The Skinny on Green Investment

The Skinny on Green Investment

Straight talk from Steve Lippman of Trillium Asset Management. Earlier in March, the green-investment guru fielded questions from readers of GreenBiz affiliate Grist Magazine.

What criteria do you use to make the ultimate yay or nay decision on what constitutes a socially responsible corporation? -- Maire McDermott, Winnipeg, Manitoba, Canada

We're in a little different boat than SRI mutual funds, because as an asset manager we offer individual investment portfolios to our clients and thus can customize their accounts to reflect their values. However, to meet the basic values of the majority of our clients, Trillium Asset Management typically excludes from our clients' portfolios companies that are significantly engaged in the production or marketing of firearms and weapons, tobacco, gambling, pornography, and nuclear energy. On a case-by-case basis, we also avoid companies that have systematically failed to protect the environment, human rights, or workers.

In addition to our basic avoidance screens, we proactively seek to invest in companies with strong records of corporate citizenship and those that offer sustainable products to the marketplace, such as renewable-energy technologies and organic foods. Even after all that, we hold plenty of companies that have mixed records of strengths and opportunities for improvement, and we generally put more emphasis on our efforts to actively engage with the companies we hold to improve their performance once we do our basic screening.

Overall, I'd personally define a socially responsible company as one that: (1) has systems in place to identify the key social and environmental impacts relevant to its business; (2) recognizes that it has obligations to address those impacts and sets goals and targets for improvements; (3) engages its employees and works collaboratively with key external stakeholders to address its impacts and meet its goals and targets; and (4) reports openly and honestly on its performance and progress. I'm not sure all of the companies we currently hold are yet leaders at following this path, but we're working on getting a lot of them farther along it!

You mentioned that you would like to see a group or coalition of groups organize and mobilize consumers in a way similar to MoveOn's efforts politically. Have you ever heard of Co-op America and the Green Pages? -- Melissa Leonard, Naugatuck, Conn.

I should have mentioned Co-op America when I mentioned IdealsWork in my response earlier this week. Both their Green Pages and Responsible Shopper Web sites are definitely useful resources for consumers who care about social and environmental issues.

But I look at MoveOn's successes -- getting millions of its members to take their power as citizens seriously and make their first political donations, go door-to-door registering voters in their neighborhood, and even volunteer to travel to another state as poll watchers -- and it makes me hope for the development of a similarly ambitious and successful effort to mobilize people to take their power as consumers seriously. So I threw out the challenge to Grist readers with the hope that some smart people out there would figure out how best to do it ... or that MoveOn would offer to!

If you live in a place where the notion of socially responsible investing is alien, what's the best way to get advice on how to be a green investor? -- Shannon Brennan, Lynchburg, Va.

There are free guides to investing in socially responsible mutual funds and other SRI topics geared to the individual investor available at that you can order online. There are also publications you can read, like the GreenMoney Journal, and Co-op America offers a Financial Planning Handbook and Real Money journal to its members.

If you do want to talk to a financial planner in your area who knows about socially responsible investing, one way to find them is through the First Affirmative Financial Network, a nationwide network of financial advisers who specialize in socially responsible investing.

I've looked into all the socially conscious mutual funds several times over the last few years, and I'm always turned away by the high fees -- much higher than those charged by high-performing funds that don't concern themselves with the future of the planet. Can you explain why these fees are so high? -- Elizabeth M. Ferranti, Marstons Mills, Mass.

The main reason some SRI mutual funds have higher expense ratios than some traditional mutual funds isn't that they practice SRI, it's that they tend to be smaller. Some of the huge mutual-fund companies have tremendous economies of scale and thus can have lower fees, just as Wal-Mart can offer lower prices than many neighborhood stores. To take this into account, the Social Investment Forum did a study that compared SRI funds to other mutual funds of similar size and found their fees were basically the same.

I know from experience that at Trillium Asset Management our fees are generally comparable to traditional asset managers that don't do SRI. And I'd argue we're providing our clients more value, because we are doing screening, carefully voting clients' proxies, and engaging with the companies we hold while charging the same fees as many companies that don't offer these services.

The good news is that fees at SRI funds are now tending to come down a bit as those funds get bigger and gain economies of scale. And the mutual fund giant Vanguard, known for its efficiency and low fees, now offers a screened SRI product based on the Calvert Social Index that may be attractive to investors who are particularly concerned about fees.

When working with large corporations on improving their environmental track records, what would you say is your best leverage point in achieving change? -- Christopher Walts, Kalamazoo, Mich.

A key leverage point unique to socially responsible investors is the fact that corporate managers are supposed to be working in the interests of their shareholders, which gives us the opportunity to offer input on behalf of the companies' owners ... or those who are our clients, anyway. Most companies have established formal channels for responding to inquiries from investors, which helps us get our voice heard and hopefully begin a dialogue. Also, with share ownership comes the right to bring policy issues to a vote of all the owners of the company through a shareholder resolution. Companies most often hate having to deal with shareholder resolutions at their annual meeting, and often work to address our concerns without things resorting to the resolution process.

Does the Securities and Exchange Commission effectively require companies to disclose the information that you need as an SRI analyst? Also, how has the SEC been reducing the rights of SRI shareholders to file shareholder resolutions on the financial risks of issues like global warming and toxic-chemical exposures? -- Sanford Lewis, Amherst, Mass.

The SEC does have rules that require companies to disclose potential environmental costs and liabilities -- both the amounts of money reserved to pay for future litigation and environmental compliance, and a written analysis of developments that could significantly affect the bottom line. Unfortunately, the SEC hasn't strongly enforced the disclosure of these issues, so SRI analysts have to attempt to draw the information from other sources such as other government records. To address this, there's a strong coalition of environmental groups, socially responsible investors, and others called the Corporate Sunshine Working Group that is working to lobby the SEC and Congress for stronger disclosure requirements, which are in the interest of all investors.

Shareholders have also tried to use shareholder resolutions to get companies to assess and disclose to investors the financial risks they face from major looming environmental issues like climate change or potential liabilities associated with past environmental disasters like Bhopal. In a disappointing move, over the past two years SEC staff has begun allowing companies to exclude these types of shareholder proposals that demand disclosure of future risk. They argue that companies are supposed to address such risks in their annual reports, instead of through the shareholder resolution process, yet ironically they aren't doing much enforcement to ensure that companies do disclose those risks in annual reports. It's a bit of a catch-22, and both the environment and investors come out poorer for it.

What do you think about the role of private certification schemes such as the Forest Stewardship Council and those created to deal with sweatshops? Do you think that there is potential for a multi-issue progressive certification scheme? -- Evan Thomas Paul, Columbia, Mo.

I do find independent third-party certification systems, like FSC standards for sustainable forestry or the Social Accountability 8000 and Fair Trade standards on social performance in global trade, incredibly useful in judging corporate performance. The standards that are most credible and useful are those that were developed with input from key stakeholders (and have governance structures representing those stakeholders) and include independent monitoring mechanisms, as opposed to some industry self-regulation systems.

Some of these standards, like the FSC standard, do incorporate multiple issues, addressing a mix of environmental and social issues. I'd welcome the development of more multi-issue standards, but think it'd be most helpful if they were still tied to specific sectors so they focus on key industry-specific impacts and issues and don't get overly abstract or watered down.

What companies are most active in development of technologies using wind and/or solar? Do any of these companies trade publicly? -- Tom Svoboda, Kent, Ohio

One interesting source of information on green technology investments is Clean Edge. Its Web site currently lists about 30 publicly traded U.S. companies involved in wind, solar, fuel cells, and other forms of alternative energy and green technologies. I'm not the clean-tech analyst at Trillium Asset Management, so I'm not personally familiar with all the companies on the list and am not endorsing them as investments. But I do think the Web site and company list at Clean Edge could be a good place to start your own research about potential investments in this sector. One other cautionary note is that many of these companies are so-called small-cap stocks, which tend to have more volatile share prices and be more risky to invest in than larger, more established companies.

I am currently studying to become a Certified Financial Planner through an evening program at Virginia Commonwealth University. Do you have any suggestions for folks that have spent about 10 years in the environmental field who want to begin careers in social investing? -- Chip Goyette, Arlington, Va.

There's a large range of jobs related to socially responsible investing, from doing research on corporate performance at a rating agency like the Investor Responsibility Research Center or KLD Analytics to a job like mine doing shareholder advocacy for an SRI firm to being a certified financial planner helping clients make investment decisions.

Your mix of specific environmental experience with certification courses in financial planning sounds like a strong combination to bring to the field. Like most social change-related jobs and jobs in the environmental movement, there's a lot of demand for the good jobs that are out there, so it can take persistence, good networking, and sometimes a lucky break to get your foot in the door. But I'd point out that Al Gore has just started his own socially responsible investment firm, so at least he was able to make a mid-career switch into socially responsible investing.

Are you aware of any initiatives, projects, or programs that connect SRI with churches and religious communities? -- Bruce Wiggins, Kansas City, Mo.

A great resource is the Interfaith Center on Corporate Responsibility, an association of 275 faith-based institutional investors, including national denominations, religious communities, pension funds, endowments, hospital corporations, economic development funds, and publishing companies with an estimated $110 billion in assets. ICCR members have been pushing companies for greater social responsibility for more than 30 years on issues as diverse as ending support for apartheid in South Africa to challenging automakers to make more fuel-efficient vehicles.

I am on the board of a local Audubon chapter. Several years ago, we decided to invest $20,000 in an SRI mutual fund with Calvert hoping to make money on the capital, but after five or so years of earning nothing, we're now revisiting our investment strategy. Some board members feel as though we should invest in a higher-earning, non-SRI fund so that we can earn more money to put to good local use in building a nature center. They feel it's a worthy trade-off. Can you comment on this argument? -- Laura Henry, Fairbanks, Alaska

I'd argue it's a trade-off you and other groups don't have to make. There's now more than 10 years of experience from SRI benchmarks and a set of over 15 rigorous, peer-reviewed academic studies (compiled at SRI Studies) that suggest that socially screened investments don't perform any differently from comparable conventional mutual funds. For instance, one of the best-known U.S. SRI indexes has performed just slightly better than its benchmark of the S&P 500 index over the past 10 years. During that period, there have been times it's beaten the S&P and times it's lagged it a bit, but it's generally performed the same. (As an individual asset manager, Trillium Asset Management doesn't offer mutual funds, but our client portfolios have been very competitive with the S&P 500 and other benchmarks we use to measure financial performance.) Also, SRI mutual funds as a group have ranked as well or better than conventional mutual funds in the widely watched Morningstar ratings of mutual-fund strength and performance. So there's a strong body of evidence that you don't have to sacrifice performance to get some of the benefits of socially responsible investing that are consistent with your organization's mission.

OK, so I offer those arguments in theory, but you've still got the pain of looking at the past five years of your group's financial statements. One key thing to keep in mind is that the last five years have been an incredible roller coaster in the U.S. stock market. I feel your pain because I put some money in the stock market about five years ago -- at a time when the markets were at all-time highs, remember -- only to see my funds shrink for the next several years. If you haven't looked at how comparable non-SRI funds performed over the same time period, that would be useful information to have. It would also be helpful to consider how your fund did compared to similar non-SRI funds over the past three-year and one-year periods when the markets have picked up considerably and many SRI and non-SRI mutual funds have done quite well.

A final recommendation is diversification, an important strategy all investors should consider, whether they are in SRI funds or not. I'm not sure how your $20,000 was invested, but to hedge your bets and lower your risks, you could split the $20,000 into four different styles: such as a value fund, a growth stock fund, a global or international fund, and perhaps even an income fund. There are SRI options within each of these investment styles, and you'll lower your transaction costs if you stay within the same family of funds.

My company offers a 401(k) retirement plan that allows us to choose from among about eight mutual funds to invest in, none of which are socially responsible. A group of us employees have pushed to get a socially responsible fund on the list of options. We're getting fierce resistance from management, who say that they have a fiduciary responsibility to provide only the best-performing funds, in terms of return, as options in the plan. I wonder how other companies have overcome this problem and are able to provide socially responsible options to their employees, even if such funds are not necessarily the top performers in their fund categories. -- Mark W., Auburndale, Mass.

First you can point to the growing number of large companies offering an SRI mutual-fund option in their 401(k) retirement plans, which now include Alaska Airlines, Coca-Cola, The Gap, Ford Motor Company, General Motors, Hewlett-Packard, and more. There's general support for their actions from an official advisory opinion the U.S. Department of Labor's Pension and Welfare Benefits Administration issued in 1998 on the appropriateness of SRI options under Employee Retirement Income Security Act rules. That opinion said that SRI funds can be offered if their expected returns are commensurate to other investments having similar risks.

As I note in other answers here, there's now a long track record and a raft of academic studies demonstrating that SRI funds as a class don't underperform financially compared to non-SRI funds, so this shouldn't be a barrier to offering SRI options. And it's not just fiduciaries of some of the large corporate 401(k) plans that have come to that conclusion. The trustees of state pension plans from states as diverse (and presumably conservative) as Indiana, Maine, Missouri, and New Mexico have also added SRI options to their pension-fund offerings for state employees. I hope you're successful in convincing your employer to follow their lead!

This article has been reprinted courtesy of Grist Magazine, a news affiliate. It was first printed on March 11, 2005.