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Put Your Money Where Your Conscience Is
Socially and environmentally responsible investing comes of age
By Wendy Priesnitz

Socially and Environmentally Responsible InvestingSeemingly one of the last bastions of fiscal conservatism, the investment industry has been greening itself up over the past decade or so. Shareholders have realized that by voting with their dollars, they have the potential to leverage markets in favor of the planet and of those less fortunate who live on it – and to make some money for themselves at the same time. 

And that, in turn, is slowly but steadily leading the business community and governments toward becoming part of the solution rather than part of the problem. With the responsible investment sector watching over their shoulders and primed to pounce at missteps, they are finding that rhetoric and greenwashing advertisements are no longer enough. 

Socially Responsible Investing 

Shareholder advocacy is one aspect of socially responsible investing (SRI). SRI is defined as the integration of investment with social responsibility and environmental sustainability. It includes all the financial decision-making processes that are a part of a prudent investment management approach, but it also includes the selection and management of investments based on issues of sustainability or social responsibility.

That selection and management is accomplished through screening or the application of social and environmental guidelines or “screens” to the investment process. It can be done directly by investing in particular stocks or other investments selected according to specific screens, or through socially responsible mutual funds employing pre-established screens.

Negative screens can include such issues as companies operating with sweatshop or child labor, or that manufacture alcohol, tobacco or pornography, or that are heavy polluters. Companies falling into these categories are excluded from portfolios containing these screens. Examples of positive screens include seeking out companies with good employee relations, strong records of community involvement and exemplary environmental impact policies and procedures.

Besides shareholder advocacy and screening, a third aspect of SRI is community investing, whereby investors place their money in businesses or investments reflecting a vision of an alternative kind of economy. Community investors generally place money in community loan funds providing capital to local entrepreneurs, co-operative or community-oriented enterprises such as worker or consumer co-ops, regional development bonds, not-for-profit enterprises or community loan funds. Community investment funds provide capital that cannot be offered by banks and other for-profit financial institutions. In addition, by bringing mentoring or government-funded resources to the process, community investment helps to provide training, networking and other technical support.

Social investing can be done by individuals or institutions such as foundations, religious organizations, trusts, investment pools and pension plans. And all these types of socially responsible investors have been ramping up their corporate engagement activity in recent years, as a way of holding companies accountable for their social and environmental behavior on the international stage.

According to the Shareholder Association for Research and Education (SHARE), Canadian investors filed close to 30 shareholder proposals on a wide range of socially responsible and sustainability-related issues in 2006 alone, including the rights of local communities in development projects, biodiversity and climate change.

There is even an award for excellence in this sector. The Capital Markets Award for Sustainable Investment & Banking is a category of the GLOBE Awards for Environmental Excellence, presented at the GLOBE environmental conference held in Vancouver. The Capital Markets Award is based on “an explicit recognition that financial markets are increasingly integrating environment factors into investment and banking decisions, and are placing more capital into sustainable technologies and ventures,” states the Globe Foundation, sponsors of the awards and organizers of the conference.

Shareholder Activism

A good example of shareholder activism is resolutions filed by two groups of Canadian investors: The Ethical Funds Company, a Vancouver-based socially responsible mutual funds company, and the Missionary Oblates of Mary Immaculate. The resolutions demanded that Alcan create an improved policy of stakeholder engagement. They cited community opposition to the company’s Utkal project in India, a large new bauxite development. Some local groups in India have opposed the project for a number of years and public protests have been marked by police violence. As part of its Share Power campaign, Amnesty Canada urged its members who hold shares in Alcan to support the resolutions and to write to mutual fund companies holding Alcan shares asking them to support the proposals.

The UN Principles For Responsible Investment

As institutional investors, we have a duty to act in the best long-term interests of our beneficiaries. In this fiduciary role, we believe that environmental, social, and corporate governance (ESG) issues can affect the performance of investment portfolios (to varying degrees across companies, sectors, regions, asset classes and through time). We also recognize that applying these Principles may better align investors with broader objectives of society. Therefore, where consistent with our fiduciary responsibilities, we commit to the following:
1. We will incorporate ESG issues into investment analysis and decision-making processes.
2. We will be active owners and incorporate ESG issues into our ownership policies and practices.
3. We will seek appropriate disclosure on ESG issues by the entities in which we invest.
4. We will promote acceptance and implementation of the Principles within the investment industry.
5. We will work together to enhance our effectiveness in implementing the Principles.
6. We will each report on our activities and progress towards implementing the Principles.

Although the Alcan annual meeting hadn’t been held at press time, at another such meeting, the American energy giant Dominion Resources had just been given a strong message by its shareholders who had been seeking greater analysis and disclosure from the company about the financial impacts posed by global climate change, including foreseeable greenhouse gas emission limits on U.S. power plants.

Twenty-two-and-a-half percent of the company’s shareholders, who collectively own about $5.85 billion worth of shares, supported a resolution requesting that the company undertake a comprehensive review on how it is responding to growing regulatory, competitive and public pressure to reduce greenhouse gas emissions. Shareholders requested that the climate risk report be completed by September 1, 2006 and be reviewed by a board committee of independent directors.

The 22.5 percent support is nearly three times higher than the 8.3 percent voting support a similar resolution received at Dominion’s 2005 annual meeting. The measure was backed by many of the company’s largest shareholders, including public pension funds in California.

“Shareholders have sent a loud and clear message that they expect Dominion to be far more active to reduce greenhouse gas emissions and plan for a future in which carbon constraints change the way electric companies do business,” says Shelley Alpern, director of social research and advocacy at Trillium Asset Management, which filed the resolution along with the New York City Employees Retirement System.

“We hope [this] strong vote will spur Dominion to be more responsive to climate-related business issues,” says Mindy S. Lubber, president at Ceres, a coalition of investors and environmental groups that has been coordinating shareholder filings with electric power companies.

In the two years preceding this article, more than a dozen electric power companies have published or agreed to publish climate risk reports at the request of shareholders. Dominion has received similar shareholders requests in recent years, but has balked at producing such a report.

The Bottom Line

There is no doubt that shareholder activism is effective. But can you comfortably park your retirement savings in a socially and environmentally responsible investment? If the growth of the phenomenon is any indication, your nest egg will be safe.

The Social Investment Forum’s 2005 Report on Socially Responsible Investing Trends in the United States identified $2.29 trillion under professional management involved in one or more of the three socially responsible investment strategies. Assets under professional management involved in one or more of the three dynamic strategies that define socially responsible investing in the U.S. grew from $639 billion to over $2 trillion between 1995 and 2005, an increase of 249 percent. Socially screened mutual fund assets grew 15-fold over the same ten-year period from $12 billion to $179 billion, outpacing the growth of the mutual fund industry in the U.S. In Canada, according to the Social Investment Organization (SIO), SRI grew 27 percent from 2002 to 2004 to $65.46 billion in assets.

Multiple academic studies have shown that socially responsible investing results in equal or even superior financial performance to non-screened investments. For instance, the SIO reviewed over 40 empirical studies on the issue of screening and financial performance, the majority of which conclude that screened portfolios perform as well as non-screened portfolios. Moreover, with proper portfolio management, screened portfolios pose no additional risk or volatility.

Of even greater interest is research showing a direct link between progressive environmental management of a corporation and improved financial performance.

Principled Investing

Even the United Nations has hopped on the responsible investment bandwagon. Secretary-General Kofi Annan launched the Principles for Responsible Investment (see sidebar) at the New York Stock Exchange in late April. By the time the European launch was held five days later in Paris, investment funds endorsing the Principles were worth more than US$4 trillion.

Monique Barbut, Director of the UN Environment Programme says, “The commitment embodied in the Principles and now supported by some of the world’s largest asset owners and asset managers is a clear signal to business and global capital markets. The [money] now backing the Principles confirms that the integration of environmental, social and corporate governance considerations is now an essential part of good business.”

The Principles were developed during a nearly year-long process convened by the UN Secretary-General and coordinated by the UN Environment Programme Finance Initiative (UNEP FI) and the UN Global Compact.

In joining with institutional investors and investment managers to develop the Principles, the United Nations collaborated with some of the world’s most influential institutions – many of them public pension funds – involved in investment activities worldwide. It is estimated that pension funds alone – public and private – account for up to 35 percent of total global investment.

The six overarching Principles, which are voluntary, are underpinned by a set of 35 possible actions that institutional investors and asset managers can take to integrate environmental, social and corporate governance (ESG) considerations into their investment activities. These actions relate to a variety of issues, including investment decision-making, active ownership, transparency, collaboration and gaining wider support for these practices from the whole financial services industry.

You can be sure that there will be many eyes watching to ensure that the corporations signing on to the Principles are giving more than lip service  to them.

Wendy Priesnitz is the editor of Natural Life Magazine, a prolific author, and a small business writer. This article was published in Natural Life Magazine in 2006.

 

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