Profit from your principles.

Can you be socially responsible and still make a profit? At first blush, you might be tempted to say no. It's tough enough to get good returns without forcing every investment decision through the social-criteria wringer, you reason. And what do peaceniks and treehuggers know about making money?

Plenty, as it turns out. Socially responsible asset managers and mutual funds have been racking up impressive numbers -- and not just once, but year after year. By its third anniversary last April, the Domini Social Index -- an index fund of 400 socially screened stocks designed to be sort of an ethical Standard & Poor's 500 -- had a total return of 56.38 percent, compared with 46.54 percent for the S & P. The Parnassus Fund, which is screened for a broad range of social issues, increased 57.2 percent in 1991 alone, much better than the average fund in its small-company growth category. In 1992, it increased another 36.8 percent to place it second among 233 funds sharing its financial objective.

These performances aren't aberrations. Most socially responsible investment mutual funds do as well or better -- sometimes much better -- than average. The New Alternatives Fund, which invests in alternative energy, energy conservation and efficiency, as well as utilities that aren't coal or nuclear, generally outperforms the conventional funds to which it is compared. New Alternatives boasts a 10-year return averaging 12.2 percent. The Pax World Fund, the first U.S. fund to be broadly screened, is one of the most respected funds in the country. Although in the last year and a half it has turned in an uncharacteristically flat performance, it still received Business Week's highest ranking ("superior performance") in the publication's latest annual ratings, based on a long-term risk-adjusted record. In the same issue, Calvert Managed Growth, which, like Pax, is a balanced fund, received the second highest ranking of very good performance.

After conducting its own study of socially responsible mutual funds, the CDA/Weissenberger Mutual Fund Update concluded that "Over the longer term, social equity funds have done as well on a risk-adjusted basis as general equity funds." Money magazine has also acknowledged the impressive performance of SRI mutual funds.

UNVEILING A MYTH

In short, the performance of socially responsible mutual funds and portfolios has debunked the notion that money and conscience don't mix. A closer look at SRI shows why it's such a successful investing strategy. First, "socially responsible investing" simply means investing according to both social and financial criteria. It certainly doesn't mean you throw financial criteria out the window. The difference is that an investment has to meet socially responsible requirements in addition. And, as you'll see, these tests can translate into a positive financial impact.

Although there's no universal agenda for socially responsible investments, socially responsible investors generally agree that any company or product in which we invest should be environmentally sustainable and humane in its ultimate effect on society, and it should promote peace, not war. Thus, mutual funds developed to serve social investors tend to screen out nuclear-weapons manufacturers and other heavy defense contractors; companies operating in South Africa or other repressive regimes; companies that treat their workers poorly or discriminate against women or minorities; companies marketing unsafe or unhealthy products like cigarettes or alcoholic beverages; nuclear-power utilities (which have proven to be financial black holes anyway); companies cited for major ethical violations; companies that are the target of major consumer boycotts; and so on.

On the positive side, social investors favor the stocks of companies with a good record of hiring and promoting women and minorities; companies that give their employees both a stake in the wealth they help create and a voice in company decisions; companies that market products with a positive social impact, such as energy efficiency or use of recycled material; and companies that in other ways show they take their corporate citizenship seriously.

Becoming a socially responsible investor requires you to do an extra layer of research, but it pays off, because most SRI criteria also identify well-run companies and therefore better-performing stocks. For instance, studies show that when employees are treated well, they tend to be more productive, offer constructive suggestions for improving the company, provide better customer service and so on. Total quality management rarely works in a company without a strong pro-employee profile. Happy employees also stay with the company longer, saving the company recruiting and training costs. These effects are magnified when employees have an ownership stake in the company or share in its profits.

GOOD VIBES, GOOD PROFITS

As another example, companies that endeavor to be good citizens are less vulnerable to government penalties, consumer boycotts, adverse publicity and all the other bad things that befall corporations cutting corners to make an extra buck. Corporations that refuse to modify their behavior to protect the environment often pay a steep price for their obstinacy. Witness the hole the lumber companies have dug themselves into by failing to conserve their most important asset -- trees. Meanwhile, companies that become more energy-efficient, reduce their waste and packaging, decrease their dependence on virgin resources and streamline their production processes to reduce pollution find that their efforts also save them considerable money.

Two Dickinson College professors compared the financial performance of the best and worst corporate citizens as rated by the Council on Economic Priorities, a corporate responsibility watchdog organization. They found a clear link between long-term profitability and social performance in five categories: environment, advancement of women, advancement of minorities, charitable giving and community action. In the environmental area alone, good corporate citizens significantly led the bad in such measures as return on assets, return on equity, return on investment, sales growth, asset growth, and operating income growth.

Critics of SRI say you can't earn competitive returns if you have to select from a limited investment universe. Again, these critics have failed to first examine the numbers, but their argument also fails on reason alone. Ruling out powerful but socially irresponsible companies still leaves a multitude of strong, ethically credible stocks from which to choose. Social investors don't just invest in small, quirky companies. The roster of conscientious corporate citizens and solidly performing stocks includes such familiar names as Rubbermaid, Federal Express, Pitney Bowes, Home Depot, Quaker Oats, Maytag, and TABULAR DATA OMITTED Oshkosh B'Gosh. There are hundreds of such companies -- far more than needed for even a large mutual fund to maintain a diverse portfolio.

Socially responsible investors must be doing something right, because plenty of folks have hopped onto their bandwagon these days. Since 1991 alone, 10 new mutual funds have sprung up to meet spiraling demand. That brings the total of socially screened funds to 25, including income, balanced, growth, growth and income, sector and global funds. In addition, some 100 other mutual funds, limited partnerships, fixed and variable annuities and insurance products qualify as social investments because of their socially positive or benign nature. While the choice of socially responsible insurance products remains limited, investors can choose from socially comfortable, financially sound alternatives in every other major financial planning category, including banking, money-market funds, credit cards and even government bonds. In fact, an individual investor will run out of money long before he or she runs out of SRI options.

Most of us invest to create a more secure future for our families. Why invest in companies whose activities would erode the quality of that future? By becoming a socially responsible investor, you're not just investing in a company; you're investing in a better world for your family.

START WITH THE FACTS

Socially responsible investing can be good for your conscience and your wallet. But as with any investment, you need the right information before you decide to allocate your money to a socially responsible mutual fund or other investment vehicle. Peter Kinder, president of Kinder, Lydenberg, Domini & Co., Cambridge, Mass., an investment advisory and research firm that tracks corporate behavior on social issues, recommends socially responsible investors-to-be take the following steps:

* Read the prospectus of a socially responsible investment vehicle even more carefully than you normally would. The prospectus will describe the social screens used to select the stocks in the fund. However, since the prospectus is usually general, you may want to contact the fund for a more specific description of its criteria.

* Get a copy of the semi-annual report for a list of the fund's stock holdings. Try to spot any companies you may consider ethically irresponsible.

* Ask the fund to send past issues of its newsletters and other client communications. These are the best source of information on shareholder activities and often describe how proxies are voted.

* Don't overlook activist groups as a resource, especially if you're interested in one issue in particular. Many of these organizations compile lists of companies with good and bad track records on specific issues.

* While it sounds elementary, remember that mutual funds aren't insured. Evaluate the fund's risk strategy carefully, and examine its past performance, although this is not necessarily an indicator of future performance.

* In addition, bear in mind that most mutual funds are relatively young -- five years old or less. Therefore, nearly all socially responsible mutual funds have yet to weather a serious downturn in the stock market.

Mr. Brill, who lives in San Diego, is a financial planner affiliated with First Affirmative Financial Network, based in Colorado Springs, Colo. Mr. Reder is a writer who lives in Rogue River, Ore.