Socially responsible investing goes mainstream

An article in The Wall Street Journal looks at the changing face of socially responsible investing.

Socially responsible investment funds generally use screens to avoid stocks that they perceive as being objectionable: alcohol and tobacco companies, along with weapons manufacturers are generally excluded from these funds.

But as the funds gather assets and gain a mainstream following -- as investors everywhere become increasingly concerned about issues like global warming -- these funds are finding themselves with more leverage than ever before. They can get meetings with CEOs and use shareholder meetings to voice concerns about issues and drum up support among other shareholders.

As pension funds jump into the mix, issues involving labor and health care also gain prominence.

I'm a big supporter of socially responsible investing but, taken to an extreme, there can be a downside. As these funds gain increased leverage, they can push companies into adopting policies that are reflective of pet causes rather than the broader interests of minority shareholders.

As Milton Friedman wrote, "There is one and only one social responsibility of business -- to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud."

While I would argue that that may be extreme, many investors adopt that ideology wholeheartedly and will object to the growing influence of SRI funds.