Investing in Socially & Environmentally Responsible Stocks

Investing with your conscience rather than against it may be a good idea. How can you fully enjoy profits from a company that pollutes, subjects animals to painful testing or lure teens to smoke if you're morally opposed to its practices? On the other hand, charity has a time and a place - and this isn't it. You invest money to earn a decent return, otherwise you might as well keep it in your mattress. So how do you strike a sensible balance between sound investment and doing your part in making the world a better place?

Start with a gut check. Are there any industries that are out right off the bat? Tobacco? Fast food? Guns? Write them down and try to identify specific companies to avoid. Then run through your checklist before executing any trades. This will prevent temporary greed and general forgetfulness to cause buyers remorse later on.

Next, use the Internet to do some basic homework. Many companies have multiple branches, some of which are perfectly acceptable to you while others may be objectionable. For example, Altria, formerly Philip Morris, controls half the US tobacco market but is also deeply involved in the food industry through its subsidiaries. In other words, you'll need to take a good look under the hood to identify the members of your 'black list'.

With the bad guys out of the way, it's time to focus on the good guys. Which companies are really living up to your standards as being 'socially responsible'? Remember, glitzy ads mean very little, so it's time to hit the Internet again. Fortunately, there are tons of helpful sites out there that help make your job a lot easier. Do a search for 'socially responsible stocks' in Google and you'll get dozens of reputable sources served on a platter.

But here's the caveat; just because a company strives to be a good citizen doesn't automatically mean it's a good investment. While some are as good for your wallet as they are for the environment, others stink to high heavens. What you're looking for is a company run by experienced managers, producing good products, with a solid balance sheet and with good growth potential. In other words, use the same criteria you would use for any other stock.

If individual stock picking is not your thing, you may want to go with a mutual fund. With these, all you do is cut a check and let the fund manager take it from there. But make sure to read the prospectus carefully so that you're on the same page as the fund manager when it comes to deciding what's socially responsible and what isn't. Some examples of such fund companies are Domini, PAX World, Citizens Trust and Green Century.

Last but not least, don't forget to keep an eye on the 'regular' stock market. Companies change course due to necessity, new management philosophies, pressure from consumer groups and whatnot. That can make a previously so-so company right on target for your socially responsible portfolio even though the watchdogs have not yet caught wind of it. If you're lucky, you'll catch a good thing in the early stages before the fruits of the changes have come into effect from both a financial and environmental perspective. But remember: Dealing with virtuous stock doesn't prevent you from losing your shirt if you make the wrong call. Don't invest the rent money.