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Hearts & Minds

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Regardless of how or where they were raised, most people seem to have an innate desire to do something for the common good, at least whenever it’s not too inconvenient. Some part of this attitude, no doubt, derives from the morality of whatever religious belief system we were exposed to as children. All of the world’s major religions teach some version of the golden rule and place a high moral value on acts of charity. There’s also quite a bit of scientific evidence that all creatures, not just humans, have an evolutionary bias towards altruistic behavior that allows species to survive at the expense of individuals, which may also explain why doing something for others just feels good.

In an article entitled, “Why Do Good?” (MIT Sloan Management Review, Spring 2006), William F. Pounds, professor and dean emeritus at the MIT Sloan School of Management, examined human behavior in an attempt to determine if there is, in fact, a natural impulse to do good. Pounds’s conclusion is that individuals in the pursuit of their own self-interest can improve the welfare of society as a whole, if that pursuit is balanced with social guidance. That idea is in essence the basis of what has come to be known as the socially responsible investing, or SRI, movement.

The SRI movement can be traced back to a pair of events that followed the social upheavals of the 1960s. One was the launch in 1971 of the Pax World Balanced Fund mutual fund, which was initiated by a pair of United Methodist ministers. The second was a General Motors shareholder resolution introduced that same year on behalf of the Episcopal Church opposing GM’s investments in South Africa. These two actions were inspired by a desire to put faith into practice. Together they helped spur the birth of what is now a category of investments totaling more than $2.3 trillion, according to figures compiled by the Social Investment Forum, an association for more than 500 planners, mutual funds, and asset managers dedicated to promoting the concept and practice of SRI. Of that total, about $179 billion is invested in more than 200 SRI mutual funds. In 1995, the first year the Forum gathered data, the total amount of investments that they identified as subscribing to SRI principles was only $639 billion, of which $12 billion was in 55 mutual funds.

In On The Ground Floor

Tim Smith has been actively involved in the SRI movement since the late 1970s when he worked at the Interfaith Center on Corporate Responsibility. Since 2000 he’s been a senior VP at Walden Asset Management, in Boston, at which he oversees shareholder engagement and social research. As a result of his position with Walden he was first elected to the board of the Social Investment Forum and is currently its president.

Smith believes that there are a variety of reasons why socially responsible investing has exploded in the last decade. Among them, he identifies the numerous financial scandals of the last few years, including ongoing concerns about such issues as backdating stock options. “The scandals woke up a lot of investors to the fact that they couldn’t be just passive shareholders, they needed to be active investors,” he says. “What we’ve seen is investors paying attention to a whole range of issues that affect shareholders’ value.”

With such a large total of investments, it’s not surprising that SRI encompasses a large spectrum of players and approaches. “It goes all the way from mutual fund investors who want screens on their portfolios to many investment entities such as the State of New York’s public pension funds, which don’t have any screens at all but are very active in using their voice and vote to leverage companies,” Smith explains. “You’ll sometimes hear socially responsible investors talking about a three-legged stool. The three legs are: screening; shareholder engagement and advocacy; and community development investing.”

A big part of the SRI movement, especially for institutional investors, is shareholder advocacy. Two areas that Smith highlights to show the widespread influence of the movement toward socially responsible investing are the U.N. Principles for Responsible Investment and the Carbon Disclosure Project. (You can download reports on both initiatives at, in the Web Extra section of this month’s issue.)

The U.N. Principles are aimed at institutional investors and stress the fiduciary duty that those entities have to their shareholders, along with the belief that environmental, social, and corporate governance (ESG) issues have an effect on investment performance. Smith says that within the first week after the Principles were issued earlier this year, they had received the endorsement of investors with about $4 trillion in assets.

As the name implies, the Carbon Disclosure Project is focused on carbon emissions and their contribution to greenhouse gases, and has been asking companies to disclose information on their carbon emissions. The request was sponsored by 225 investment organizations, and what Smith sees as particularly significant is that the group included not just firms like Walden or Calvert, but also such gigantic and mainstream investors as JPMorgan Chase, Citibank, and USB. “The investors who supported that request have $31 trillion [in assets],” Smith notes. He acknowledges that in this case the investors were addressing a single issue, but finds it unlikely that the participants would not also be concerned about issues such as corporate governance.

Another area where Smith has seen shareholders attempt to push corporations toward a change in behavior is in the realm of proxy voting on shareholder resolutions. “Votes on many governance issues are regularly getting over 50% of the vote now, which was inconceivable ten years ago,” he says. “And votes on many environmental and social issues are doing in the 20% to 35% range, so you’ve got an indication that investors are waking up and paying attention and being more active and voting their proxy.”

He also points to the ripple effect of such efforts as seen by the “thousands of companies that are acknowledging that good corporate governance and being a good corporate citizen is a commitment that they have. They believe it’s good for shareholder value and they believe it’s the right thing to do.”

Same Words, Different Meanings

As can be seen from the discussions of the subject so far, socially responsible investing is a rather broad term that can encompass a wide variety of philosophical approaches and even definitions of what “socially responsible” means. Advisors who want to help their clients to find socially responsible investments would be advised to make sure they understand what those words mean to the client. Angela Thomson of Coastal Financial Planning in Lincoln, Rhode Island, learned that lesson the hard way.

Thomson is a fee-only solo practitioner who, up until about three years ago, “was very involved in helping clients make socially responsible investments.” One of her clients was adamant about her desire to have her money invested responsibly.

“We were not on the same page as far as socially responsible investing,” Thomson recalls. “When I think of it I think of no nuclear weapons, no gambling, no tobacco, and so forth.” Based on those criteria Thomson bought a block of Pfizer stock for the client, who was outraged because Pfizer makes birth control.

“It was a good lesson for me because “socially responsible” is not the same to all people. I would never have considered birth control not being socially responsible. I would never have made that connection,” Thomson observes. “Some people are anti-gay rights, some people are pro-gay rights. Some people are pro-green forests, some people don’t care about forests. Everybody has such a broad base of what is socially responsible that I don’t hold myself out there anymore as that type of advisor.”

For clients with portfolios of individual stocks and bonds, advisors who want to screen out certain types of businesses or corporate behavior, the research can be rather daunting. When it comes to mutual fund investing, however, the screening has already been done for you.

The Social Investment Forum offers performance reports, screening criteria, proxy voting, investment minimums, and fund profiles for almost 100 mutual funds in six different categories on its Web site (

The Mutual Fund Approach

For the majority of individuals who want to be socially responsible investors, mutual funds are the easy way to get a ticket into the game. “The number of SRI funds has grown to several hundred, which is still minuscule compared to the [total] number of mutual funds,” points out Smith of the Social Investment Forum, adding that besides the growth in the number of funds, the things to look at are the size of the funds, and then who is running them. “For example, Northern Trust came out the other day with a social investment fund,” he adds. “Vanguard has one on its platform and so does Barclays Bank. It’s no longer just the Calverts of the world. The mainstream investment managers are participating in this.”

Smith stresses that while some investors might feel a greater loyalty to an SRI fund because of the underlying philosophy, few investors are willing to remain loyal if it means losing their money. “But I think we’ve been able to demonstrate that performance is competitive,” he notes. “You don’t pay a conscience penalty for investing in a socially responsible mutual fund.”

Among the SRI funds, as with most mutual funds, the first step is to identify potential investments according to standard investing criteria, such as market cap or sector strength. After the likely candidates have been assembled, a number of screens are applied. There seem to be two basic approaches to the screening process. The first is to eliminate companies engaged in certain industries (e.g. alcohol, gambling, pornography, weapons) or in certain behaviors (e.g. carbon emissions, water pollution, married/partner benefits to gay couples, animal testing). Tobacco stocks are screened out by most SRI funds, but not always for the same reasons. For some it might be a moral issue, for others a health issue or an environmental one. Another approach is to apply positive screening, which seeks to reward companies with good environmental records, or human rights policies, or community investing.

Gavin Jabusch is portfolio manager for the Sierra Club Stock fund, which he describes as a large-cap growth fund focusing on “the most progressive and environmentally responsible [companies] among the large caps.” He thinks that seeking to invest in companies for their positive accomplishments produces more long-term benefits to society than does shunning those with “negative” behaviors. “If you’re a religious fund that screens out gambling and alcohol because you’re opposed to those things, and have not really done anything to further the cause of sustainability, which of course is what the big macroeconomic trends are doing. You’re also not going to have as good a chance of achieving outperformance as a fund that is trying to select the companies that are looking to exploit the emerging trend towards sustainability and trying to wean ourselves away from carbon fuels.”

Advisors would be well advised to do a little digging if they want to help their clients find SRI funds that match their personal values. Some, such as the Walden Social Equity Fund or the Ave Maria Catholic Values Fund, pretty much telegraph what they’re all about by their names. Others such as the Ariel Fund, Parnassus Fund, or Citizens Balanced Fund sound much like any other fund.

Ultimately, socially responsible investing is just another tool that advisors can use to help clients achieve their financial goals. It’s also one that can make both the advisor and the client feel a whole lot better about what they’re doing.