In the News

The Best of Both Worlds: Responsible Social and Financial Investment

Friday, August 1, 2003
by Betsy Brill and Susan Winer


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 topics:

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 Mainstream Investments

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 Forum:

� 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 process.

� 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, among others.

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 , P.C., and Investment Management, Inc., an investment advisory firm. Mr. 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 BUSINESS.


The Discussion

Question: How would you define mission-related or socially responsible investing?

: From 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 this area?

: I 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?

: Investors 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?

: Sure, 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?

: Advisors 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?

: I 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 OF PHILANTHROPY 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



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