Laws and Regulations for Socially Responsible Investment Funds

Socially responsible investment funds do not need to qualify for the title through any specific application or regulatory process. In fact, each fund can set its own definition of social responsibility, including, but not limited to, social, environmental and ethical responsibility. The funds then largely self-regulate, and they are subject to the same laws as any other investment fund. However, thanks to adjustment in regulation, all financial funds may be required to disclose the considerations they made in social, environmental and ethical responsibilities to shareholders. This allows shareholders to determine if they are indeed investing in a "responsible" fund.

Disclosure Regulation

Prior to the recent decade, socially responsible funds could self-title themselves as such. This meant there was no oversight into their actual application of their responsibilities. Understandably, investors who were placing their money with these special funds wanted more oversight into whether they agreed with decisions and concessions made concerning social responsibility. Today, socially responsible investment funds highlight these concessions, not just fiscal performance, in annual reports. For example, in the United Kingdom, an amendment of the 1995 Pensions Act requires all pension funds to release a Statement of Investment Principles to shareholders. 

Investment Principles

"Investment principles" is a broad and often misunderstood term. For example, a fund may call itself "green" and therefore be considered a socially responsible fund. Investors should know what that means, though, to the allocation of their dollars. For example, does it mean the fund will not invest in any automobile companies? Or does it mean the fund will invest only in those companies with a record of meeting or exceeding nationally accepted emissions standards? As a third option, the fund may operate on a principle that states its own emissions standards. According to current regulation, the way the fund makes this decision would be disclosed in a statement of its principles. 

Violating Investment Principles

Unfortunately, there is no real law that determines what would occur if a fund violated its own stated investment principles. Of course, if the fund lied in its annual report, portraying principles it was not upholding, investors could sue the fund, or the Securities and Exchange Commission could levy punishments. However, there is nothing stopping the fund from deciding to change its principles at a convenient moment, altering its own standards in order to save money. This would have to be disclosed in a statement of principles, and the investors would then have the decision of whether to leave the fund.

Finding a Truly Responsible Fund

Once an investor understands there is no unique regulation for a socially responsible fund, the investor will also understand the importance of tracking the investments and decisions of the fund managers. Only by keeping tabs on the decisions the fund managers make can the investor gain insight into whether the fund is acting in a responsible manner. At a time when social responsibility is very trendy, funds may profess to be acting in a sustainable manner in order to simply sway clients. Clients must be discerning enough to read investment principles and find out what is really in the name "socially responsible."

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