Broad acceptance follows solid performance by indexes and funds.

    Every so often Peter Kinder, president and co-founder of KLD Research & Analytics in Boston, gazes out his window at Fort Point Channel and the Federal Reserve Bank with a sense of accomplishment about the growth of socially responsible investing.
    LD developed the Domini 400 Social Index about 15 years ago. The index, a benchmark for more than $10 billion in socially responsible stocks, is made up of 400 companies that pass multiple broad-based social and environmental screens. Investors in socially responsible stocks typically are religious institutions, educational institutions, pension funds and mutual funds.
    Kinder and Amy Domini, his former wife, cooked up the idea of a socially responsible investing index more than 20 years ago on their kitchen table in Cambridge, Mass. In 1989, Domini, Kinder and their partner, Steve Lydenberg, began work on the Domini 400 Social Index, which was launched in 1990. Today, Kinder presides over the research and consulting firm with 33 employees, including 18 analysts. Meanwhile, Domini runs a stable of socially responsible index mutual funds for Domini Social Investments in Boston.
    "I feel like a different person," Kinder says. "It seems inconceivable how far we have come since the 1980s. I was the first employee in 1988, and did the research on the index until we launched it in 1990."
    In the mid-1980s, approximately $100 million was invested in socially responsible stocks. Investors were driven by antiapartheid and antitobacco sentiments. Today, there are 200 mutual funds with assets of $150 billion that make up socially responsible investments, according to the Social Investment Forum of Washington, D.C. The $2 trillion market of socially responsible stocks is driven by diverse social forces and religious concerns.
    In recent years, KLD has launched indexes that can be used to benchmark different investment styles. The indexes include Social Select, Large Cap, Broad Market, Nasdaq and Catholic Values.
On the investment side, Barclay's Global Investors recently started an exchange-traded fund, the KLD Select Social Index. Meanwhile Domini Social Investments offers the Domini Social Equity Fund, Domini Social Bond Fund and the Domini Money Market Account. The company has no ties to KLD.
    The Domini indexes, however, are not the only game in town. International investors can use several "Dow Jones Suitability Indexes" to benchmark their overseas investments. Nor is KLD the only company providing social screens to institutional investors. An estimated 25 companies screen for socially responsible investments worldwide. 
    Joshua Humphreys, research coordinator for the Social Investment Forum, says the Calvert Group and Citizens Funds started socially responsible stock indexes a few years ago.
    Calvert, in Bethesda, Md., uses the Calvert Social Index in-house. It includes 620 to 650 stocks, based on seven social screens as well as value and growth criteria, gleaned from the Russell 1000 stock index, according to Steve Falci, Calvert Group chief investment officer. Citizens Funds, of Portsmouth, N.H., also uses its own index.
    By contrast, the Domini Social 400 screens the inappropriate stocks out of the S&P 500, then seeks additional socially responsible stocks from the Russell 1000. "The Domini Social 400 is the oldest and most prevalent socially responsible index," Humphreys said. "The indexes are all quite comparable and highly correlated."
    Not all mutual funds use the Domini index as a benchmark. Anita Green, vice president of social research with the Pax World Fund Group in Portsmouth, N.H., said her fund group uses the Lipper averages as benchmarks. The reason: The company would rather compare its funds to the universe of funds, and not limit it to socially responsible investments. Pax World has balanced, growth, high-yield and money funds.
    "There is nothing wrong with the Domini 400 Social Index," she says. "The Pax World Fund is the oldest (socially responsible) fund. We have always used the Lipper benchmarks."
    Socially responsible funds formerly avoided "sin" stocks-companies in the gaming, liquor and arms businesses-and companies that did not pollute the environment. But Green says many socially responsible mutual funds now go one step beyond the traditional screens. For example, the Pax World Fund only invests in companies that favor women and minorities. Since its inception in 1971, the balanced fund has grown at a 9.5% annual rate. 
    The fund owns stocks such as: Amdocs, an Israeli company that makes support software for back-office telecommunications; PepsiCo, which has a number of women and minorities on its board of directors; and Johnson & Johnson, which offers diversity as well as good employee benefits. On the bond side, it favors Jafra Cosmetics bonds because the company is run by women.
    Falci, of Calvert Group, says community investment is one of the fast growing areas of socially responsible investing. Calvert wants to invest in companies that promote communities, small business and housing and international economic development.
    Many investors scoffed at the idea of socially responsible investing 15 years ago. Not now. Today, Kinder says pension funds, other institutional investors and individuals are concerned about corporate governance policies and global warming.
    Over the past 15 years, the Domini 400 Social Index has outperformed the S&P 500, according to Dow Jones and Standard & Poor's. The Index has gained 439% since its inception on May 1, 1990. By contrast, the S&P 500 grew 382%.
    The Domini 400 Social Index, however, has lagged over the past three-year and five-year periods. Reasons: Declining technology stock prices and rising energy stock prices hurt social stock returns.
    Kinder says that in the longer term, the index has stood up well versus the broad market. Socially responsible companies, he says, tend to have good management and employee relations, which typically help financial performance. But he stresses that performance should not be the only criterion for ethical investors.
    Financial research shows that Kinder may be on the right track. A 2005 study by James Ang, a finance professor at Florida State University, found that better managerial skills result in good stock price performance. The study was published by the Financial Management Association.
    Earlier research, in 2003, found that companies with poor governance policies also had lower stock values. That research, by Gompers, Ishii and Metrick, appeared in the article "Corporate Governance and Equity Prices," published in the Quarterly Journal of Economics.
    However, socially responsible stocks are not without critics. Emily Hall, an analyst with Morningstar Inc. in Chicago, found that socially responsible funds as a group performed as well as funds that do not screen for social responsibility. Individually, socially responsible fund performance varied dramatically. "As a group they are about average," Hall said in a 2004 report.
    Hall's greatest concern: There are not enough socially responsible funds to build a diversified portfolio. Falci, of the Calvert Group, disagrees. Calvert offers 14 different types of mutual funds, including an international fund, bond fund and money fund. The funds are managed by subadvisors. Many of its funds have outperformed their respectable markets over the past three years, powered by stocks like Apple Computer, Erog Resources, Nordstrom, Western Wireless and Marvell Technology.
    Last April, Calvert launched two funds of funds, a conservative asset allocation fund and a moderate asset allocation fund. "The markets are deep enough today for asset allocation," Falci said. "Both the number of (socially responsible) stock and bond issues are poised to increase, particularly with the focus by investors and corporations on corporate governance today." 
    Other critics believe that the socially responsible mutual funds are too liberal with their screening. A 2005 study by environmental stock advocate Paul Hawkin found that socially responsible funds may not be so responsible when it comes to picking stocks. The study published by the Natural Capital Institute (, a Sausalito, Calif.-based environmental research firm, found that the top 30 holdings of socially responsible stock funds are almost identical to those of the Dow Jones Industrial Average. And 90% of Fortune 500 companies are included in socially responsible mutual fund portfolios.
    The study claims that socially responsible mutual funds own socially irresponsible companies, including: American International Group, Coca-Cola, Wal-Mart, Clear Channel, Altria, Halliburton, McDonald's, Raytheon, Exxon Mobil, Monsanto, Dow Chemical and General Electric.
    Green, of Pax World, disagrees. She says the criteria used to screen for socially responsible stocks differs from fund to fund. By lumping all funds together, Hawkins' data may be distorted because of a few large funds with limited social screens. Some funds may just avoid one industry, such as liquor or arms. Others invest based on various degrees of socially responsibility.
    "If there is a perfect company, I haven't seen one," she says. "It is a matter of degrees in screening stocks. After that, it is more art than science." 

Alan Lavine is the author of numerous books and a contributing editor to Financial Advisor.