Deep green investing: a closer look

A divestment rally at Harvard

A divestment rally at Harvard

As you’ve no doubt heard, Bill McKibben and his allies at 350.org have launched a  a national campaign to persuade colleges, universities, churches, foundations and, yes, people like you and me, to stop investing in the fossil fuel industry. The campaign raises interesting questions as, I’m sure, McKibben hoped it would. Among them:

Does divestment make sense as a strategy to curb climate change?

If those of us who are concerned about climate change want to align out investments with our beliefs, what options are available?

In a column called Deep Green Investing published last week by Ensia, a lively new online magazine about environmental solutions, I argued that, by itself, divestment will probably not accomplish much. Having said that, the campaign could prove useful as one of a number of tactics being deployed by 350.org, the Sierra Club and others that are aimed at bringing about political change–namely, taxes or caps on global warming pollutants, EPA rules to curb coal-burning, etc.

In The Nation, Mark Hertsgaard argues that these grass-roots climate efforts have already produced results–350.org galvanized opposition to the Keystone Pipeline, which may have persuaded President Obama to delay a decision after the election, and the Sierra Club’s Beyond Coal campaign has, along with cheap natural gas, helped drive the decline of coal in the US. Hertsgaard writes:

As important as the victories themselves was how they were won. Both the Sierra Club and 350.org eschewed the inside-the-Beltway focus and top-down political strategy of big mainstream environmental groups, as exemplified by the cap-and-trade campaign. Instead, they emphasized grassroots organizing at the local level on behalf of far-reaching demands that ordinary people could grasp and support. Their immediate goal was to block a specific pipeline or power plant, but their strategic goal was to build a popular movement and accrue political power.

This is the political context in which the divestment movement makes sense. It won’t shake up the oil industry–the Ensia story explains why–but it’s a useful organizing tool.

But what might the campaign mean for investors? Today, I’m taking a closer look at a couple of “deep green” broadly-diversified mutual funds that have decided, unlike most other funds that market themselves as green or socially responsible,” to cleanse their portfolios of companies that extract fossil fuels. [click to continue…]

Stephen Viederman: Foundations don’t practice what they preach

Today’s guest post comes from Stephen Viederman, the former president of the Jessie Smith Noyes Foundation and an expert on sustainable investing. Steve, who has worked in the foundation world for more than 25 years, defines sustainable investing is “future-oriented, risk-adjusted and opportunity-directed.”  This is also called socially-responsible or green investing.

Here’s the problem: Even foundations that aim to promote sustainability or social justice with their grants don’t see their investments as another tool to achieve that end. They don’t, in other words, put their money where their mouth is, or where their values are. Steve, by the way, is also the father of Dan Viederman, executive director of Verite, a human-rights nonprofit; evidently, working for the public good runs in the family. This essay was originally published by Inflection Point Capital Management, a new sustainability-driven asset management boutique led by the estimable Matthew Kiernan with offices in Toronto, London, New York and Melbourne.

Philanthropic foundations are like old-fashioned slot machines. They have one arm and are known for their occasional payout.

Although the term “mission-related investing” found its way into the lexicon of philanthropy decades ago, the finance committees of most foundations continue to manage their endowments like investment bankers. Their portfolios give no hint that they are institutions whose purpose is the public benefit. There is a chasm between mission – grantmaking – and investment. The logic of a synergy between the two has yet to take hold. [click to continue…]

Can sustainable investing beat the markets?

This week, Newsweek released its second annual  Green Rankings of the largest companies in America, as well as a new analysis of big global corporations. These sorts of cross-industry comparisons of companies are difficult to do, but my sense is that Newsweek has done a credible job, with the help of partners MSCI ESG Research, Trucost and CorporateRegister.com. Given the attention that the list is getting,  it seems like a good time to return to a question I’ve thought about for years: Do companies committed to sustainability represent good investment opportunities?

The stock-market performance of Dell, which tops the 2010 list, is not encouraging: The firm’s shares have fallen by 55% during the last five years, while the NASDAQ is up by 18% during the same time period. Of course, one company’s performance over one time period doesn’t prove a thing. It turns out that over the past year, the top 100 companies on the 2009 Newsweek list outperformed the S&P500 by 6.8%.  While this data point doesn’t prove anything either, it’s interesting. So I arranged an email interview with Cary Krosinsky of Trucost to explore the issue further.

Cary Krosinsky

Cary is head of investor and corporate services for North America for Trucost, which is based in the UK. He’s also the author and co-editor, with Nick Robins of HSBC, of Sustainable Investing: The Art of Long Term Performance (Earthscan Publications, 2008), and he has taught classes on investing and sustainability at Columbia.

Marc: Cary, let’s start by defining “sustainable investing.” Is it different from socially responsible investing?

Cary: Socially responsible investing, or SRI, is too broad an investment category.  SRI encompasses very different things—alternative energy investing on the one hand, funds with a religious mandate on the other, as well as funds investing in a mainstream index such as the S&P 500, and subtracting out alcohol, tobacco and firearms.  We see many different styles of SRI.

Sustainable Investing is the more positive strand of SRI – one that is future-oriented, risk-adjusted and opportunity-directed. It looks at what companies can do to lessen risk, as well as capitalize on opportunities, in order to be ahead of the curve in their respective industries. It helps create long-term value, identifies “predictable surprises,” (as opposed to “black swans,”) such as climate change, diminishing water availability, human rights issues and others that influence investment outcomes.  Innovation emerges as a key driver of value through sustainability, as does the active management of environmental impacts.

Marc: It sounds like sustainable investing means identifying the smartest, most forward-thinking companies. In your book, you write that “sustainable investing funds have already outperformed consistently over the short, medium and long term.” How can you support that claim?

Cary: We found that for the 1, 3 and 5 years leading up to the end of 2007, when looking at SRI funds with this positive, opportunity-focused sustainable investing methodology, that they consistently outperformed their mainstream index equivalents.  When updating this study for a UN Principles of Responsible Investment academic paper in 2009, this still held true, both before, through and after the recent financial crisis of 2008 into 2009.

Further correlation of this has been demonstrated by diverse investors including Paul Hawken, who helps manage the Highwater Global Fund as well as Abby Joseph Cohen of Goldman Sachs.  Mark Fulton of Deutsche Bank spoke earlier this year regarding how the climate change sectors they are tracking have been outperforming their benchmarks since the recent market bottom. Matthew Kiernan, formerly of Innovest, now runs money and is also demonstrating outperformance from this more positive approach. The top 100 performers in the Newsweek Green Rankings which we actively participate in at Trucost, have outperformed the S&P 500, on an equally weighted basis, by 6.8% over the last year. [click to continue…]

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…]

Paul Hawken’s winning investment strategy

If you believe that companies that are strongly committed to socially and environmentally sound practices will outperform their peers in the long run, then you would expect so-called socially responsible investment (SRI) funds to deliver superior returns to investors.

The trouble is, they don’t. Sure, some years the mutual funds run by the Calvert, Domini, Parnassus and the rest do very well—they excelled during the tech boom of the late 1990s because they tend to eschew heavy industry—but other years, they lag market indexes. Over time, most track the broader market.

paul-hawkenOver the three years ending December 31, 2009, for instance, among the big SRI funds, Calvert Social Investment is down by a cumulative 13.02%, Domini Social Equity is down by a total of 16.2% and Parnussus Equity Income is up by 0.14%. Only Parnussus performed significantly above the S&P500, which was down by 15.9%,

Why haven’t they done better. Some of us have long believed that the problem with conventional SRI funds is that their definition of “socially responsible” is not nearly as rigorous as it could or should be.

Paul Hawken has been vocal in his critique of the SRI establishment, and since 2005 he has put his money where his mouth is. In a partnership with Baldwin Brothers, a Massachusetts-based investment firm, Hawken has overseen the Highwater Global Fund, a fund for qualified investors (i.e., the rich) that invests in companies “that have a clear sense of current global trends and future societal needs.” His results have been impressive, to say the least.

Since inception in the fall of 2005, Highwater is up by a total of 52.55%. During the three years ended in December (the same period cited above), Highwater is up by a total of 19.75%.  This is, in part, because Hawken and the other fund managers are very picky about what stocks they hold. More than 90% of the FORTUNE 500 fail their screens.

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