Socially responsible investors may salve their
consciences by declining to buy tobacco stocks or to fund
the war machine, or by steering clear of other businesses
they find objectionable. Fearing that screening out whole
industries might sabotage their investment returns, however,
they may hold their noses and honor the guiding principle
of Modern Portfolio Theory that a prudent investor grows wealth
through broad diversification.
InvestingSM,” the strategy I developed, actually
empowers the ethical investor by promoting the individual’s
values--or driving the institution’s mission--without
increasing a portfolio’s volatility or sacrificing investment
returns. The portfolio reflects the investor’s convictions
in a meaningful, yet practical way, and through proxy voting
and shareholder initiatives, the strategy invites the investor
to the table where corporate decisions are made.
Investors dedicated to promoting human rights or cleaning
up the environment can be true to themselves (or in the case
of an institution, its mission) and invest only in companies
that have exemplary human rights or environmental records,
while insisting that every company pass all the exacting financial
tests it should.
Investment selection becomes a finely honed process where
the investor’s social or environmental concerns are matched
against the company’s performance.
My original research, tracking corporate behavior over an
eight-year period--through good markets and bad--found that,
on the whole, companies earning the highest marks in advancing
social justice and treating the environment with respect outperformed
the Russell 3000. The empirical evidence suggests that a company’s
social and environmental performance is tied to shareholder
Let’s look at a few examples. Retailers Staples
and Best Buy (nyse: BBY)
delivered returns of 114% and 73%, respectively, over the
five years ending Aug. 31, 2005. Women and minorities are
significantly represented on both companies’ boards,
and both companies have implemented progressive policies toward
their gay and lesbian employees. Their peers, OfficeMax
and Circuit City (nyse: CC),
earned only 9.2% and 1.0%, respectively, for their shareholders
over the same period. Both companies have substantially underfunded
pension plans and have been involved in employee relations
controversies. OfficeMax settled a class action alleging violations
of state overtime laws, and Circuit City faces a series of
lawsuits alleging gender, race and age discrimination.
Electrical utilities Entergy (nyse: ETR)
and FPL Group (nyse: FPL),
earning total returns of 187.8% and 95.1%, respectively, both
realize substantial revenue from alternative energy sources
and are recognized as “clean energy” companies.
Their cohorts, Xcel Energy (nyse: XEL),
which delivered 3.0%, and Duke Energy (nyse: DUK),
with a total return of -3.5%, derive most of their electricity
from power plants driven by fossil fuels and are among the
top emitters of toxic pollutants.
Of course, correlation isn’t cause, and company-specific
issues often explain financial outperformance and underperformance.
So the prudent investor shouldn’t view advocacy investing
as a magic bullet to improve investment returns. But it’s
fair to say that aligning one’s portfolio with one’s
values shouldn’t compromise returns.
That’s true even though corporate responsibility requires
funding and involves trade-offs among business priorities.
A company that voluntarily remedies its environmental hazards
is usually perceived by its lender as more creditworthy, so
its borrowing costs are bound to be lower, its return on equity
higher. Similarly, a company that treats its employees well
is likely to suffer less turnover, incur lower recruitment
and training costs, and enjoy greater productivity.
The companies that demonstrate they’re accountable to
all their stakeholders are simply better bets. They’re
also likely to be more transparent, better governed and shielded
from the invidious risks and liabilities that led to the enactment
of Sarbanes-Oxley. In short, they’re likely to give their
investors both a fair shake and a fair count.
here for a video with Marc Lane discussing his investment
Marc Lane is an attorney in Chicago, Ill., and president
of Marc J. Lane Investment Management.
For additional information on purchasing the book and on ,
click on or go to the following URL: www.AdvocacyInvesting.com