Boomers came of age in the 1960s, a time of idealism and
social upheaval. Did they translate their background into
financial activism as they became investors? It seems so—socially
responsible investing (SRI) is more popular than ever, and
some advisors are looking at it in a new way. ,
has developed "Advocacy
to help his high-net-worth clients and has written a book
about it, "Profitable Socially Responsible Investing?"
He spoke with us about what's wrong with SRI mutual funds,
why responsible companies may be more profitable, and how
many religious groups are coming together to influence corporate
What's been the problem with traditional socially responsible
SRI historically has been about the systematic exclusion of
an industry. I have concerns with that. As you start limiting
certain classes, you are less diversified. Therefore it's
riskier. If you look as these portfolios, they tend to have
a drag. Also, for most people, although we may care about
health or certain industry exclusions, this is not the most
meaningful way of achieving SRI.
We are more nuanced at our firm. We seek to match behaviors
of companies with the core values of individuals. We've developed
tools to assist us. We ferret out deep individual convictions
and seek to develop portfolios that handle the financials,
and also make sure companies are exemplary regarding the individual
values of investing.
We took a benchmark, the Russell 3000, and calculated returns
over an eight-year period. We found that it generated 13.05%
return. We then found the companies with highest scores for
social justice and the environment, and we noted that these
delivered even better performance! I think there is ample
evidence that "Advocacy
as we call it does no damage to results.
We have investor advocates who police the SRI policies and
match them with positive screens of clients. And we develop
You state that SRI does not work well with mutual funds—you
need separately managed accounts. Why don't socially responsible
mutual funds work?
With mutual funds, you have a manager who is a fiduciary,
working with the objectives of many investors. So, what does
a manager do? He creates a hodgepodge. He works from a ”Best
Employer List" or other lists. He doesn't work with any
one set of values in particular. Everybody has to give up
something. I do want to give these SRI mutual funds credit,
and maybe these are the only practical way for lower-end investors
to gain access to SRI, but these funds may not be a particularly
meaningful expression of values.
With SMAs you can be more laser-like. We customize accordingly.
If someone is very concerned about human rights, but also
the environment, we can balance this out. We can mix and match
and exercise judgment. (At our firm, there is a $500,000 minimum.)
You have a chapter in your book on behavioral social screening,
examining whether companies that promote diversity, human
rights and respect for the environment, for example, deliver
better returns. Is this true?
The key thing to understand is that our comparison was fairly
macro. What is useful to know is why might this be. Why is
a company that does better in environmental protection outperforming
its peers? Consider this example: There is a case study that
describes two groups of companies that faced environmental
hazards they were NOT legally obligated to address. However,
one group said they'd fix the hazards anyway, and the other
did not. We follow these groups over time. The companies that
fixed the problems voluntarily were perceived as better credit
risks. So they outperformed the others over time.
This becomes intuitive: Look at companies that treat employees
well. They have lower recruitment costs, lower training costs,
and they hold onto institutional knowledge. You get greater
value. Good companies treat their customers well, make safer
products, and achieve greater brand loyalty. If they have
good ties to the community, they will get a better reception
at City Hall. Companies that are more sensitive to certain
SRI issues have enlightened management and perform better.
Are we going to see more shareholder activism with shareholders
caring more about companies' political, social, and environment
There has been a significant increase in SRI. At the end of
2003, there was about $2 trillion in SRI portfolios—a
huge increase over past years. The people who grew up in 1960s
and lived through social change, women's rights, and civil
rights, are now most concerned about alternative energy and
natural foods, for example.
You have a whole chapter on faith-based investing. "People
of Faith" seem to be such a potent political force—will
it become a potent economic force as well, in terms of investing?
Yes and no. Those guidelines are less than universal. However,
many do agree today that there is a chance of greater action
with leverage. I talk about the Interfaith Center On Corporate
which represents faith-based organizations. There is strength
in their numbers--about $100 billion in assets altogether.
They're aggressive in directing shareholder votes—against
videogame violence, for example. They look at global warming,
at healthcare access. They've lobbied against companies on
certain issues, such as their employment practices in Third
When you can leverage a lot of people, you have a loud voice.
We looked at the Interfaith Center as not a bad paradigm.
Much of SRI is still based on exclusion. Each religions has
own screens. But this group has identified human rights issues
broadly shared by people of faith. They look at the greatest
For additional information on purchasing the book and on
on or go to the following URL: www.AdvocacyInvesting.com