With the Dow down in the dumps, will socially responsible investments continue to outperform the wider market? Yes - and potentially now more than ever. By John Friedman

It has been said that many investors who put their financial backing behind socially responsible investments (SRI) are willing to forgo potentially profitable investments in companies and industries that they find morally objectionable. But investors have embraced sustainable investing because it is not only good for the planet and society – it has been good investment in its own right.

On average, the performance of SRI has been close to that of regular mutual funds. There are several indexes that track the performance of stocks considered socially responsible investments. According to KLD Indexes, the total returns for the Domini Social 400 Index between 1990 (its inception) and September 2007 was 12%. Over the same period, the S&P 500 returned 11.49%.

Additional research from Cary Krosinsky, co-author with Nick Robins of Sustainable Investing: The Art of Long-Term Performance, points out that sustainable funds outperformed mainstream indices between December 2002 and December 2007, with sustainably invested funds showing 18.7% return on average compared to S&P return of 13.2%, and MSCI World's return of 17% during the same time period.

Easy to say when the Dow was topping 14,000, but what about now? There is good evidence that what we have experienced was a true collapse and not a correction. The massive losses in value not only brought down companies with inflated values, the momentum also carried down well-run, fiscally sound ones.

As a result, SRI was not exempt - nor did those funds fare better – as one might have expected (or hoped) – during the decline. The same Domini Social 400 Index cited earlier has returned a -11.22% through June 2008, compared with a -10.49% for the Standard & Poor's 500-stock index during the same period. The Ariel Fund (ARGFX), one of the largest U.S. socially responsible funds with more than $2 billion in assets, dropped 20.2% though May.

There is some encouraging news; however, the median performance of socially responsible funds compiled by Morningstar performed better just 6.76% compared to 9.59% for the S&P. When we’re looking at trillions of dollars this translates to billions of dollars that could have been, but were not, lost.

Strong Medicine for an Ailing Economy

As we sit in the doldrums of this recession it is important to note that the economy will recover. What makes the distinction between a correction and a collapse significant is the later indicates the need to rebuild the economic model rather than an attempt by governments (and industries) to try to patch the holes that deflated a bubble. This awareness makes the task more daunting because they must work to build something truly sustainable.

As investors, the question before us now then goes beyond whether or not sustainable investment will continue to outperform traditional indices. Rather, if these investments and companies will have an even greater advantage going forward?

Robins believes that the answer is unequivocally yes, pointing out that SRI businesses are poised to take a leadership role in a new, revitalized economy:

"As the world seeks to stimulate an economic recovery, sustainable investing in clean technologies, microfinance and social enterprise offer proven routes to generating wealth and resolving pressing problems such as climate change and global poverty."

The new Obama Administration has indicated its priorities include rebuilding the nation’s infrastructure and focusing on alternative energy sources. Certainly alternative energy companies would then be poised to benefit not only from Federal emphasis, but also tax and other incentives (and possibly an infusion of capital). Those companies, and the funds that contain those companies, are therefore poised to do even better as part of the recovery.

The bottom line? An investment strategy that benefits people, protects the planet, and generates profits is still a winning strategy, especially in this global economy.

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