In the News

A New View On Socially Responsible Investing

Tuesday, September 13, 2005

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. , J.D. ( has developed "Advocacy InvestingSM" 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 America.

What's been the problem with traditional socially responsible investing?

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 InvestingSM" 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 proxy guidelines.

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 positions?

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 Responsibility (, 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 World countries.

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 common denominator

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