I look around, and I’m appalled – and not just by the banking crises, financial follies, threats of sovereign-debt default or spikes in food or gasoline prices that dominate the daily headlines.
Those problems come and go. What bothers me is the almost-total abandonment of professional judgment and ethics in Washington and on Wall Street – and the absolute lack of urgency that these problems should be attacked and fixed, once and for all.
Roll your eyes, if you want, but I’m deeply troubled. That’s why I believe the time is right for a socially responsible investing strategy that will serve as a wakeup call to Corporate America, Washington and Wall Street. And I’m going to show you four investments that will help get you started.
An Ethical Wakeup Call
Maybe I am old-fashioned, naïve or both, but I believe that our elected leaders and corporate institutions should be setting examples for the rest of us. So I don’t think it’s OK for our elected officials to engage in extramarital affairs or to “sext” blackjack dealers, or for Wall Street firms to trade against clients. But two-time California Gov. Arnold Schwarzenegger and House Democrat Anthony Weiner, and Goldman Sachs Group Inc. (NYSE: GS) apparently do.
The way I see it, our leaders and our financial institutions need to be doing everything cleaner, better and more ethically than the rest of us because their ability to serve us depends on the most delicate – and critical – of all human attributes.
I’m talking, of course, about trust.
Unfortunately, it’s very clear that trust doesn’t rank very high on their list of priorities at the present moment. As a result, I believe that we should take matters into our own hands by embracing the social-investing philosophy. This approach to ethical investing is one that’s coming back into vogue -one we are very likely to hear a whole lot more about in the years to come – and one that will deliver a very clear message to our leaders in New York and Washington.
That message: We want change.
I’m not alone in making this call.
Ernst and Young LLP recently estimated that more than 50% of all new shareholder proposals filed this year will contain socially focused agenda items. The consulting firm noted that a staggering “83% of investors now believe environmental and social factors can have a significant impact on shareholder value over the long term.”
Admittedly, this is a tough row to hoe because corporate management has a history of ignoring so-called “rogue” shareholders proposals. But the numbers suggest that corporate boards would do well to listen.
Last year, Ernst and Young found that about one quarter of all socially related investment proposals garnered shareholder support of about 30%.
Why is this relevant? Simple. You see, at a 50% level, board members and upper-level management members start losing their positions – which is why E&Y refers to the 30% shareholder-response point as a key “threshold” in the socially responsible investing realm.
Now I would call that an “ethical wakeup call.”
A Look Back
Historically speaking, social investing was relegated to the fringes of the investing world and was quite simplistic in nature: It essentially called for investors to avoid companies involved in such “morally conflicting” businesses as firearms, gambling or gambling equipment, alcohol, or tobacco.
Somewhat appropriately, these were originally referred to as “sin stocks.” But the term has morphed over time, and has taken on a much-broader meaning. Some of the considerations now include the company’s environmental policies, how “green” it is, who lobbies for it, and how much they’re paid.
Here in the aftermath of the global financial crisis, I think there’s a strong argument to be made for including a company’s workplace standards, and its legal history – particularly when it comes to a firm’s track record for employment with respect to age, gender, or even sexual preferences.
At the moment, the socially responsible investing universe remains relatively small: There are only about 250 mutual funds and 26 exchange-traded funds (ETFs) that follow a socially responsible investing mandate – accounting for about 1% of invested assets, according to Kiplinger’s and Morningstar.
Back in 2000 – slightly more than a decade ago – there were only 75 socially responsible funds.
Socially Responsible Investing: The Tradeoffs
Because socially restricted funds cannot invest in a broad mix of stocks, you might expect their performance to badly lag the market averages over time. But that’s not always the case. What’s more, because socially responsible funds tend to avoid such volatile venues as gambling or specific industrial conglomerates, they can be more stable when markets go haywire.
If there’s a downside, it’s the fact that expenses can be rather high: Constructing socially conscious portfolios is time consuming because of the increased managerial oversight and research required. In general, then, the management fees you’ll pay for investing in line with your ethical views are a few basis points higher than in their “actively managed” counterpart funds. And those expenses are a whole lot higher than they are in the pure, broad market-index funds.
But the bottom line is this: As more investors embrace this philosophy – and as the number of investment options proliferate – socially responsible investing will become more and more of a force in the investment world.
And as the standards by which each company is measured – again, I’m talking about employment policies, its environmental stance, its political involvement, and the industries it serves – gain in number and complexity, the ethical-investment movement will gain some major muscle.
Companies won’t be able to ignore it.
And neither will Washington and Wall Street.
Four Socially Responsible Funds To Consider
Here are four choices that will get you started:
- TIAA-CREF Social Choice Equity Retail (TICRX): If you are used to investing broadly and are interested in tracking the general markets, this may be a good place to start. The fund’s managers use a five-tiered screen that includes corporate governance, labour relations and natural-resources usage while deliberately excluding the sin stocks of old – alcohol, tobacco and gaming. Expenses are a 0.38% a year versus the typical 1.4% a year for an average equity mutual fund. Performance is slightly better than the broad Standard & Poor’s 500 Index by 1.2% since inception but its 1.4% yield has helped make returns more stable.
- Domini Social Bond Investment Fund (DSBFX): A classic mutual fund in terms of its structure, the Domini Social Bond Fund selects intermediate-term bonds and fixed-income securities, using social and environmental standards, as well as business-segment considerations. The fund also evaluates potential investments based on qualitative judgments, including the quality of its relationships with a specific focus on key shareholders, employees, communities, customers, and ecosystems. Where possible, the fund favours investments that can make a “positive impact” on communities. Expenses are 0.95% a year.
- Amana Trust Income Fund (AMANX): Islamic funds, also known as Shariah funds, make up one of the fastest-growing asset classes in the world in recent years – with more than $400 billion invested as of 2009 according to Standard and Poor’s Financial Services LLC., which notes the potential market may be as much as $4 trillion. Indeed, an estimated $1.2 trillion is already on deposit in Shariah-compliant banks. In contrast to other religiously oriented funds, the Amana Trust’s performance has been in line with unrestricted income funds lately and that makes it worth your consideration no matter what your beliefs. The fund maintains a list of “excluded assets,” including financial companies, pornography, gambling and pork producers. Fees are 1.25% a year. Over the last 10 years the fund has gained 76.13%, while the S&P 500 is basically flat.
- Portfolio 21 R Fund (PORTX): If green is your thing, you may want to take a look at Portfolio 21, which focuses on ecologically sound companies developing earth-friendly products. As you might imagine, this includes companies that focus on alternative energy and excludes those involved in nuclear power. Not surprisingly, 97% of the holdings are in developed markets, because more-mature economies tend to have the highest, best-developed environmental-stewardship requirements. Even so, the fund has a definite “global” tilt, and as much as 70% of the assets may be in foreign securities. Fees are at 1.5% and performance is roughly in line with what you’d expect for other large-cap-stock funds – about 3.87% over the past five years, as of April 30. The fund’s 10-year total return is 5.13%, versus 5.07% for the MSCI EAFE NR USD and 4.35% for the World Stock Index, respectively.
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