Social funds: BP, the 1960s, and greed

Recently, after posting a column about BP and socially responsible mutual funds (See Social Funds and BP: How embarrassing!)  I heard from Adam Kanzer, who is managing director and general counsel at Domini Social Investments. While Domini has never owned shares of BP, Adam and I began a conversation about the role  of socially-responsible mutual funds. Adam, who has been in the fund business for twelve years, is a smart and committed executive, but we don’t always agree, so we decided to engage in a dialog about social funds.

Adam Kanzer
Adam Kanzer

Marc: Adam, let’s start with BP. Why did Domini exclude the company? Do you hold any other oil or coal companies?

Adam: Domini has consistently excluded BP from our portfolios because of our concerns about their safety record. Our initial review followed the Texas City explosion in 2005, but our decision was quickly reinforced by the Prudhoe Bay spill the following year.  We met with BP to discuss these and related issues with them. And each time we revisited BP, we found more violations.

We’re looking to identify the key sustainability challenges each company faces. For the oil and gas industries, worker safety and environmental compliance are among a handful of core issues we consider.  I should also note that we have consistently excluded Transocean and Halliburton, both of whom played a role in the Deepwater Horizon project. In addition we have also consistently excluded Massey Energy, the other current poster-child for disaster, as well as Toyota for substantial safety, employee relations and human rights concerns.  We discuss these decisions on our website. And yes, we do hold other oil and gas companies, although we set a high bar for entry. We do not invest in companies whose core business is coal mining.

Marc: Any thoughts on why BP was so widely held by other socially-responsible funds?

Adam: As CEO of BP, Lord Browne made very important statements about the reality of climate change at a time when others in his industry were denying its existence. That was important. In addition, BP has been committed to transparency on its social and environmental performance. I can’t speak for other firms, but I can see how those factors may have led some to hold BP. We felt that the safety and environmental issues outweighed these positives.

If a fund’s benchmark is heavily weighted towards oil, then an SRI manager will need to consider that. This tyranny of the benchmark certainly led many to hold BP and other oil companies that in a perfect world they would have preferred to avoid.

Which brings me to the important question that I have not heard – why did all of the so-called ‘mainstream’ investors buy BP? Why did investors allow this company to become one of the largest in the world by market capitalization? At least social investors weighed these issues and came to a decision. The rest of the market acted as if there was no problem.

Marc: That’s an excellent point, and it makes me wonder why people pay mutual fund managers such high fees. They missed the housing and Wall Street bubbles, and didn’t see or care about the safety issues at BP. Clearly most  funds aren’t very good at managing risk.

Turning to another topic, many SRI funds have their roots in the anti-war movement of the 1960s and 1970s as well as in faith-based investing. So funds like Domini exclude companies that make weapons, alcohol, tobacco and nuclear power. My question is, why? Let’s start with weapons. Don’t we need companies that make weapons in the post 9/11 era?

Adam:   First, it is important to understand that we divide those industries into two general categories – companies that provide addictive products and services, and companies whose products contribute to geopolitical instability. We place military weapons manufacturers and nuclear power in the latter category. We do not consider investments in addiction and global instability to be productive uses of capital.

National defense is too important to be placed in the hands of the same system that brought us the financial crisis. When Eisenhower issued his warnings about the growth of the military-industrial complex, he wasn’t questioning our need for a strong national defense. Yes, we need weapons, but do we need publicly traded companies manufacturing weapons? Are the capital markets an appropriate mechanism for providing these goods, or have the markets distorted our national priorities? That’s a critical debate our nation needs to have.

There are also categories of weapons that violate international humanitarian law because they cannot distinguish between military and civilian targets. These include landmines, clusterbombs and nuclear weapons. These ‘products’ make the world more dangerous, and landmines have caused incalculable misery to innocent civilians – including children – around the world. As investors, we have a responsibility to choose wisely. Our Funds’ shareholders choose not to profit from these violations, so we exclude these manufacturers and companies that manufacture nuclear weapons delivery systems.

Marc: What about nuclear power? Some environmentalists, notably Stewart Brand, say we need to seriously consider nukes in light of the climate crisis? [click to continue…]

Social funds and BP: How embarrassing!

bp_logo_color.180105622If you are a shareholder in a so-called socially responsible or sustainable mutual fund, you may also be an owner of  BP, the company responsible for the environmental catastrophe in the Gulf of Mexico.

When BP’s oil rig in the Gulf of Mexico exploded on April 20, the company was a major holding of the Dow Jones Sustainability Index–which calls itself an index of “the leading sustainability-driven companies worldwide.”

BP was also held by Pax World Funds (“sustainable investing is a better smarter, way to invest”), by the MMA International Fund, which is part of a fund group that is “guided by Christian values,” and by the Legg Mason Social Awareness Fund, which, as of March 31, had BP as its single biggest holding.

These are not anomalies. When Cary Krosinsky, an editor of a book called Sustainable Investing: The Art of Long Term Performance, tallied up the holdings of about 350 socially responsible investment (SRI) funds from around the world, he found that at the end of 2008, BP was the second biggest holding, in terms of how much money the funds had collectively invested. The five biggest holdings were Royal Dutch Shell, BP, Nokia, Vodafone and HSBC Holdings.

Does this look "sustainable" to you?
Does this look "sustainable" to you?

What’s more, BP and Shell aren’t the only oil companies held by the social funds. The biggest holding of a mutual fund called the Sentinel Sustainable Core Opportunities Fund–which says it “screens for fundamentally strong, well-managed companies with sustainable business models and a commitment to corporate responsibility”– was, as of March 31, believe it or not….Transocean, the world’s largest offshore drilling contractor, which operated the Deepwater Horizon rig for BP.

While no mutual fund manager could have foreseen the oil rig explosion, you’ve got to wonder how a fund with the word sustainable in its name could have as its biggest holding an offshore oil drilling company. I emailed Sentinel to try to probe their reasoning a bit. You won’t be surprised to hear that they declined to be interviewed.

So what does the BP-SRI connection tell you? At the very minimum, it suggest that any investor in a mutual fund that calls itself socially responsible, sustainable, green, blue or any other color would do well to dig deep beneath the magazine ads and website fluff to understand what the fund is really all about. (Disclosure: I’m a small investor in Calvert and Domini Funds, and a believer in the SRI idea.) Some SRI funds still focus on feel-good, negative screens that shield investors from weapons, tobacco and alcohol, and don’t get much more analytical than that. (See Socially Responsible Investing’s Silly Screens) [click to continue…]

How to be a HIP Investor

R. Paul Herman
R. Paul Herman

Make money by making the world a better place.

What’s not to like about that? So appealing is the idea of doing well by doing good that a significant slice of the financial services industry is devoted to persuading people that they can invest with their values without sacrificing returns. That’s what so-called socially responsible mutual funds are all about.

R. Paul Herman, the founder and CEO of an investment advisory firm called HIP Investor, goes a step further:  He argues that companies that are leaders in sustainability and corporate responsibility are likely to outperform their peers. Those companies can be identified by using publicly-available data, he says. So by constructing an index of big companies, and investing more money into the better companies and less into the not-so-good, Herman says he both promote good corporate behavior and make money for his investors.

HIP stands for Human Impact plus Profit, Herman explained today during a talk at the  Kenan Flagler business school at the University of North Carolina. (I’m in Chapel Hill for a couple of days, participating in a conference called Global Innovations in Energy organized by Kenan Flagler’s Center for Sustainable Enterprise.) I interviewed Herman, who gave a talk about HIP investing and his brand-new book, called The HIP Investor: Make Bigger Profits by Building a Better World. He’s a personable, 41-year-old Wharton grad who did a stint at McKinsey and worked at and the Omidyar Network before starting HIP.

The core of his argument, as expressed on the HIP website, goes like this:

Our world of more than six billion people faces many human problems that need solutions, many of which can be served by companies.  By solving these human needs profitably through products and services (from Walmart’s $4 generic drug program to ICICI Bank’s micro-loans to Vestas’s wind turbines), a company can benefit customers, inspire employees, engage suppliers,  and deliver sustainable profitable growth for its investors.

Well, sure. Like many, I believe that Herman’s fundamental investing thesis makes sense.  I wrote it right into my bio: “Companies that make the world a better place—by serving their customers, their workers and their communities—will deliver superior results to their owners in the long run.”

The challenge for an investor comes in identifying those better companies and deciding whether they are fairly priced by the market. [click to continue…]

Social investing (finally) grows up

Calvert_Web_Logo_72dpiDo you agree or disagree that…

…nuclear power may help solve the climate crisis.

…we need weapons to prevent humanitarian disasters like the Darfur genocide.

…Wal-Mart’s sustainability efforts are making the world better.

…A cold beer at a summer ballgame is a wonderful thing.

Reasonable people will differ about those assertions (except, perhaps, for the one about beer, which is inarguable). But until recently, most  socially responsible mutual funds—funds designed to appeal to people who want their portfolio to reflect their mostly liberal values—screened out companies that provided nuclear energy, manufactured weapons or brewed beer. As for Wal-Mart, forget about it.

That’s changing, and it’s about time. Calvert Investments, a leader in social responsibility investing (SRI), has introduced new funds that—are you sitting down?—own shares in oil and mining companies, in a utility that sells nuclear power and in Wal-Mart. [click to continue…]

A low carbon mutual fund?

You want a car that gets good gas mileage and you want energy-efficient appliances (or at least I hope you do). But do you want a low-carbon investment portfolio?

The Green Century Balanced Fund is betting that you do. The Boston-based mutual fund says it is the first U.S.-based fund to disclose its carbon footprint, which is 66% less than the carbon intensity of the S&P500 Index.


Let’s be clear what we’re talking about here. This isn’t an accounting of how much energy the mutual fund company uses in its offices or how often its staffers get on planes. It’s an analysis of the tons of carbon emissions per million dollars of revenue that are generated by the companies held by the Balanced Fund, compared to the firms in the S&P500.

Why would you care? Not merely because you want to invest in mutual funds and companies that are greener and cleaner than average (although, again, I hope you do) but because those funds and companies will over time outperform their peers—an arguable but much iffier proposition.

[click to continue…]

Shaky foundations & Bernard Madoff

How could smart people be so dumb? That’s the overarching question raised by the Bernie Madoff-with-the-money affair. But because the decision to entrust one’s entire fortune to a black-box operation like Madoff’s is a triumph of greed over common sense, it’s hard for me to get worked up about the suffering of the Palm Beach society types who invested millions with Madoff.

Far more troubling are the losses suffered by foundations and nonprofits—because they raise important questions about how these institutions invest their money. Among those that have been forced to shut down are The Picower Foundation and the JEHT Foundation (the name stands for justice, equality, human dignity and tolerance) and the Fair Food Foundation. Others that have suffered substantial losses include The Elie Wiesel Foundation for Humanity, the Ramaz School, Yeshiva University, Stephen Spielberg’s Wunderkinder Foundation, Hadassah and the Carl and Ruth Shapiro Family Foundation, according to this roundup in The Washington Post.

There is lots to say about all this. See, for example, this excellent story in The New York Times about the campus debates at Yeshiva University, about the scandal and Jewish values. But the screamingly obvious lesson, to me, is that nonprofits and foundations have been woefully deficient when it comes to aligning their investments with their broader purpose. This problem extends well beyond Madoff.

Think, for instance, of that JEHT Foundation, which supported such human rights groups as Amnesty International, Human Rights Watch and Human Rights First. You’d think a group like that would want to invest its money only with companies that respect human rights by, for example, refusing to do business with Sudan, or pressing for freedoms in China. But there’s a disconnect between the way groups like JEHT invest their money and how they give it away.

The same goes for Jeanne and Kenneth Levy-Church, who were behind the Fair Food Foundation, a group that had generated lots of buzz in the sustainable food world. You would think the couple would want to make sure that their money was invested in companies that respect the environment. Instead, they turned it over to Madoff, and like everyone else, had no idea how he made his money.

This isn’t a new issue. You may recall that a few years ago the Los Angeles Times looked into the investments of The Gates Foundation and found that some of the companies it was supporting undermined the purposes of the foundation. For example:

The Gates Foundation has poured $218 million into polio and measles immunization and research worldwide, including in the Niger Delta. At the same time that the foundation is funding inoculations to protect health, The Times found, it has invested $423 million in Eni, Royal Dutch Shell, Exxon Mobil Corp., Chevron Corp. and Total of France — the companies responsible for most of the flares blanketing the delta with pollution, beyond anything permitted in the United States or Europe.

More generally:

The Times found that the Gates Foundation has holdings in many companies that have failed tests of social responsibility because of environmental lapses, employment discrimination, disregard for worker rights, or unethical practices.

You can read the long L.A. Times series here.

Steve Viederman, the former president of the Jessie Smith Noyes Foundation, has for years been calling upon foundations to align their investments with their mission. Foundations, he has noted, tend to be passive investors. They rarely throw their weight around when it comes to shareholder resolutions aimed at getting companies to be more socially and environmentally responsible. Here’s an essay by Steve about the issue.

Another who has sounded this alarm for years is the shareholder activist Robert A.G. Monks. Monks has griped that university endowments manage investments that are entirely unrelated to their values and missions. See, for example, To Harvard With Love, a letter that Bob wrote to Larry Summer, who was then the president of his beloved alma mater, back in 2003. He wrote:

Harvard has become an “owner” of virtually all of those enterprises whose collective functioning impacts life on earth perhaps more than any other institutions. The question is the extent of Harvard’s responsibility as owner. What is Harvard doing now? Does she ensure optimum value? What should she do in the future?

The fact that people like Steve Viederman and Bob Monks and a group called the Sustainable Endowment Institute have been making this argument for so long and getting so little traction is, among other things, a reflection of the weakness of the socially responsible investment industry. SRI investment pros have simply failed to make the case that values-driven investing is the best way to invest.

If there is any benefit from the Madoff scandal, it will be that nonprofits and  foundations pay a lot more attention to how and where their money is invested. They can’t just be responsible donors. They need to be responsible owners as well.