Q: I would like to see a portion of my investments make a difference in the world. Can you suggest an approach to socially responsible investing?

Sincerely, Abe Etterworld

Dear Mr. Etterworld,

Although I would prefer to offer glad tidings, the practice of socially responsible investing (SRI) is more challenging and flawed than most people think.

Consider two different publicly traded companies. One makes solar power products; the other makes flooring. The solar panel manufacturer will immediately pass the socially responsible screens, whereas the flooring manufacturer will not (nylon carpet is petroleum based).

First, imagine that the financials of the solar power company indicate that profits have turned to losses and the company will soon be facing massive layoffs. Compare this to the flooring company, which has slowly been growing its bottom line and is now hiring. Which company will have a more positive effect on the families in their communities?

Now take into account that one company’s management style borders on abusive and the other is directed by an inspiring and highly principled leader. You begin to see how difficult it is to ensure that your dollars are making a positive difference in the world.

Finally, consider that solar panels create many toxic byproducts both in the manufacturing and landfill disposal. Petroleum-based carpets can now be recycled and leave behind minimal waste.

My point is not to tarnish solar panel companies or exalt flooring companies but simply to illustrate the inherent complexities of labeling corporate saints and sinners. Identifying socially responsible companies by using broad industry screening techniques is like judging the character of a person by asking for their zip code.

Another item to consider is that SRI adds an extra layer of expense. The management expense ratio of the iShares MSCI KLD 400 Social Index Fund (DSI 0.5%) is more than five times a nonsocial index like the iShares S&P 500 (IVV 0.09%). The costs of active management will be even higher.

Many people drawn into this investment sphere because of their strong personal beliefs leave disenchanted because they must accept an entire platform of social and moral preferences. For example, is it socially responsible to build nuclear power plants? Some say yes and others a vehement no. Is animal testing socially responsible? How about companies that make political donations?

Despite the quagmire, these issues are too important to ignore. Socially responsible consumption has a bit more clarity and a more direct impact than investing, and so I would start here. One of the most educational websites I have seen on this issue is slaveryfootprint.org.

You can also consider micro lending in places where traditional banking systems are not fully functioning. For example, both Kiva (kiva.org) and Microplace (microplace.com) provide user-friendly tools to make such loans. Through Kiva, I am currently lending money along with others around the world to a farmer in the Ukraine with money that was repaid by a tailor in Rwanda. And it only takes $25 to get started!

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