Capitalizing on Principles

Socially responsible investors choose funds that balance financial and societal priorities. The funds have become an increasingly powerful force in implementing change through shareholder activism.

As more investors look for ways to merge their philanthropic and financial activities, the popularity of socially responsible investing (SRI), or investing according to one’s beliefs, has advanced steadily. Assets in social investment increased from $639 billion in 1995 to $2.29 trillion in 2005, growing at a faster clip than general investments, according to the Social Investment Forum, a nonprofit group that promotes SRI. Critics of the movement contend that people should only seek out investments based on financial returns, eschewing the social component. But savvy social investors insist they don’t need to sacrifice returns to stay “green.” Those who prefer to invest with a conscience should single out the issues they find most important and select an SRI fund that shares their philosophy and goals.

Social Funds Defined
Because different people have different social priorities, SRI funds cover a wide range of values. Environmental funds skew away from oil concerns; religious funds often avoid tobacco or liquor stocks. In the 1970s and 1980s, anti-apartheid social funds banned stocks of companies operating in South Africa.

When it comes to how they pick stocks, social funds generally follow one of three strategies. The first and most common method, used by social fund group Calvert, based in Bethesda, Md., is called negative screening—a practice of eliminating stocks that fail to meet specific guidelines (for example, anti-warfare funds screen out defense stocks). The second strategy, used by New York-based advisory firm Innovest, is called positive screening. Here, researchers evaluate the stocks in one sector according to social criteria, and recommend those that rank higher on their scale of beliefs. Completely eliminating an ethically unpopular sector—like energy—distorts risks and returns, positive screeners contend.

The third method is referred to as an integrated investment strategy. Under this newer strategy, practiced by Generation Investment Management, which has offices in Washington, D.C. and London, financial and social analysis is integrated and performed by the same people; the other methods generally have separate groups evaluating the two sides of each stock.

Blended Value

Not everyone who takes social concerns seriously buys into the current incarnation of SRI. “I don’t think in terms of social investing,” says Jed Emerson, a senior fellow with the Generation Foundation and a fellow with the Saïd Business School at Oxford University. “The point is, are you managing your total assets to leverage the greatest financial value possible?”

To Emerson, “financial value” isn’t as simple as cash returns. He believes that investments should maximize social and environmental value along with financial performance, a combination he terms “Blended Value.” In the long run, he explains, thoughtless environmental practices will harm a company and its stock price. Emerson favors SRI funds that use an integrated investment strategy. Those employing two separate groups of analysts often view sustainability issues as black and white, Emerson says, adding that most companies have positive initiatives and negative drawbacks. “The only way to tell where they stand … is to engage in a single debate with a unified team doing the analysis.”

Shareholder Activism

SRI funds are becoming an increasingly powerful force in implementing social change. To do so, they gather a group of like-minded shareholders—ranging from state pension funds to foundations—and use their influence to lean on executives in a practice known as shareholder activism. First, they approach companies about a specific cause. If the companies don’t respond, the group then sends out shareholder resolutions, voted on by the shareholders. While the vast majority of resolutions are nonbinding, even if they garner more than half the vote, they let companies know their shareholders’ concerns. If a specific cause receives a significant percentage of votes over a number of years, management will often implement that change, says Doug Wheat, a director of SRI World Group, a Brattleboro, Vt.-based company that tracks social investing trends.

The popularity of many resolutions often mirrors newspaper headlines. During last year’s gay marriage debate, Wheat says, a popular resolution said companies should include an antidiscrimination clause that covers sexual orientation. Other favorite topics are global warming, executive compensation, and disclosure of political contributions.

A number of smaller organizations formed to organize shareholders have sprung up, with each group focusing on a specific issue. One of the leaders pushing climate-change awareness is Boston-based Ceres, which coordinates campaigns with groups like the Connecticut state treasurer’s office and the Nathan Cummings Foundation, a private foundation in New York. One of Ceres’ goals is to have electric power companies research how climate change will affect their earnings. “We asked them to do some analysis and disclosure on the proposed [federal] regulations to limit greenhouse emissions,” says Ceres representative Peyton Fleming. They hope the report will prod companies into making proactive changes.

Going Abroad

Like other investors, those interested in social funds have recently begun searching abroad for the best investments—a step Morningstar analyst Bill Rocco chalks up to the outperformance of foreign stocks over the past two years. Hoping to catch the momentum, SRI fund house Domini Social Investments launched its European Social Equity Fund last October. But Rocco warns investors to be wary of the international SRI scene, calling the funds “expensive or uninspiring” at this point. (Domini’s fund is too new to gauge its performance.)

The majority of international SRI funds are “global,” Rocco says, meaning U.S. blue-chip stocks comprise a large percentage of their holdings. These funds will likely overlap with other North American-oriented holdings. Other funds focus only on Europe and lack worldwide diversity, he says. Additionally, foreign stocks have high price tags. Analysts widely expect them to enter a period of weakness after their recent growth spurt, Rocco adds.

Risks and Returns

Despite the popularity of social funds, many investors believe the only way to choose an investment is via financial returns, and that companies honing in on social issues will underperform. Yet very little research has been done on the risks and rewards of social funds. In an attempt to fill the void, Foundation Strategy Group has begun to survey several hundred foundations on their socially responsible investments. They expect to issue a report on their findings in November, says Managing Director Mark Kramer.

Choosing an SRI fund comes down to personal values and expectations of financial returns. Each investor needs to assess his or her own priorities. According to Emerson, it’s all about creating “alignment between your mission and investing.” As the value of assets in SRI funds continues to rise, more investors are using their financial investments to serve their social goals.

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Amy Braunschweiger is a freelance writer based in Brooklyn, N.Y.

Copyright 2006 Community Foundations of America
Used with Permission

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Posted at 11:53 AM, Oct 31, 2006 in Peace and Justice | Performance Measurement | Philanthropic Strategy | Permalink | Comment