There is a Bob Dylan song from the 1960s entitled The
Times They Are A-Changin. Now, almost 40 years
later, those words carry special meaning. In the wake of 9/11,
the debacle of Enron and WorldCom and the activities surrounding
companies like ImClone, a whole new lexicon has emerged. Phrases
such as "corporate responsibility," "corporate
governance" and "corporate screens" have become
increasingly more common in the news and in mainstream discussion.
In addition, a whole new meaning has been given to the word
"transparency" as it relates to corporate activities
and financial reporting. All of this has begun to change the
way in which investors look at their portfolios.
There are several factors contributing to the changes in
investor attitude and why there has been unprecedented public
scrutiny around the judgment and morality of corporate officers.
These include the heightened awareness of sophisticated investors;
the failure of the stock market; corporate scandals leading
to investor distrust and increased shareholder activism; the
economy, in general, and consequently investor concerns about
traditional investment mediums, and the fact that these mediums
have not performed adequately enough to meet investor criteria
for return. Add to this the changes taking place in the philanthropic
arena with the highly publicized intergenerational transfer
of wealth and a desire on the part of individuals and families
of wealth to pay even greater attention to how their values
and passions are demonstrated.
All of this has led to an increased interest in socially
responsible, or as it is also referred to, mission-based or
values-based investing. But why should an advisor care whether
his or her client knows about or understands Socially Responsible
Investing (SRI)? What are the implications-the impact of pursuing
SRI as a strategy for (1) mirroring and perpetuating (generational
and consistent) values and missions, (2) protecting the assets
of the trust and putting them to work to support grantmaking
and charitable activities, and (3) ensuring that clients fully
understand their fiduciary responsibility as prudent investors?
We spoke with five leaders in Socially Responsible Investing.
The "virtual roundtable" discussion focused on four
1. What SRI (or mission-based investing) is and what the
"typical" investor looks like and should consider
relative to SRI
2. The upsides and downsides of SRI
3. What advisors should know about SRI
4. How to broach the topic of SRI with clients
In order to put the conversations with the experts into perspective,
let's look at the rapidly changing SRI landscape. Socially
responsible investing has been around for more than 30 years.
However, the field is growing exponentially, concomitant with
the media and political spotlight on corporate responsibility
and the growing awareness of how global business decisions
affect communities, the environment and the general health
and wellbeing of all people.
SRI As the Baseline for Transparent
There are various synonyms for Socially Responsible Investing:
social investing, mission-based investing, values-based investing
and socially aware investing. The terms are often interchangeable,
but all reflect the same premise: the integration of investment
decisions with personal interests and/or concerns.
This investment process considers social and environmental
consequences within the context of rigorous financial analysis.
It is a process of identifying and investing in companies
that meet certain baseline standards, or criteria, of corporate
social responsibility, increasingly recognized as an international
standard. As explained at the Prince of Wales Business Leaders
Forum, "Corporate Social Responsibility means open and
transparent business practices that are based on ethical values
and respect for employees, communities, and the environment.
It is designed to deliver sustainable value to society at
large, as well as to shareholders."
There are basically three strategies employed to promote
socially and environmentally responsible business practices.
Screening is the practice of including or excluding
publicly traded securities from investment portfolios based
on certain criteria. Shareholder advocacy reflects
the actions of socially aware investors in their role as owners
of corporate America. Community investing is the financing
that generates resources and opportunities for economically
disadvantaged people in urban and rural communities and abroad.
What an Advisor Needs to Know
As a trusted advisor, it is important to both stimulate
and advocate values-based socially responsible) thinking,
planning and investing with your clients. As with anything
else, the more you know and understand, the more you can share
with your clients.
The Uniform Prudent Investor Rule requires that a trustee
shall invest and manage trust assets as a prudent investor
would, by considering the purposes, terms, distribution requirements
and other circumstances of the trust. In satisfying this standard,
the trustee shall exercise reasonable care, skill and caution.
Broadly interpreted, prudence is determined by more than just
portfolio performance, it also includes conduct on the part
of the fiduciary that takes into account the intent of the
grantor. Following this thinking, it would be logical to begin
to look at the whole of a foundation's, trust's or
nonprofit organization's assets, as a reflection of its mission,
not just the five percent that foundations give away in grants,
or the operating and program expenses that charitable organizations
devote to fulfilling their missions, or even the tax driven
requisite charitable giving of families or individuals. All
of these entities must work with 100 percent of their assets,
if the values and missions they espouse are to have the broadest
and most sustained impact.
Advisors must be knowledgeable enough to help their clients
integrate their values with their investment strategies. This
is what values-based planning, or mission-based planning is
about: helping to bring the clients' values into the total
asset management picture. There is a substantial amount of
literature that suggests that portfolios screened for investments
that are not at odds with the mission of a trust, foundation
or organization, may do as well, if not better than unscreened
portfolios. According to the 2001 Report on Socially Responsible
Investing Trends in the United States by the Social Investment
� Assets in professionally managed, socially screened
investment portfolios rose by 35 percent from 1999-2001.
� Socially screened portfolios surpassed the $2 trillion
mark for the first time.
� Assets in socially screened separate accounts managed
for institutional clients and individual investors grew by
nearly 40 percent from 1999-2001.
� The growth rate for socially screened portfolio assets
was more than 1.5 times that of all professionally managed
assets in the United States.
� Assets of socially concerned investors using both
screening and shareholder advocacy to encourage greater corporate
responsibility have more than doubled from $265 billion in
1999 to $593 billion in 2001.
� As of 2001, there are 181 mutual funds in the United
States that incorporate social screening into the investment
� Almost $900 billion in investment assets are leveraged
through shareholder advocacy. According to Cerulli Associates
in London, as of November 2002, the U.S. market, alone, for
SRI stands at $1.9 trillion compared to $1.4 trillion in September
2001, which, again according to Cerulli, underscores the robustness
of the SRI arena.
Mission-Based Investing from the Investment
and Philanthropic Perspectives: A Roundtable Discussion
The virtual roundtable participants in this article looked
at the implications for advisors in reflecting their clients'
concerns, missions and values in their clients' portfolios
instead of just in their charitable giving and grantmaking
strategies. As the participants pointed out, the conclusion
herein would apply whether the client was an individual investor,
a foundation, trust, pension fund or nonprofit organization,
Because of the depth of experience and commitment to the
subject matter by the roundtable participants, the authors
of this article felt that it was particularly important that
these professionals "speak for themselves." We thank
them for taking the time to share their perspectives and expertise.
The "roundtable" participants were:
President of the Law Offices of ,
Investment Management, Inc., an investment advisory firm.
is a business, estate and tax attorney specializing in wealth
management strategies. He is the author of 30 books on personal
finance, taxation, corporate organization and management and
a regular columnist in CRAIN'S CHICAGO
Question: How would you define mission-related or socially
my perspective, socially responsible investing seeks to align
the objectives of the portfolio with the personal values of
the investor. This is superimposed on whatever financial characteristics
and criteria would otherwise be utilized in the development
and construction of a portfolio. Mission-based investing is
the same thing, but from the perspective of an organization
rather than an individual. Socially responsible investing
is highly personalized, meaning different things to different
people, depending upon their specific concerns and the way
in which they wish to voice those concerns. For most people,
it tends to be most commonly employed in the way in which
they choose to invest consistent with their financial planning
objectives as well as with their values and their concerns.
Question: How would you describe or define an investor in
think there are many different people and institutions investing
socially responsibly and many others who are candidates for
it. For example, there are individuals who are concerned about
transmitting their values to their children along with their
money. They may be people who are embarking on estate planning,
trust or philanthropic planning and are starting to recognize
and become sensitized to the opportunities of having their
portfolios value driven, just as their trust documents are.
A variation on this is the family foundation where the entity
itself may have certain philanthropic objectives and it is
only logical therefore that the assets within the foundation
reflect the social responsibility of the corporations in which
those families would like to invest.
Question: Why should investors consider SRI?
should consider SRI because their money could do double duty.
Their money could not only generate the returns necessary
to achieve whatever their financial objectives are, but at
the same time make a difference in issues that are of greatest
importance to them. Not to do that is both a default in planning
and a missed opportunity. If there are ways to construct the
portfolio where you are not suffering any drag with respect
to financial performance and move ahead some specific issue
that is important to you, the question should instead be framed
differently: why should investors not consider SRI?
Question: What are the upsides and downsides to SRI?
there are risks because when you look at socially responsible
investing, you have to understand that it means different
things to different people. If I am a pacifist, I may not
want to invest in defense stocks, for example. Somebody else
may think that there is a societal value to making sure we
have a strong homeland defense and therefore would want to
invest in defense stocks. Both of us may be described as socially
responsible investors because we're making decisions based
upon our view of society. So, when one invests in a mutual
fund for example, by definition you end up in a kind of homogenized
mix of securities, so the risk is that you end up with perhaps
a less diverse portfolio than you bargained for and at the
same time one that does not precisely address the issues of
greatest concern to you.
I think it is very hard to invest in a socially responsible
way unless a portfolio is designed with you and your concerns
in mind. Most investment advisors today resist doing it because
they have a preconception that socially responsible investing
will result in a drag on performance within the portfolio.
They are also probably afraid that their client relationship
would be at risk if a year or two out they have under-performed
whatever index is relevant. There has been so much conversation
about SRI not working, how it is really harmful and no investor
can really make a difference anyway, and how you are going
to hurt your financial planning or your organization's treasury.
On balance, though, the right thing prevails and I think SRI
is in that category … it will have its day and I think
that day is very near by.
Question: Is it important for an advisor to be conversant
about this topic?
have a professional obligation to their clients to make sure
the clients are making informed decisions. Part of the information
that must be available to clients is the opportunity that
SRI offers. Advisors must talk to clients about how strongly
they hold certain beliefs and convictions. All of us will
have a visceral reaction to certain things and in an ideal
world we would only do those things that are good. The truth
is that all companies are imperfect. We tend to adopt a "best
of class" approach. We look for those companies that
are trying to do the right things, and often, this is a work
in progress. Rather than inviting the client to react rashly
to a prepared list of behaviors that someone has suggested
may be inappropriate, there must be a more in depth discussion
about these opinions to determine a client's commitment and
tolerance of particular situations so that the portfolio can
reflect the deeply held beliefs of clients without being sabotaged
by the impression of goodness. Failing to do that is a default
in exercising one's professional obligation.
Question: Do you have any suggestions about how an advisor
might broach the subject of Socially Responsible Investing
with a client?
think the conversation should naturally flow from the consideration
of purpose or mission. If you are talking about individuals,
the conversation will grow out of an estate planning or tax
planning conversation where certain philanthropic objectives
or succession objectives have to be defined. It is easy to
segue into the question of how we can get the most bang for
the buck, in terms of the kind of vehicle that is designed,
the philanthropic strategy and the investment decision regarding
the assets. Just as you look at the kind of vehicle used in
estate planning, the client should look at the assets they
are putting into a trust, for example, and how those assets
are managed in a way that also speaks to the same kind of
concerns that are incorporated in the mission or parameters
of the trust.
It is an easy conversation for an advisor to have. It also
shows the client that the advisor is motivated to advocate
the client's interest and to understand what the client's
core beliefs are. For the advisor to be effective, he or she
must educate the client about the fact that there is more
to SRI than meets the eye and there are opportunities that
may be less obvious, more nuanced. It is okay to challenge
clients. Clients do appreciate it when an advisor steers them
into new unknown territory that is beneficial. The advisor
should not assume that because a client says, "I can't
do that because I can't afford to give up the total return,"
that he or she is not interested in exploring different opportunities.
If you do, you are doing the client a disservice.
In 1995, Steve Viederman wrote in the CHRONICLE
that "all foundations and charities with investment portfolios
cannot have a clear conscience until they come to terms with
these questions: What kinds of companies do we wish to support?
What kind of corporate culture do we wish to encourage? What
kind of economy do we wish to build? What kind of communities
and world shall we attempt to shape?"
Eight years later, these questions have even greater import.
While there may be divergent perspectives within the socially
responsible investing industry, there is one commonly held
position: socially responsible investing is no longer the
purview of a few but portends of things to come and offers
unparalleled opportunities to individuals and institutions
to affect change on multiple levels simultaneously, without
negatively impacting their financial capacity.
©2003 B. Brill and S. Winer