From the May 2009 issue of Investment Advisor • Subscribe!

May 1, 2009

The Green Advisor: A Triad of Values

Trust, transparency, and responsibility in investing

In this space last month we wrote that while green investing and socially responsible investing (SRI) have much in common, they are not always the same thing. Many green funds, such as Gabelli SRI Green Fund (SRIAX), Green Century Balanced Fund (GCBLX), and the Winslow Green Growth Fund (WGGFX), among others, do operate from an SRI perspective as evidenced by their membership in the Social Investment Forum. For that reason, in this column I'd like to take a look at some of what's going on in the SRI movement.

In early April, in conjunction with her being named to the IA 25 (see cover story), I was able to talk with Barbara Krumsiek, CEO and president of Calvert Group, an investment company with three decades of SRI experience and some 30 mutual funds, including the Calvert Global Alternative Energy Fund (CGAEX), in its stable.

The growth in assets committed to SRI principles has been dramatic over the last few years, but in Krumsiek's estimation, the best is yet to come. "The growth that we've seen to this point will not hold a candle to the growth we're going to see going forward," she says. Although the SRI-specific data so far has only been collected through 2007 by the Social Investment Forum (SIF), meaning the tumultuous period since then is not represented, "if we figure that all boats went down the same amount, some of the statistics will hold up," Krumsiek posits. "According to the Social Investment Forum, SRI assets increased 18% a year for the three years 2005-2007, while according to an SIF trend study, the universe of professionally managed assets increased less than 3%. It's off a relatively smaller base, but we grew to $2.71 trillion from $639 billion vs. SIF's estimate that the total universe of professionally managed assets grew from $7 trillion to $25 trillion during that time."

The aspects of SRI to which Krumsiek attributes the recent growth spurt--trust, transparency, and responsibility--are virtues that are becoming increasingly important to the rest of the investing population. "I think a guidepost for sustainable investors and what we call social investing has been transparency, in terms of what we expect from corporations in their conduct in business. The trust factor certainly has been very high because we look at companies according to an array of factors...[and] the way we do that is very comprehensive. Corporate social responsibility has been part of our mission and vision at Calvert since its founding, but now these are words that matter to every advisor, every client, and every investor."

In the wake of the numerous scandals in recent years, starting with the Enron fiasco and on through the subprime mortgage mess and the rest of the current meltdown, there's certainly going to be a renewed emphasis on good corporate governance. There are also environmental liabilities to consider, not to mention under the stimulus program a fresh focus on renewable and sustainable energy. "All of these are going to be factors that I think a growing number of advisors are going to find their clients asking them about," Krumsiek notes.

But What About Performance?

With any type of investment, performance is always a factor, and the obvious question is how did SRI funds fare compared to the rest of the investing universe when it comes to returns. Krumsiek can only speak for her own funds, but the results do offer a sliver of sunlight in a bleak and dreary landscape. The Calvert Social Investment Fund (CSIFX), the firm's largest equity portfolio, had $843 million in assets at the end of 2008 and was down 35.5%, versus the S&P 500 which was down about 37%, according to Krumsiek. "Maybe 1.5% outperformance in one year, when you're down that far, isn't going to resonate, but that's an outperformance advantage. This year so far, the social equity fund is up 1.57% vs. the S&P, down 4.37%," she says. (The figures cited are through the market close on April 9, 2009).

"Generally, looking at these short time periods is not always accurate," Krumsiek cautions. "We certainly think in our Calvert signature portfolios, where we exclude companies that we think are really not up to par in environmental, social, and governance metrics, that over the long run we expect to achieve at or above broad benchmark averages. However, in different periods of time we might outperform or underperform. We're not making any implicit promises, but we do think in the long run the companies we're investing in should do at least as well, because the managements and the boards are focused on not just the short-term drivers of stock price change, but the long-term drivers of sustainability. And that means survival of the company and thriving of the company over long time periods."

Although there are advisors out there committed to SRI principles, in most cases such investments are client-driven, but Krumsiek thinks over time an increasing number of advisors will join the fold. "Advisors are great listeners," she says, "but they're going to have to listen a little differently."

The Changing Notion of Risk

Krumsiek thinks that clients are starting to express more concern about who they're doing business with, both in terms of the companies they invest in and the companies managing those investments. Krumsiek says that in Calvert's case the company was fortunate to have avoided many of the issues facing financial firms because it didn't invest in subprime mortgages or credit default swaps. "I credit our strong risk management," she says. "For us risk is more broadly defined. We believe there is risk in the way a company conducts its business.

"I think clients will start asking about risk management," she continues. "They will start asking about governance, both in terms of the companies that their advisor is recommending for them to do business with, but also in the portfolios that those managers run."

Moving forward, Krumsiek believes that such factors will be included in risk assessment on a broader basis. Although very few recognized the risk embedded "in the explosion of leverage and risk-taking in certain unregulated instruments...risk is certainly now on the tip of everyone's tongue and every investor will want to know how risk is being evaluated, analyzed, managed. And every advisor will be asking the same question of everyone they do business with."

She's also noted a shift in the corporate boardrooms, some of it due to the shareholder advocacy of companies like Calvert and other members of the Social Investment Forum, that has helped increase the diversity on corporate boards and also has brought a number of other issues to the fore. "There are lots of different drivers of this change and one can be just a bottom line driver: as risks and liabilities have surfaced, there's a sense that attention must be paid to that. I think there are many different drivers, but the bottom line is that companies are paying more attention and we believe there's lots of room to engage very directly with companies for improvement in all these different areas."

Although there are no new Calvert funds in the pipeline at present, Krumsiek says the firm is always open to new opportunities, citing the launch last year of the Calvert Global Water Fund (CFWAX). "There are many problems that need solving and investment solutions will aid in solving some of these problems," she says. Advisors can serve their clients well by keeping their eyes open for those solutions.

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