Armchair Investing  and DIRECTING CHANGE  with a Case Study by Jon Luft                       Imagine if everyone invested in corporations that reflected their values?                        YOU MIGHT BOYCOTT BUYING GOODS FROM COMPANIES WHO DON’T REFLECT YOUR VALUES, BUT HAVE YOU LOOKED AT YOUR PORTFOLIO OF INVESTMENTS?

SOCIALLY RESPONSIBLE INVESTING is the process of investing money in corporations, infrastructure and community development that are not causing social or environmental harm. The designation is based on scrutinizing business practices: the treatment of employees, customers, communities and the environment and by being respectful of social justice and ethical issues. It is an investment approach that integrates environmental, social and governance values (ESG) into financial analysis and decision-making. Socially responsible investments can be made in individual companies or through a socially conscious mutual funds or an index fund. This article will provide you with a process of how to “Walk the Talk” and invest congruent with your values.

MYTH BUSTING: RETURNS are NOT LESS than OTHER INVESTMENTS

1. “Over the last two years, SRI investing has grown by more than 22% to $3.74 trillion in total managed assets, suggesting that investors are investing with their heart, as well as their head. In fact, about $1 of every $9 under professional management in the U.S. can be classified as an SRI investment. “ Forbes Magazine April 2013 https://www.forbes.com/sites/feeonlyplanner/2013/04/24/socially-responsible-investing-what-you-need-to-know/#25ef778f3442
2. “One of the myths around socially responsible investing is that aligning investments with ethics means lower returns… Companies that were committed to sustainability outperformed companies that weren’t, they found. A dollar invested in sustainability-minded companies in 1993 would have grown to $22.58 by 2014, but just $15.35 if invested in companies with no such commitments.” George Serafeim, an associate professor at Harvard Business School and colleagues analyzed data going back over 20 years: https://hbr.org/2015/04/the-type-of-socially-responsible-investments-that-make-firms-more-profitable
3. In a paper entitled “Socially Responsible Mutual Funds”, published in the May/June 2000 issue of the Financial Analysts Journal, Meir Statman of Santa Clara University reviewed 31 socially screened mutual funds and found that they outperformed their unscreened peers, but not by a statistically significant margin. The bottom line appears to be that SRI funds do not behave all that differently from regular funds and that investing in a SRI fund will not negatively affect your returns compared to choosing a conventional index fund.” From Go Green with Socially Responsible investing (Investopedia) http://www.investopedia.com/articles/07/clean_and_green.asp
4. The Domini 400 Social Index (DSI): Outperforming the S&P 500 Blogs @ The Motley Fool Published June 25, 2013 Can these types of funds perform? Can the DSI perform just as well, if not better than an index that has investments in these lucrative yet controversial markets? The chart below shows the value of $1 invested in the DSI 400 since its inception in 1990 compared to $1 invested in the S&P 500 in 1990: http://www.sfgate.com/business/fool/article/The-Domini-400-Social-Index-Outperforming-the-4620645.php

The PROCESS to become a SOCIALLY RESPONSIBLE INVESTOR

1. Hire a professional? Ask your stockbroker for help or for a reference?
2. Go through your portfolio and decide what to keep and what to sell. You might be amazed at what you have been supporting with your investment dollars! You might have some gains to pay. This does not need to be an “all or nothing” approach. TAKE THE CHALLENGE: Invest some amount in SRI stocks or funds and then compare after 6 months to your other investments.
3. Decide what screens or filters to use. Screening is the process to decide what companies to include in your investment portfolio and what companies you may want to delete from your portfolio.
   1. Environmental Criteria: Some examples are LEED (Leadership in Energy and Environmental Design) standards for buildings, recycling programs, alternative energy usage, high mileage or electric vehicles, research on climate change or innovative energy sources are some good examples. Examples for bad stocks to dump would be BP Oil for polluting the Gulf of California because their oilrigs were not serviced regularly, Phillip Morris for tobacco, Raytheon for defense hardware- missiles, nuclear energy or coal utilities.
   2. Business Practice Criteria: Examples could be realistic CEO compensation, diversity and inclusion in hiring, equal pay for women and minorities, companies with family leave for care of children and elderly, onsite day care, work week requirements, the use of underpaid prison labor and use of sweatshops. Have they had any lawsuits for discrimination?
   3. Product criteria:Do their products use less packaging? Are they made in the USA? You might want to exclude companies that make guns, war hardware like missiles or tanks, benefit off of prisons, tobacco, addictive substances, big oil and banks or investment firms that lend money for pipelines and industries that pollute water or air.
   4. Shareholder Activism– a reason to buy shares in a corporation is that by owning just one share you can attend shareholder meetings and introduce new ideas. SRI investors can be a powerful catalyst for change. (Recently 62% of Exxon shareholders required a study to understand the environmental impacts of the company’s practices. 5.2017)

 FOR MORE INFORMATION:

1. Socially Responsible Investing in Investopedia: http://www.investopedia.com/terms/s/sri.asp
2. Forbes: Socially Responsible Investing: http://www.forbes.com/sites/feeonlyplanner/2013/04/24/socially-responsible-investing-what-you-need-to-know/
3. Socially Responsible Mutual Funds Chart from Bloomberg: http://charts.ussif.org/mfpc/
4. “The Complete Idiot’s Guide to Socially Responsible Investing” by Ken Little.
5. “Socially Responsible Investing for Dummies” Ann C. Logue
6. PAX World Investments: http://paxworld.com/about/sustainable-investing/what-is-esg
7. Financial Times: http://lexicon.ft.com/Term?term=responsible-investment
8. CASHING IN ON CLIMATE CHANGE: http://www.nytimes.com/2016/12/03/opinion/sunday/cashing-in-on-climate-change.html?_r=0
9. Get That Oily Mess Out of My Money! https://www.naturalinvestments.com/blog/category/advocacy/
10. Socially responsible investing report for 2016: http://www.greenmoneyjournal.com/january-2017/the-2016-biennial-report-on-us-sustainable-responsible-and-impact-investing-trends-from-the-us-sif-foundation/
11. THE ‘DOMINI 400 SOCIAL INDEX’ http://www.investopedia.com/terms/d/domini_400.asp

A market cap weighted stock index of 400 publicly traded companies that have met certain standards of social and environmental excellence. Potential candidates for this index will have positive records on issues such as employee and human relations, product safety, environmental safety, and corporate governance. Companies engaged in the business of alcohol, tobacco, firearms, gambling, nuclear power and military weapons are automatically excluded. This relatively new index was designed to help socially conscious investors weigh social and environmental factors in their investment choices.

BREAKING DOWN ‘Domini 400 Social Index’- Socially conscious investing is a growing trend across many demographic and geographic areas, and having a social conscience may become a competitive advantage for corporations through their relationships with shareholders. The index is independently maintained by research firm KLD Research & Analytics, and aims to be comprised of chiefly large cap stocks in the S&P 500; the ranges break down as follows:

1.  Approximately 250 companies in the S&P 500
2. 100 companies not in the S&P 500, but providing sector diversification and exceeding pre-determined market cap limitations
3. 50 companies that have shown excellence in their social and environmental dealings
4. “The record of the Domini 400 Social Index (DSI) is an indication that socially responsible investors do not have to automatically assume a sacrifice in performance for following their values. Created in 1990, the DSI was the first benchmark for equity portfolios subject to multiple social screens. The DSI is a market capitalization-weighted index modeled on the Standard & Poor\’s 500 and has outperformed that unscreened index on an annualized basis since its inception.

From Michael Kramer, stockbroker and author of the Resilient Investor   can be found at Natural Investments: https://www.naturalinvestments.com/about/ “A friend of mine who has known me for years asked me today, “So how exactly do you align values with investments?” And so… the aim is to steer clear of products, practices, and industries that are causing social and environmental harm while supporting everything – infrastructure, community development, and companies – that are better for society and trying to treat employees, customers, communities, and the environment with greater respect and principles of justice and sustainability. There’s compromise everywhere you look, of course – as there are many shades of green and no perfect investments – but as we engage the companies we own shares of we have a voice to help them change their ways, to acknowledge and address the real risks of climate change, to foster diversity at every level of their company, to provide living wages and safe working conditions, to be good citizens in the community, and to minimize harm to the environment. And there are some sectors many investors want no part of at all – fossil fuels, toxic chemicals, tobacco, military contractors, nuclear power, to name a few – and these can be excluded. And then there is being proactive in investing in the green economy – organic food, renewable energy, green building, biodegradable and recycled products, clean tech, water and energy efficiency, etc. This can be done through the public stock and bond markets, but some investors also engage in private debt and equity opportunities. Many also support community development financial institutions locally and globally, including international microfinance, to channel capital to low-income and other marginalized groups who need access to capital to start businesses, buy a home, and build community facilities. Investing for good requires clarity about one’s intentions and a willingness to use one’s savings to be part of the solution to the many challenges of these times. As I enter my 27th year of involvement with Natural Investments (including the first 10 years as one of its clients), I am pleased that so many people have discovered that it is possible to align their values with their investments to make a difference. Through our offices nationwide – in California, Colorado, Hawai’i, Kentucky, Minnesota, New York, North Carolina, South Carolina, and Washington – thousands of individuals, families, non-profit organizations, foundations, and businesses entrust us to manage over $330 million. We are honored to have earned this trust over the past 32 years, and regardless of the political environment we will continue to focus on evolving our economic system so it operates for the benefit of all of this planet and us.

AN INVESTMENT REALIGNMENT STORY by JON LUFT

We all think about doing the right thing and many of us live and lead by example that reflects who we truly are.   Walking the talk. I aspire to that and wanted to share a recent, transformative experience regarding the landscape of my retirement investment funding.

Through hard work, diligent saving, and a moderately conservative approach to risk/reward, I now have dollar value accruing in my retirement portfolio. More than 20 years ago I associated myself with a qualified financial adviser from a large financial institution to help guide my investment strategies. I have no formal training in economics or finance so I always feel better collaborating with subject matter experts. I’m also averse to anxious waiting or nervous speculation and not one who watches the market every day. I’m a long haul investor. We made initial investment decisions together, watched and adjusted with a cautious but firm hand, and through the ups and downs of the market I’ve experienced reasonable growth in the long run.

My investment portfolio was typified by funds positioned primarily to be moneymakers, without paying much attention to the specific stocks and/or bonds populating them. I left those decisions to the fund managers. There are many examples of mutual fund families available in the marketplace such as American Funds, Vanguard and others. More recently, with an eye to the destruction of our environment, impacts of climate change, increasing social inequity at home and abroad, the recent banking debacle and other issues of corporate governance, I decided to take a much closer look at my specific holdings and decide if they aligned with my values. All of them. What I found was troubling and I decided to take action and make a wholesale transformation. Divest in those sectors and companies I don’t value, and reinvest in those I do. Working closely with my financial advisor I turned to what is known as Socially Responsible Investing (SRI), also known as Impact Investing, to direct the process and meet my goal of aligning my investments with my values.

There were basically three pathways I could take. The first option was to tweak my existing portfolio and select a different fund within the same family. To explore this I did a deep dive into all of the mutual funds within the larger family of funds I was currently invested in, to see if I could find any funds that fully met my selection criteria. Scattered widely among literally all of them were oil and petroleum, big agri-business, tobacco, and big banking among others that I wished to divest from. It became apparent this path was not going to be productive.

The second option was to look at funds that apply Environmental, Social, and Governance (ESG) filters to identify and compile stocks and bonds into funds based on these criteria. The best resource I could find for this is the Forum for Sustainable and Responsible Investment (www.ussif.org), where a comprehensive listing of funds using these ESG filters is available. I worked my way through all the funds currently listed, looking closely at the fund manager’s philosophy on ESG filters, the actual stock and bond holdings, risk profile, performance and finally the management fees. Some fund managers apply these ESG filters rigorously (i.e. absolutely no tobacco, or oil), and others are less absolute. Some fund managers for example do not exclude (filter) a company that derives less than 5% of its revenues from a specific sector. I chose to ignore these funds and focus on assembling a more “pure” portfolio. From the expansive list of ESG filtered funds I narrowed to a few dozen that met all my goals and represented enough variety from which I could compile a portfolio and mirror my current mix of asset classes.

The third path was the potential to create a fully custom portfolio through a financial service provider who specializes in stocks and bonds with very specific exclusions or requirements. This allows the investor to build a personalized portfolio that meets very specific filtering criteria. This method is basically assembling a portfolio based on picking individual stocks and bonds that meet whatever criteria the investor choses. My research found fewer financial advisors knowledgeable about SRI or Impact Investing, with higher management fees/commissions, so this was not the best choice for me.

Today my portfolio is primarily a mix of mutual funds that meet all ESG filtering criteria and do not allow any marginal participation in companies, sectors, products or services I find objectionable. My mix is roughly 65% stocks and 35% bonds with a small percentage in cash. These funds include large, mid and small cap equity funds, balanced funds (combination of stocks and bonds), blended funds (combination of value and growth stocks), and bond funds, altogether closely mirroring the asset class mix of my pre-divestment holdings.

As I write this in the spring of 2017, markets have trended upward after having bounced up and down. I am happy to report overall growth of 11.98% in my portfolio since complete re-alignment in mid-August of 2016, indicating SRI has the potential to meet similar expectations of a more traditional portfolio. I am even happier to say I am only invested now in funds with companies whose products, services, community involvement, and corporate behavior align with my values.

Helpful Links:

The basic portal used to identify SRI funds is the Forum for Sustainable and Responsible Investment.

The Forum for Sustainable and Responsible Investment: http://www.ussif.org

NOTE:

Click on the Mutual Funds tab and there’s a comprehensive list of funds in every asset class that claim SRI in one way or another. These change from time to time so it is wise to check in to see what’s new and if a fund has dropped off.

Select a specific fund and read through the SRI criteria and decide if it aligns with your values

Once I identified a fund I was interested in, I actually looked at the holdings the mutual fund has in it’s portfolio, along with some performance history and load (management fee)

To do this I called up the fund using one of the independent investment research sites like

http://www.morningstar.com

https://fundresearch.fidelity.com

https://www.bloomberg.com/markets/stocks

These are pay to play sites to go deep but the free portion gives a lot of key info about fund holdings, performance, and other details.

Sometimes I looked at the fund managers and scanned their LinkedIn or other public info to sense their politics.
Sometimes I went to a specific company website and looked at the resume of the key leaders there too.