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Social Investing 101

Some people are afraid to invest because they think it might be immoral. They don’t want to encourage excessive greed, contribute to environmental damage, or make choices that go against their religious convictions.

And here’s the thing: they don’t have to. Socially responsible investing is the process of choosing investments based on both financial and ethical values. It involves careful research and monitoring of investments, which is what any investor should be doing anyway.

Social investing is pure capitalism, not charity. The people who have the money to invest expect those who need funds to meet certain standards. Some social investors are guided by political ideology or religious beliefs covering a broad spectrum of ideas, but others simply want companies to reveal their business practices and operate for the benefit of shareholders, not managers. After all, isn’t that how it should be?

The primary way to succeed through social investing is to do careful research. First, you need to see if the investment meets your financial goals. Then, you need to see if it makes good economic sense. Both steps are necessary. Read the annual report on Form 10K. What is the company’s business? What is going right, and what isn’t going well? How much debt does the company have? How profitable is it? Are profits growing or shrinking? Are customers paying their bills? Is inventory being shipped? Annual reports may not be compelling reading, but they can tell you a lot to help you decide.

Once you make an investment, you need to monitor it to make sure that it still meets your needs. You should be involved, too. For example, if you buy stock or mutual funds, be sure to vote your proxy statements. These are forms that are sent out to shareholders every year to solicit their votes on compensation packages, members of the board of directors, and other issues. Sure, your vote may be small relative to the size of the company, but if people band together, their votes can add up. And, it tells management that shareholders are paying attention. Social investors can make capitalism work for society, but they have to exercise their power.

Because social investors are so often guided by their passions, they lose their heads. Just because you love a company doesn’t mean it will perform well. You have to be rational in your investing; you aren’t entering into a friendship when you buy a stock or put money into a mutual fund. Likewise, you have to keep perspective on your social goals. We live in a messy and imperfect world. If you set your standards too high, you won’t be able to put your money anywhere.

By Ann Logue, author, Socially Responsible Investing for Dummies (Wiley, 2009)