Socially Responsible Investing – An Overview

Why Should I Care?

Petrochina Company Limited is the largest oil producer in China and has the largest market capitalization of any company in the world. Petrochina’s stock is traded on multiple exchanges including the New York Stock Exchange (NYSE: Symbol PTR). In 2008, the company issued the largest bond offer at the time for a listed company. Petrochina is a massive company that may be part of many investors’ portfolios without their knowledge. Many large mutual fund companies hold Petrochina in their mutual fund portfolios.

Its parent company, China National Petroleum Corporation (CNPC), is helping the Sudan government explore and drill for oil. China National Petroleum Corporation owns a majority share of Petrodar Operating Company, Ltd. Petrodar is an oil company that explores, develops, and produces oil in Sudan. According to many advocacy groups, the oil dependent Sudanese government uses a large percentage of its oil revenues generated through foreign direct investment to fund militias accused of killing hundreds of thousands of innocent civilians in Darfur. In 2005, President George W. Bush declared the killings in the Darfur Region genocide.

Companies such as Petrochina act against the efforts of the international community by enabling the Sudanese government to fund its military and militias.

With this in mind, many investors have to ask themselves – Am I comfortable investing in a mutual fund that owns stock in Petrochina?

This is just one example of the thousands of local and global issues that many investors would hope to recognize and avoid through socially responsible investing (SRI). Socially responsible investing is a very broad term. Of course, core values are going to be very different for individuals and organizations. For some, green or environmental issues may be extremely important. Faith-based values may be important for others. In this article, I attempt to give readers an orientation into three core SRI strategies.

Social Screening

The history of socially responsible investing started with religions and religious groups in the eighteenth century. These groups did not want to invest, work, or support certain activities and businesses that were thought to be against the values of these organizations. This same idea applies to the basis of most SRI mutual funds. The start to a SRI mutual fund is founded with the idea that it will not invest in companies based on certain social criteria. Keep in mind, the complexity and criteria for which stocks are selected in a SRI mutual fund goes well beyond just a negative screen. A SRI mutual fund will usually not invest in companies that produce or receive a certain percentage of profits from:

  • Tobacco
  • Alcohol
  • Weapons
  • Mining
  • Forestry
  • Nuclear Power

In addition to negative social screens, most SRI mutual funds will seek out companies based on social, environmental and governance screens. According to TIAA-CREF’s website, their Social Choice Account invests in companies that are strong stewards of the environment, devoted to local communities and society in general, committed to high labor standards, and dedicated to producing high-quality safe products in an ethical manner. Again, these social criteria may be different based on the objective of the mutual fund. SRI Indexes such as KDL Research and Analytics, Inc (KDL) have made it easier for mutual fund families to offer socially responsible funds in a cost effective manner.

In most cases, an SRI investor may not agree entirely with all of the negative screens. I can remember meeting with a couple employed at Colorado State University. They were interested in the TIAA-CREF Social Choice Account. I first discussed the negative screens of the fund. I noticed right away that there was something they did not agree with. When I asked them what their concern was, they informed me that they were avid wine drinkers and did not like the fact that alcohol was screened from the account. This is a case where the investor did not agree with the screens due to their lifestyle. However, most investors will agree that alcohol has produced more problems in society than it has good.

Social screening can be an effective way to influence an issue over time. Finance can very quickly change the stance of a company or country. The divestment of investors, mutual fund companies, and business in South Africa largely influenced the end to apartheid in South Africa. However, social screening is usually thought of as a long-term approach to change the attitude and position of companies over time. For the investor, it is a way to have peace of mind knowing that their core values align with their investments.

Shareholder Advocacy

When an individual owns stock in a company, they actually own a part of the corporation. As owner of the company, they have the right to vote on the board of directors, propose shareholder resolutions, and vote on shareholder resolutions.

Shareholder Advocacy or Activism is actively working with corporations to point out or change behavior that conflict with the core values of socially responsible investors. Shareholder advocacy is an active way to communicate directly with companies and has the potential to produce quick results. In a large majority of cases, resolutions do not pass. However, shareholder resolutions provide direct communication to management. This direct communication provides management of these companies with information regarding the social, corporate, and governance concerns of investors. This direct communication can often lead to change proactive change.

Most investors use mutual funds to provide greater diversification than owning a small number of individual stocks. An investor who owns mutual funds relies on the mutual fund company to propose shareholder resolutions and vote on current resolutions. In most cases, the goal of a mutual fund company or financial services company is to maximize profits for investors without taking into account SRI concerns. With this in mind, many of these companies will oppose SRI shareholder resolutions they perceive as having the potential to decrease profits. It is important for socially responsible investors to choose mutual fund families with a history of voting and proposing resolutions that align with the core values of the investor.

Community Investing

Community investing involves placing investments with organizations that support underserved communities. These underserved communities may not be able to get a loan from a traditional bank. Community Development Financial Institutions (CDFIs) usually are banks or credit unions. In a typical situation, they are able to provide competitive rates for investments like CDs. When an investor places money in a CD at a CDFI, it works the same as if they bought a CD at a traditional bank. However, the CDFI is able to turn around and provide a loan to an underserved community such as a not-for-profit institution. Studies have shown that loans from CDFIs to these communities are more likely to be paid back than a traditional business loan. Community investing allows investors to have a direct impact on underserved communities.

How You Invest Does Matter

Many investors do not understand or have not thought of the impact their decisions have on business organizations. SRI investors each have different core values and various reasons for investing in a socially responsible portfolio. Social screening, shareholder advocacy, and community investing each provide a way for investors to express their values. However, each channel has strengths and limitations. Together, they can provide a powerful forum to interact and affect corporate decisions while providing investors peace of mind with their investing decisions.

Kevin McNab

This article is written by Kevin J. McNab. Kevin is President of ACE Wealth Partners, LLC and is a CFP®, ChFC®, and CRPC®. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. The views expressed in this blog post are as of the date of the posting, and are subject to change based on market and other conditions. This blog contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Please note that nothing in this blog post should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax or legal advice. If you would like investment, accounting, tax or legal advice, you should consult with your own financial advisors, accountants, or attorneys regarding your individual circumstances and needs. No advice may be rendered by ACE Wealth Partners, LLC unless a client service agreement is in place. If you have any questions regarding this Blog Post, please Contact Us. Please read our website DISCLOSURE carefully for additional information.