Estate Conservation Associates: Selection Criteria

When a portfolio of stocks is assembled, whether for an individual, a trust, an index, a mutual fund or pension fund, both negative and positive criteria are, of necessity, employed in the selection of those stocks. Generally, in addition to the posture of the buyer and its current portfolio, those criteria will have to do with such characteristics as the amount of company capitalization, earnings, the positioning of the company in its market, the business plan, management, projected sales, the price-earnings ratio of the stock, dividend history, price volatility, etc. These criteria determine the appropriateness of a stock for the portfolio. SRI adds an additional layer of criteria to the screening process, further narrowing the selection process.

Based on an historical overview covering the period 1995–2001, the Social Investment Forum found that tobacco is the most common screen employed by socially screened portfolios (as a negative criterion). Following is a list of screens often employed in socially responsible investment

It should be noted that portfolios and funds utilize these criteria differently and there is no uniformity in how these criteria are applied. Each portfolio makes its own selection of criteria and gives its own weight to a given criterion. One of the more successful screened mutual funds, for example, does not screen for gambling and holds several gambling stocks in its portfolio—while embracing other criteria. Social screening means that ethical criteria are being employed, not that there is universal agreement about those criteria and about which are of greatest importance.

For many years, a debate has raged over the value of employing non-investment criteria in the selection of stocks. Critics argue that the use of such criteria narrows the field of selection and will negatively affect return. Advocates for the use of social criteria argue that, by eliminating problem issues that involve costs and liabilities, social screening further insures the financial prospects of a company. A company that is free of labor problems, lawsuits stemming from toxicity or human rights violations, even the volatility of weapons manufacture, is a company more likely to generate profits. Furthermore, companies that embrace employee loyalty, positive community relations, environmental sustainability, and peaceful creativity are companies more likely to succeed in the long run.

The debate is largely over. Over the past decade, numerous studies have found that social screening either enhances return or, at worst, makes no difference. In January, 2002, the Social Investment Forum reported that nearly two thirds (63%) of all socially screened funds tracked by the Forum earned one of the two highest rankings for performance from either Lipper, Inc. or Morningstar or both during 2001. Despite the stock market downturn, the number of top marks from Lipper and Morningstar in 2001 was almost unchanged from 2000.

Of the smaller group of sixteen screened funds tracked by the Social Investment Forum with $100 million or more in assets, four out of five (81%) received top performance marks for 2001 from one or both of the tracking firms.

The success of socially screened mutual funds is reflected in the growth of those funds, as well as socially-screened portfolios, in the past few years. From 1999 through 2001, for example, the growth rate for socially screened portfolio assets was more than 1.5 times that of all professionally managed assets in the United States, with socially screened portfolios surpassing the $2 trillion mark for the first time to $2.3 trillion at the end of 2001. Two hundred and thirty mutual funds in the U.S. now incorporate social screening into the investment process.

Estate Conservation Associates
California Insurance License No. 0538317. Insurance and annuity services available to California residents only.
PO Box 6881, San Rafael, CA 94903 • phone: 415-491-4762 • fax: 415-491-4763 • e-mail: jshell@ecafinan.com.

Comprehensive Planning & Investment Advisory Services offered through Pacific West Financial Consultants, Inc. Securities offered through Pacific West Securities, Inc., member NASD, SIPC. 555 South Renton Village Place, Suite 700, Renton, WA 98055.

Site created and maintained by Mountain Muse Communications. If you have problems with this site, please contact the webmaster.

Broadly Used used in ≥50% of screened portfolios	Commonly Used used in 30–49% of screened portfolios	Specialty used in <30% of screened portfolios
Tobacco Environment Human Rights Employment/Equality Gambling Alcohol Weapons	Labor Relations Animal Testing/Rights Community Investing Community Relations	Executive Compensation Abortion/Birth Control International Labor Standards