Monday, August 31 , 2015, 11:25 am | Fair 74.0º




Craig Allen: Time Is Right to Be a Socially Responsible Investor

By Craig Allen, Noozhawk Business Columnist | @MPAMCraig |

Many investors seek investment vehicles that reflect their social values. This is true for a sizable segment of the investor population in California, and especially here in Santa Barbara. The challenge has been finding investments that meet the investor’s specific social requirements and that also represent sound investment opportunities for real returns.

Socially Responsible Investing (SRI) is not a new concept. In 1758, the Quaker Philadelphia Yearly Meeting prohibited members from participating in the slave trade. One of the most articulate early adopters of SRI was John Wesley (1703–1791), one of the founders of Methodism. Wesley’s sermon, “The Use of Money,” outlined his basic tenets of social investing, i.e. not to harm your neighbor through your business practices and to avoid industries like tanning and chemical production, which can harm the health of workers.

Some of the best-known applications of socially responsible investing were religiously motivated. Investors would avoid “sinful” companies, such as those associated with products like guns, liquor and tobacco.

The modern era of socially responsible investing evolved during the political climate of the 1960s. During this time, socially concerned investors increasingly sought to address equality for women, civil rights and labor issues. The Rev. Martin Luther King Jr. combined ongoing dialogue with boycotts and direct action targeting specific corporations in an attempt to influence the operations of companies.

Concerns about the Vietnam War were galvanized by the 1972 image of a naked 9-year-old-girl, Phan Thị Kim Phúc, running screaming toward a photographer, her back burning from the napalm dropped on her village. That picture focused outrage against Dow Chemical, the manufacturer of napalm, and prompted protests across the country against it and other companies profiting from the war.

Socially responsible investing is also known as sustainable, socially conscious, “green” or ethical investing, and is any investment strategy that seeks to consider both financial return and social good. In general, socially responsible investors encourage corporate practices that promote environmental stewardship, consumer protection, human rights,and diversity. Some avoid businesses involved in alcohol, tobacco, gambling, pornography, weapons and/or the military.

The three general categories of focus by SRI portfolio managers are the environment, social justice and corporate governance. In addition to stock ownership either directly or through mutual funds, other key aspects of SRI include shareholder advocacy and community investing.

While SRI can simply involve portfolio managers screening companies for certain SRI criteria, it can be more broadly defined as proactive investment approaches, such as impact investing, shareholder advocacy and community investing. Today, many leading advocates of SRI believe that simply screening investments is inadequate.

Although many companies previously believed that incorporating environmental, social and governance objectives into their corporate ethos reduced profitability, the combination of positive sales results, long-term cost savings from reduced waste disposal expenses, and higher productivity from employees, among many other benefits, has driven positive change in the way companies conduct business. The result of this alignment of corporate profit motive and SRI objectives has greatly expanded the universe of investment choices.

Another significant change within the SRI movement has been the adoption of SRI-focused portfolio management approaches by mainstream asset management firms. Until about 10 years ago, the majority of SRI portfolio managers were proponents of SRI first and professional portfolio managers second. Their main objective was to find companies that met SRI criteria, with far less emphasis given to identifying good investments. The result was typically poor performance for SRI investments.

With the population of SRI-focused investors growing significantly over the past decade, the universe of companies following acceptable SRI business policies and the quality of portfolio managers improving dramatically, today’s SRI investor can reasonably expect to invest according to SRI principles and also achieve returns in line with other investment approaches.

Some examples of specific SRI company characteristics that can be used to build investment portfolios include stakeholder relations, clean energy, renewable energy, water scarcity, sustainable agriculture, climate change, positive environmental impact, animal welfare, human rights, green manufacturing processes and green building. Some of the characteristics that are typically screened out of SRI portfolios include tobacco, alcohol, gambling, weapons manufacturing, nuclear power, negative environmental impact, animal testing, human rights/employee abuses, poor working conditions, underage employees and excessive executive compensation.

Impact investing includes direct investments in microenterprise, community development, clean technology, the use of community development financial institutions (CDFIs) that direct capital to create jobs and sustainable economies in underserved communities, both domestically and internationally, and other high social and environmental impact investments.

For investors looking for opportunities for direct socially responsible investments, events such as the Clean Business Investment Summit (CBIS), which features early stage clean businesses seeking capital, are a great way to interact with entrepreneurs focused on SRI business practices. Click here for more information.

With the increasing number of companies — through the application of new technologies and SRI-focused management practices, — offering investors attractive SRI opportunities, there has never been a better time to be an SRI investor.

The most effective approach for the SRI investor is to identify a portfolio manager who can build a customized portfolio specifically targeting investment vehicles that closely match the investor’s specific SRI criteria. For more sophisticated SRI investors willing to do their own leg work, events like CBIS bring together some of the most innovative, exciting SRI opportunities in a single location to allow the investor to interview entrepreneurs about their SRI criteria.

Regardless of the chosen approach, there has never been a better time for SRI investors to find attractive investment options that offer good prospects for positive portfolio returns.

Craig Allen, CFA, CFP, CIMA, is president of Montecito Private Asset Management LLC and founder of Dump Your Debt. He has been managing assets for foundations, corporations and high-net worth individuals for more than 20 years and is a Chartered Financial Analyst (CFA charter holder), a Certified Financial Planner (CFP) and holds the Certified Investment Management Analyst (CIMA) certification. He blogs at Finance With Craig Allen and can be contacted at .(JavaScript must be enabled to view this email address) or 805.898.1400. Click here to read previous columns or follow him on Twitter: @MPAMCraig. The opinions expressed are his own.




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