Broader trend of scrutiny by individuals and institutions
Individuals who measure societal impact as part of their investment performance are finding themselves with an increasingly sophisticated array of options, ranging from the latest practices in quantitatively evaluating an overall portfolio on those terms to approaches that favor investment in a specific regional economy.
While not a new concept in the investment world, those practices have become increasingly mainstream and have advanced a concept known as “socially responsible investing.”
“As recently as ten years ago, SRI primarily revolved around excluding companies based on moral or religious beliefs,” said Steven Jenkins, senior vice president overseeing the trust and investment management division of Santa Rosa’s Exchange Bank. “Clients would want to exclude Philip Morris stock because they found the sale of cigarettes to be morally objectionable. For these investors, the performance of their portfolio against the S&P 500 or other index was not an issue. They were willing to forgo typical portfolio metrics such as risk, return, and diversification to avoid investing in ‘bad’ companies.”
“Today, there is a much broader interpretation of SRI,” Mr. Jenkins said. “Along with this change is a shift away from the philosophy that standard portfolio construction and return expectations do not matter. Most clients want a broadly diversified portfolio that produces a market level total return.”
It was around four decades ago that U.S. colleges and other institutions began to abandon the financial promise of one of the world’s fastest-growing economies and exited investment in South Africa, pulling out of that market as part of a larger protest against its apartheid government.
It was a time considered by some to be a rallying moment for socially responsible investing, prompting more individual investors to seek approaches that incorporated similar concerns into their own portfolios.
That philosophy has continued to evolve, and has recently moved more towards a three-pronged evaluative approach known as “environmental, social and governance,” or ESG, Mr. Jenkins said. The approach provides scoring for companies based on those criteria, and has given rise to mutual funds that weigh their stock holdings with a bias towards companies that score high on those screenings.
He noted the no-load U.S. Sustainability Core Portfolio Fund from Dimensional Fund Advisors (DFSIX) as one popular example, which tracks performance of the Russell 3000 Index while truly eliminating very few stocks. The fund was launched in 2008, with returns of 19.82 percent in the five-year period ended Nov. 30, according to the company.
Other popular options include funds managed by Calvert Investments and Parnassus Investments, with hundreds of other individual mutual funds that include an ESG calculation.
While fear of compromising return in exchange for adopting an ESG-weighted approach remains a concern for investors, many of those funds and stocks have fared well versus other market benchmarks, said Patrick Costello of Green River Insurance and Financial Services in San Rafael. Morningstar has described the practice as a “free good,” hinging more on the ability of the fund manager than any other factor, he noted.
“They need to earn a competitive return on their money. It’s the nest egg they are going to use to support themselves in retirement,” said Mr. Costello, author of the recently published Green Investing: More Than Being Socially Responsible. “That’s just as important as the green, socially responsible aspect.”
Broadly evaluating the approach is a challenge amid the variety of funds and managers, but some measures do exist. MSCI’s KLD 400 Social Index includes 400 companies scoring high in ESG concerns, and has seen annualized returns of 7.36 percent over a 10-year period ended Nov. 29, 2013. The S&P 500 index, meanwhile, has seen 10-year average returns of 7.53 percent as of Dec. 26, 2013.
Among those analyzing potential impacts was the city of Napa, which in June joined other institutional investors that had recently chosen to ban future investments in manufacturers of firearms that are illegal in California. The California Public Employees’ Retirement System, or CalPERS, made a similar decision in February of that year, with Napa city staff finding no anticipated impact from the decision.
In addition to ESG calculations, investors are also increasingly interested in the regions where their money is ultimately going, said Andy Schexnaydre, a financial adviser with Progressive Asset Management Group in Santa Rosa. The topic has generated broad interest in the North Bay, highlighted by the well-established “Go Local” co-branding campaign and the second-annual “Invest Local” conference in October of 2013.
“There are many different things to consider about managing a portfolio,” he said. “If you’re diversifying a portfolio, local investing can be looked at as another asset class.”
Mr. Schexnaydre noted the diversity of investment options in the broader San Francisco Bay Area, with publicly traded companies ranging from agriculture to high-tech. At a time when the recent financial crisis has many viewing their business and investment activity with greater scrutiny, direct relationships with regional businesses can provide another layer of vetting and support what some argue is an induced economic benefit from investing in regional employers.
“Local investing is about relationships,” said Mr. Schexnaydre, who volunteers on the investment committee for Santa Rosa Junior College. “Part of the profit of Exchange Bank — we know it goes to the Doyle scholarship. Part of the profit of Summit (State Bank) — we know it goes to local nonprofits.”
Growth in investment dollars allocated based on environmental, social and governance criteria has outpaced growth in overall investment dollars under management in the U.S. in recent years, according to the most recent industry report by the Washington D.C.-based trade group, the Forum for Sustainable and Responsible Investment.
Approximately 11.3 percent of the $33.3 trillion U.S.-based assets under management were evaluated based on environmental, social and governance criteria at the end of 2012. That volume had increased 486 percent from 2009, outpacing the 376 percent increase for all assets under professional management held in the United States and tracked by Thompson Reuters Nelson, according to the report.
Options for ESG-based investing, meanwhile, have increased at a faster pace. There were 260 ESG-based mutual funds representing $202 billion in net assets under management in 2007, compared to 720 funds and $1.01 trillion under management in 2012, according to the report.
While that share still accounts for only a fraction of the total dollars under management in the U.S., a new generation of investors made wealthy by the recent wave of public offerings for Bay Area tech companies has proven to make societal concerns a major part of their long-term wealth management strategy, said Genevieve Larson, a senior associate in the Family Wealth and Exempt Organizations Groups of Farella Braun + Martel.
“It’s interesting — you’d think that the younger generation would think, ‘It’s my money. I earned it,’” she said. “The younger generation wants to see quantifiable change.”
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