Editor's Note: Our columnist Steve Schueth, president of First Affirmative Financial Network, interviews five leaders in socially responsible investing to get their take on the investing outlook for the coming year. They include Scott Budde, managing director, TIAA-CREF; Amy Domini, founder and CEO of Domini Social Investments; Joe Keefe, president of Pax World Management Corp.; Barbara Krumsiek, president and CEO of Calvert Group; and Jackson Robinson, founder and portfolio manager, Winslow Management Company.

The ancient Chinese proverb and curse, "May you live in interesting times," may have never been more applicable to the financial services industry than during the last 18 months. As 2009 ground to a close, stock markets were mostly up for the year, but flat to down for the decade; interest rates were about as low as they can go, but credit, especially for homeowners and small businesses, was tight; gold and other important commodities were highly volatile; and the national political scene seemed dominated by whirling dervishes.

For many investors, particularly those who approach the markets with an eye toward making money and making a difference with their money at the same time, it's all a bit confusing.

So, to help answer the question, "Am I doing the right thing with my investments?" I interviewed a few of the best minds in the sustainable and responsible investment industry and asked these business leaders to share their thoughts on what's happened, and what might happen next.

Of course, there are no easy answers to any of these questions, but the following observations and predictions may help you make more informed investment decisions in the weeks and months ahead.

Schueth: Has the outsized market volatility over the last 18 months helped or hindered socially responsible investments?

Domini:  Using the FTSE KLD 400 as a proxy, these past three years have been relatively good for SRI investors. That index outperformed the S&P quite significantly.

Robinson: SRI has held up better in aggregate than more traditional approaches because of the rapidly increasing interest in environmental solutions and sustainability on the part of the investment community. I think we will see this trend continue. Growth is increasingly hard for the economy to come by, but the interest in green will continue to drive revenues and, subsequently, profit. We are really optimistic about the space.

Budde:
Our socially screened funds have actually done relatively well, but on an absolute basis have suffered along with their respective asset classes. There is some evidence that impact investing programs-largely in private markets like microfinance and domestic community banks and real estate-are somewhat more removed from the mainstream turmoil.

Krumsiek:
We had several products that held up well during the last 18 months, but there is no question that we, like the industry as a whole, felt the impact of the quick drop in assets under management that hit all equity products.

Schueth: Do you think investors' experience over the last year will lead to a larger recognition of SRI concerns?

Keefe: To the degree that the financial crisis resulted in some part from misaligned incentives, excessive risk taking, outlandish executive compensation, predatory lending and other unsustainable financial practices, this creates opportunities for investment strategies focused on integrating environmental, social and governance (ESG) factors into investment analysis and decision making.

Budde:
Market volatility over the past 12 months highlighted the kind of ESG-related problems in "mainstream" business models that SRI strategies have long recognized. I'm hopeful investors will gain a more realistic perspective on what long-term returns can be expected from different asset classes. This recognition will help SRI-related strategies look even more competitive.

Krumsiek: As performance improves, we believe there is increased opportunity for SRI post-financial crisis and with emphasis on the green economy. For example, our Alternative Energy Fund, even with its volatility, continues to be one our most popular offerings.

Schueth: What important trends should socially conscious investors be tracking?

Krumsiek: We think that by 2012 we will see a more sustainable cost of carbon. That will drive winners and losers in areas like oil and gas, electric utilities and chemical companies. We believe this will also set the stage for the emergence of new companies, or the transformation of existing ones, into new business leaders that become dominant by providing solutions to global problems, like climate change and water scarcity.

Robinson:
The most interesting areas of growth are all going to be about environmental solutions or green solutions or sustainability. All the stars are aligned here. Fossil fuel prices continue to rise, and we have a political framework-at least at the federal level-that is interested in promoting green buildings, green jobs and greater efficiency, specifically in the energy space.

Keefe: Sustainability must become the economic imperative of the 21st century global economy. The shift from an industrial-age economy to a sustainable one will present tremendous opportunities for investors. I also think that achieving gender equality is an important economic imperative. Lifting up half of the human race is not only a moral imperative, and the key to eradicating poverty around the globe, but a potentially huge catalyst to wealth creation and global development.

Schueth: What kind of new products do you anticipate for the SRI industry in 2010?

Keefe: My firm is rolling out a series ETFs based on FTSE/KLD sustainability indexes to provide new opportunities for SRI investors in that space. In addition, we've partnered with Morningstar Associates to launch a new series of asset allocation funds in the SRI/Sustainable Investing/ESG arena with the goal of providing new, one-stop, turnkey solutions for advisors and their clients.

Krumsiek:
  We've been encouraging our sustainability research team to become more involved in traditional financial analysis. In this way we can push the professional development of a new generation of SRI practitioners who have the skills to truly integrate ESG analysis with traditional financial analysis. We also plan to further develop our institutional offerings, with separate accounts based on our in-house equity strategies.

Schueth: Do you see opportunities for increased visibility for the industry?

Krumsiek: Certainly the "greening of the American public" presents us with more opportunities to pique the interest of financial advisors and investors. My firm is steadfastly committed to clients using our current SRI lineup, and we spend a lot of time talking with them about how Calvert's SRI offerings should evolve.

Budde: I believe it's crucial for SRI strategies to attract new segments of investors and achieve scale. Scale allows for advantages in cost structure, returns, distribution, marketing and other areas. These are all factors that many SRI-oriented firms lack and can also be a challenge for larger firms that have developed a significant SRI niche.

Schueth: Do you have a sense that there's an integration of ESG in the mainstream financial services world?

Domini: Wall Street brokers doing their own ESG work seem the most likely evolution. Yes, they were quick to drop the departments, but between academic work indicating that this information helps, and legal work indicating it is important to look at, I imagine these departments will re-form.

Budde: While there is certainly evidence of increased interest in ESG factors, a lot of it is quite superficial and easily lost in the midst of the thousands of other variables that mainstream analysts and portfolio managers consider. And while I think this mainstreaming seems destined to continue, it has a long way to go before it fundamentally alters mainstream investment processes to the point where they will help facilitate progressive change on important ESG issues.

Robinson:
A lot of companies that never thought about sustainability before are now implementing programs. While they are less than perfect, the fact is they are going to drive more interest and dollars. It's a rising tide.

Krumsiek: We think raw data services will eventually become a commodity-much like regular financial data. SRI firms will distinguish themselves on the higher-level analysis that will help drive stock decisions and advocacy strategies. We've already seen many major mainstream investment firms develop capacity to integrate ESG analysis into their traditional financial analysis. We think this trend will continue. The winners, though, will be those firms that can demonstrate clearly how this translates into a better financial proposition for investors-providing better risk-adjusted returns and higher social impact.

Schueth: What do you think are the key drivers for SRI fund companies going forward?

Keefe: The search by investors for better long-term investment solutions in light of the recent financial meltdown along with the growing awareness and acceptance of ESG among individual and institutional investors.

Krumsiek:
On the institutional side, we expect to see demand for more advanced products that integrate ESG research into financial analysis, tackling tough thematic issues like climate change that both generate alpha and reduce risk.

Robinson: Rapidly growing interest in global warming and climate change as well as resource constraints are seen as key drivers to business. Focusing on areas and companies that are part of the solution to those two major categories really make the most sense to be involved in on the investment side. That, in our opinion, will drive performance, which is the key to attracting assets.

Budde: Increasing the range of strategies and products to convince investors that they can have both positive impact and competitive returns. A second factor for excitement might be the increased interest of various mainstream intermediaries who are interested in SRI strategies. For many market channels, involving and convincing these intermediaries of the viability of SRI strategies is crucial.

Steven J. Schueth is president First Affirmative Financial Network LLC, a registered investment advisor. First Affirmative specializes in socially responsible, sustainable and transformative investing, and supports a nationwide network of investment professionals who work with socially conscious investors. First Affirmative also produces the annual SRI in the Rockies Conference. The 21st annual SRI in the Rockies Conference will be November 18-21, 2010. Mr. Schueth is a former director and spokesperson for the non-profit Social Investment Forum. He can be reached at [email protected].