2005 Lane Reports

Profiting from Principled Investing

Saturday, October 1, 2005
by Marc J. Lane


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.

But “Advocacy 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 value.

Let's look at a few examples. Retailers Staples (nasdaq: SPLS) 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 (nyse: OMX) 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.

Click here for a video with Marc Lane discussing Advocacy Investing with Forbes Senior Editor, John Dobosz.

Copyright © 2005 by Forbes.com.


Marc J. Lane (mlane@marcjlane.com) is a Chicago lawyer and financial planner and an adjunct professor of law at Northwestern University School of Law.

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The Lane Report is a publication of The Law Offices of Marc J. Lane, a Professional Corporation. We attempt to highlight and discuss areas of general interest that may result in planning opportunities. Nothing contained in The Lane Report should be construed as legal advice or a legal opinion. Consultation with a professional is recommended before implementing any of the ideas discussed herein. Copyright © 2007 by The Law Offices of Marc J. Lane, A Professional Corporation. Reproduction, in whole or in part, is forbidden without prior written permission.

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