Finance

Green Grows the Portfolio


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After all, churning a quick return on some “touchy-feely” notion is not a likely outcome, is it?

But speculation has been that some public-issue-focused companies are boosted by the Obama administration’s “green” policies, giving them impressive 2009 returns.

“Generally speaking, the administration has, for example, committed billions of dollars to renewable energy,” says Ron Freund, vice president and director of asset allocation for Berkeley, Calif.-based Social Equity Group, “so those companies that are well-positioned could do better in the long run.”

Profiting while making a difference is the crux of socially responsible investing, colloquially referred to as SRI. The practice dates to the 18th century, when religious organizations refused to invest in businesses supporting alcohol, gambling and tobacco. And many lawyers these days would like to put their money where their social conscience is.

“Today’s SRI investors tend toward environmental issues, corporate ethics, and human and civil rights when deciding how to invest their money,” explains Freund. “To our clients, SRI is not only a way for them to make money but to promote their values via how they direct their money.”

Freund says, “Though every client is different in terms of goals and values (which is why a personal­ized asset allocation plan designed to maximize their values-based returns is a must), three sectors have aroused much interest” for socially responsible investors:

  1. Renewable energy, such as wind and solar, including both U.S.-based and foreign-based companies. Denmark has been a leader in wind and Germany a leader in solar power.

  2. Organic foods, including both production and distribution.

  3. International bonds issued by European and other developed democracies “to hedge against risk to the dollar.”

Tax-free municipal bonds add to SRI values for high-income clients, Freund says, “because they know that the money is used by U.S. counties, states or municipalities for socially responsible purposes.”

Domini Social Equity Fund, which selects its investments according to certain social and environmental standards, saw good returns. “We performed well in 2009, but there are other times when SRI has not, just like other funds,” says Steven Lydenberg, chief investment officer for New York City-based Domini Social Investments.

“Commentators argue SRI helps returns, SRI hurts returns or SRI doesn’t matter—it’s a wash,” he says. “If you have money in an asset class or sector that’s doing well and that sector lends itself to SRI values, your investment will perform. SRI screening does identify better-managed companies. Over­all, a better-managed company should perform better.”

THE BIG PICTURE

Principles that underlie successful investing apply also to SRI: “A long-term strategy remains the SRI plan,” says Freund. “Peri­od­ic rebalancing of your asset allocation is important for your objectives, time horizon and risk tolerance.”

Though each client’s portfolio will differ, “SRI likely works best for those who cast a broad net with asset classes, as well as when being selective about which companies they’ll promote,” Lydenberg says.

Be aware that a fund manager or investment adviser may apply various screenings when assembling the portfolio of investments. For example, though health-related companies are a focus for Integrity Growth & Income Fund, offered by Integ­rity Viking Funds, its screening for the use of animal testing precludes stem-cell research invest­ments because those companies normally use such testing.

Also, among less-experienced advisers, a “values drift” can occur. “We’ve had clients switch to us because their former adviser allowed an [objectionable firm] to slip into their portfolio,” Freund says.

SRI fund expenses also vary, as do fees charged by advisers. Vanguard Calvert Social Index Fund is a low-cost option. It measures returns of large- and mid-capitalization stocks.

Concerning performance, “when comparing SRI index funds, be aware that SRI is an investment approach and may be applied to different asset classes,” cautions Lydenberg. Domini Social Equity Fund, for example, tends to be diversified with a large-cap blend, while Calvert Social Index Fund is invested for large-cap growth.

Lydenberg explains, “What is responsible investing differs for cash, real estate and fixed income, and the trend going forward will be for institutional investors to think across asset classes and take into account what they can be most useful for.”

PERSONAL APPROACH

Also, because investment advisers, brokers, index funds and managed funds all exist in the SRI world, “make certain that wherever you decide to invest your money, it is with someone who has a history in SRI and a track record in committing to socially responsible causes,” advises Freund.

“Investment advisers or fund managers who are truly experienced in SRI methods not only have expertise … but can also help the client engage in shareholder advocacy or direct assets to community investing in a way that does not impede financial returns,” he says.

Investing with a clear conscience need not mean low returns. Never­theless, if you’re still skittish about practicing SRI with your retirement nest egg, there are other options.

“A core element of socially responsible investing is the use of the power of the proxy for communicating with companies to enact positive changes, from environmental to human rights issues,” says Domini managing director and general counsel Adam Kanzer, the SRI member of the Securities and Exchange Commission’s investment advisory committee.

Looking for ways to invest in your community is another way to make a difference, Freund says.

Other sources for SRI research include the GreenMoney Journal, detailing organic business investments, and the Social Investment Forum, which maintains information about companies, communities, financial advisers and mutual funds following socially responsible practices.


Susan A. Berson is a partner with the Banking & Tax Law Group of Leawood, Kan. She is the author of The Modern Rules of Personal Finance for Professionals. She can be reached at .(JavaScript must be enabled to view this email address).


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