According to the 2008 Merrill Lynch/Capgemini World Wealth Report, socially responsible investing is no longer a niche category.

People are becoming increasingly conscious of social and environmental issues, and they are looking to invest in companies that share their concerns. The thought that their investments can reflect their beliefs and potentially achieve their financial goals guides the construction of their portfolios.

In the early days of SRI, the guiding investing principles came from 17th Century England and Colonial Quaker precepts of sin and slavery. These evolved into social screens that were used to exclude investments, companies or industry groups. Initially, the most commonly used screens excluded investments in companies whose revenue was derived from alcohol, tobacco or gambling. Everything else was considered acceptable for investing. In fact, the screening process overshadowed the investment process. It was not uncommon for "good" companies or geographic places that represented less-than-ideal investment risks to be included in a portfolio. The result was that while socially responsible investors might be doing "good," they might not be doing "well." Therefore, many other investors would forgo this investment asset class because of mediocre or poor performance.

Approaches to SRI today have changed. What follows is a four-step process I use to help create portfolios for clients that align with their values:

1. Establish goals and objectives. The first thing I do is to establish a client's social and/or environmental sensitivities so we can develop his or her unique screen. This is critical in developing a client's portfolio strategy, along with long- and short-term goals and objectives.

2. Look for worthy investments. I develop a portfolio of companies that first meet the screening criteria and are investable.

3. Get client approval. I review the proposed portfolio with the client and implement the transactions. This is another opportunity to identify unique concerns the client may have.

4. Stay on track. I review the portfolio holdings and performance on a regular basis.

Step one, establishing a client's unique screen, is very important. I don't try to impose anyone else's screen on a client; I help identify the specific concerns that matter most to that person. For example, an individual who has wildlife concerns may be neutral about gambling, but they may be against wind energy projects because of the potentially harmful effects of wind turbines on birds. I also need to know their tolerance for volatility and risk, as well as other financial resources they have to draw upon. The latter is of extreme importance, because green portfolios tend to include larger percentages of small- to mid-cap companies, both domestic and foreign, whose market values may, at times, be more volatile than those of typical domestic large-cap companies.

I believe that the actual company selection process is most interesting. The first screen I use is the client's negative one-the companies or industries he or she doesn't want in the portfolio. If a client has too many restrictions, we may need to go back to redefine the screen because the portfolio could lack diversification.

The next screen I consider is whether a company has a substantial commitment to the field. Solar energy is a good example of an industry where the commitment of companies within it can vary significantly. Some firms are small parts of great conglomerates and others only focus on solar energy. The problem with conglomerates is that some parts of the company may introduce risk factors or product mixes the client would prefer not to own.

The portfolios I construct are typically global; therefore country and international market risks play a part in selection.

Another factor I look at is market share. I do not invest in venture capital or emerging companies for clients, so potential investments need to be listed and traded on some major exchange and be within the top four or five in market share. Some companies may have a unique market position because of a process or patent. This risk must also be evaluated.

Companies I recommend also must have good financials-rising earnings estimates, positive cash flow, good corporate citizenship, good technicals, etc.

Sometimes more digging and discussion are needed to determine whether an investment is truly a good fit for a client. For example, we might learn that a pharmaceutical firm that looked attractive uses some form of animal testing, and I might need to re-consult with the client to determine if the investment will be acceptable. The task does get easier as you develop more portfolios because you can build from a pre-approved list you have already developed with other clients. For example, currently I have six different water resource companies that I can include in a portfolio depending on current market prices.

I tend not to use index funds or mutual funds for my clients' portfolios. Index funds by definition include a wide range of companies, some of which may have only a minor role within the particular industry but have large market capitalization. Mutual funds, in general, have their own purchase and sale criteria and this may or may not match the client's desires and personal screens.

In terms of portfolio management, a strong sell discipline is just as important as the selection criteria. Because of the risks inherent in smaller companies and foreign investing, keeping client portfolios limited to 30 to 40 positions allows for vigilance and better monitoring of positions. Positions are liquidated at a predetermined stop-loss point if necessary. When possible, profits may also be taken to bring the portfolio back into balance.

I currently perform complete sector reviews on a quarterly basis and look at many factors, including what defines the sector, and who are the major players and are they investable?

Reviews with clients of their portfolios occur up to a dozen times a year, depending on a particular client's needs and circumstances. Usually I will do a general market review, a portfolio review, and an in-depth review of one sector. Clients with green portfolios, we have found, really are traditional capitalists in that they care about what they own and what the company does. They really do want to do good by doing well.

Jesse Walden is a senior financial advisor with Merrill Lynch Global Wealth Management in Oakland, Calif. He can be reached at [email protected].