 500, the most respected index of overall market performance. By June 2001, the Domini’s 10-year annualized performance had outpaced the S&P — 16.30 percent to 15.11 percent.

“There’s been a connecting of the dots between values and dollars,” says Steve Schueth, a member of the Social Investment Forum board. “People can invest consistent with their values and achieve the kind of returns they need to meet their goals.” To replace fiscally strong but socially undesirable stocks, Schueth says, “you just find different kinds of companies with similar prospects for growth and comparable risk profiles. There are always stocks with similar underlying market characteristics.”

There’s more good news: The types of SRI investments available are multiplying. About a quarter of all the socially responsible mutual funds have been added in the past two years. Because of the growing number of choices, Schueth says, it’s now possible to use socially responsible investing principles in any major asset class (stocks, bonds, equities, etc.).

Picking Winners
Choosing specific SRI investments is no different from choosing standard investments. Experienced market players might work with an adviser to tailor a personalized roster of individual stocks. But for beginners with smaller portfolios ($2,000 to $3,000), mutual funds are the easiest route. If you start with just one, make it a balanced fund, which blends investments in stock, bonds, and government securities to provide moderate growth, protect capital, and produce income—a little bit of everything.

As your portfolio grows above $10,000, consider diversifying into several different fund types—large company, small company, bond, foreign investment—to spread risk. For a mid-level investor—someone with, for example, $30,000 to $100,000 in the market—Schueth will typically spread assets across a range of 15 different funds, adjusting the allocation to meet the client’s risk profile.

In choosing a socially responsible mutual fund—or any mutual fund—don’t assume that one year of high returns will repeat itself. Review a fund’s performance for consistency by comparing it with its peers going back at least 5 years and ideally 10.

Both the SocialFunds.com and the Social Investment Forum (socialinvest.org) Web sites have a wealth of information on SRI, including excellent charts of screened mutual funds with performance data updated monthly.

The results? Shelagh Kenney says she’s willing, if necessary, to earn less on her investments through SRI out of principle. She may not have to. Kenney hasn’t been investing long enough to make firm determinations about how she’s doing, but so far, the two Ariel mutual funds she chose are performing handsomely, outpacing their peers and the S&P 500 as of July 1. Maybe greed and good do go together.