The Origins of Socially Responsible Investing (2024)

You're not alone if you haven't heard of corporate social responsibility (CSR). This concept stems from the belief that businesses and corporations should act responsibly in the communities and environments they operate in.

Taking action to protect the environment and to promote human rights and equal employment opportunities are some examples of CSR. Businesses can also act to promote educational opportunities or women's and minority rights.

Socially responsible investing (SRI) is an investing interest strategy in which investors develop standards to invest only in businesses that strive to abide by acceptable social values.

The Roots of Socially Responsible Investing

Socially responsible investing in the U.S. is thought to have roots that date back more than 200 years. It goes back to the money management practices of the Methodists. Others suggest that it traces back to the ideas long championed in Jewish investing.

John Wesley, the founder of the Methodist movement, urged his followers to shun profiting at the expense of their neighbors. They avoided partnering or investing with those who earned their money through alcohol, tobacco, weapons, or gambling. These investments were sometimes referred to as "sin stocks." These actions established social investment screens.

Shariah- or Shari'a-compliant investing also goes back hundreds of years. It follows the principles of Islamic finance. Shariah-compliant investing avoids investments that are related to activities prohibited by Islam.

It wasn’t until the sixties that SRI vaulted forward as an investing discipline in the U.S.

The 1960s

Dissatisfaction among students and other young people led to protests against the Vietnam War in the sixties, as well as the boycott of companies that provided weapons used in the war. Civil rights and racial equality rose in prominence.

Community development banks that were established in low-income or minority communities were part of a movement that prompted the Civil Rights Act of 1964 and the Voting Rights Act of 1965.

The 1970s

Social activism spread to labor management issues at corporations during the seventies. Protection of the environment also became an issue for more investors. The first Earth Day was celebrated in 1970. Concerns that many activists had over the threat of pollution from nuclear power plants were heightened as the decade wore on. They reached a peak with the accident at the Three Mile Island nuclear power plant.

A big SRI breakthrough occurred in 1970 when Ralph Nader, a consumer advocate, environmentalist, and later independent candidate for president of the United States, succeeded in getting two socially based resolutions on the annual meeting proxy ballot of General Motors. GM was the country’s largest employer at the time.

Both votes failed, but it was the first time that the federal Securities Exchange Commission permitted social responsibility issues to appear on a proxy ballot.

The 1980s

Progress kept on for SRI during the eighties, most notably through the effort to end the racist system of apartheid in South Africa. Individual and institutional investors pulled their money away from companies with operations in South Africa.

The investment decisions of churches, universities, cities, and states moved many U.S. corporations to divest themselves of their South African operations. That led to economic instability within South Africa. It contributed to the eventual collapse of apartheid.

The early 1980s were also a time when many mutual funds were founded to cater to the concerns of socially responsible investors. These funds applied positive and negative screens or filters to their stock selections. Two funds that did so were the Calvert Social Investment Fund Balanced Portfolio and the Parnassus Fund.

The filters included the basic concerns of the Methodists, such as weapons, alcohol, tobacco, and gambling. They also focused on more modern issues, such as nuclear energy, environmental pollution, and the treatment of workers.

The 1990s

There had been enough proliferation of SRI mutual funds and growth in popularity as an investing approach by 1990 to warrant an index to measure performance. The Domini Social Index, made up of 400 mostly large-capitalization U.S. corporations, comparable to the S&P 500, was launched in 1990.

The companies were selected based on a wide range of social and environmental criteria. They provided investors with a benchmark to measure screened investments versus their unscreened counterparts.

The activism that led to the identification of certain screens and the engagement of dialogue with companies with questionable corporate behavior also propelled the growth of community investment. This is another major element of SRI. Support for community development financial institutions (CDFIs) grew during the 1960s as a way to address racial inequality.

Activists argued that there was a positive social impact by investing in CDFIs. This in turn would inject that money into small businesses and housing programs in low-income communities. Loans were made to poor people who paid them back with a rate of interest, providing a return for investors beyond knowing that their money was used in a socially positive way.

Responsible Investing in the Millennium

There has been an acceleration of positive approaches to sustainability challenges being embraced by socially responsible investors. Such modern approaches include impact investing and the mainstreaming of sustainable investing. They continues to evolve.

You can expect corporations and businesses to address their impact on social issues with social issues continuing to manifest. Some additions are income and wealth inequality, climate change, pollution, and corruption, to name only a few. They'll strengthen their stances going forward. More investments will be designed with these concerns in mind as sustainability and corporate social responsibility keep adding perceived consumer and investor value to companies.