The merits of socially responsible funds have been debated often, usually in terms of their worth as investment vehicles. On this I think it's enough to say that 1) these funds are no more likely than any managed fund to beat a given index (it depends on what index you choose and what time frame you use for comparison, etc.); and 2) there's nothing wrong with an investor simply deciding that his or her ideals are worth upholding even if it means taking on the risk of missing out on the absolute maximum potential portfolio performance.
What there seems to be more confusion over is what it is that socially responsible funds can actually achieve. The other day, for instance, it was reported that the Sierra Club is thinking about jumping into the "socially responsible investing" field. Why? First, a fund would give investors who are in tune with the Sierra Club a place to park their money. Second, it might attract more attention, and thus more members, to the club itself. Third, it might provide new revenue. And finally, the fund might play some role in helping shape the behavior of corporate America. The New York Times quoted a Sierra Club board member on that last point: "This can influence corporate behavior, and some corporations might want to change their policies to be part of the fund."
The most convincing of these motivations is providing investors an intellectual safe haven: If you are as hard-line as the Sierra Club is on environmental matters, you presumably don't want to own a piece of this or that allegedly egregious polluter. The Sierra Club would devise a screen to be used by some financial institution partner, which would actually market and manage the fund, paying the Sierra Club a royalty. (Its CFO has speculated that this could generate $1 million a year within five years.) So if you put the part of your nest egg earmarked for equities in that fund, you could rest assured that you're not the co-owner of, say, General Electric, or some other company whose actions offend you.
But obviously this is only true if you don't simultaneously put another part of your nest egg into a popular fund like Fidelity Magellan or the Vanguard 500 Index Fund, which holds a wide array of tobacco companies, oil companies, pharmaceuticals—something for pretty much any flavor of socially conscious investor to abhor. Nevertheless, I spoke with a bunch of people in the socially conscious investing world, and while no one seems to track this data, the anecdotes suggest that lots of folks who put money into "responsible" funds do so with only part of their portfolios.
Diversification is generally a good thing since many people don't want to bet their whole future on one fund. But if your goal is to sleep soundly with the knowledge that you're doing your part against the corporations you think are no good, then you will achieve that goal only by fooling yourself. Putting a slice of your assets into a socially responsible fund and the rest into an index fund is roughly like declaring your allegiance to vegetarian ideals by having an extra helping of green beans with your T-bone or like slapping a pro-conservation sticker on the bumper of your SUV. In this scenario, a responsible investment is basically nothing more than a kind of symbol of conspicuous concern.
But wait—aren't these well-intentioned investors somehow helping the cause by supporting a fund that might "influence corporate behavior"? Again I asked around on this and didn't hear any examples of a company "changing its practices" to "be part of" a given socially conscious fund. And the more specialized the fund, the less likely it is to have much heft in the form of assets under management. The Times noted that the Sierra Club's exploration of starting a fund was partly inspired by the Humane Equity Fund, which is associated with the Humane Society; it has about $9 million under management, compared with about $75 billion in the ideology-free Vanguard 500. (A more plausible scenario for tweaking corporate behavior involves shareholder activism—affecting companies that are already in a given fund. Next week I'll delve a little deeper into this with a look at two companies that have had brushes with socially conscious investors—Wal-Mart and Home Depot.)
My point here is not that there's something wrong or foolish or quixotic about trying to make your investments square with your ideology. It's undeniable that more investors have at least some interest in doing precisely that, and it's good that there are a growing number of vehicles out there, like the Humane Equity Fund, to make it possible. But it's important to be realistic about what these funds—not to mention conspicuous concern—can and can't do.