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Are You Being a 'Muppet'?

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The most famous Muppet of all, Kermit the frog, famously stated, "It's not easy being green." Turns out, it's not easy as being an empowered investor either.

This was supposed to be an 'easy' blog to write. All the fuss around the recent New York Times Op Ed "Why I Am Leaving Goldman Sachs" in which Greg Smith publicly took the opportunity to rebuke Goldman Sachs leadership, culture and attitude toward its clients inspired me to wonder what responsibility investors (the so-called 'Muppets') have to make responsible investment choices?

In an ideal world people would empower themselves by engaging investment advisors who genuinely and honestly have their best interests and long-term goals in mind, rather than abdicating decision-making and putting their finances into someone else's hands, blindly trusting them to 'do right' by them and their money. Surely, with all the socially responsible investment (SRI) funds and standards out there, investors have the ability to make sure that their investment portfolios match their personal values, their goals and their individual risk tolerances. Right?

It appears to be the case. Sustainable and socially responsible investing (SRI) continues to grow at a faster pace than the total universe of investment assets under professional management, according to the Social Investment Forum Foundation's Report on Socially Responsible Investing Trends in the United States.

Growth of Socially Responsible Investing
Today nearly one out of every eight dollars under professional management in the United States is invested in some strategy of socially responsible and sustainable investing. Since 2005, SRI assets have increased more than 34 percent compared to 3 percent for other professionally managed assets. By the end of 2009 total assets involved in sustainable and socially responsible investing exceeded $3.07 trillion.

The rapid growth of SRI in recent years is the best evidence that sustainable and responsible investing yields competitive returns. Over the past 20 years, the total dollars invested in SRI has grown exponentially, as has the number of institutional, professional, and individual investors involved in the field.

More than 20 studies demonstrate that SRI mutual fund performance is comparable to that of non-SRI funds can be found at www.sristudies.org.

Another indication of the competitive performance of SRI funds is the performance of SRI indexes. These indexes are designed to be benchmarked to non-SRI indexes, such as the S&P 500. The longest-running SRI index, the FTSE KLD 400 has posted returns of 9.51 percent since 1990 through 2009, compared with 8.66 percent for the S&P 500 over the same period.

To better understand the rapidly changing landscape, I reached out to a number of people in the field, including Bennett Freeman, Senior Vice President, Sustainability Research and Policy for Calvert Investments. I first met Bennett in 2004 and have always found him to be passionate and thoughtful. He currently leads the Sustainability Research Department for Calvert Investments and oversees its company research and analysis as well as its policy and advocacy work. The pool of assets engaged in SRI strategies has grown more rapidly than the overall investment universe due to factors including increased interest and investing in traditional SRI products, the development of new SRI products, and the adoption of SRI strategies by managers and institutions not previously involved in the field.

As Bennett points out, "What we have seen is an evolution of towards a more sophisticated approach to understanding risks and opportunities related to the full spectrum of ESG issues -- environmental, social and governance. fUntil a few years ago, SRI may have consisted of simply avoiding some 'sin' stocks like alcohol, tobacco, gambling and some firearms manufacturers."

I also connected with Joe Keefe, president and chief executive officer of Pax World Management LLC and of Pax World Funds. Pax launched the first publicly available SRI mutual fund in America in 1971 and now offer 13 different funds totaling $2.7 billion that follow a sustainable investing approach. 100 percent of their business is focused on sustainable investing, which Pax defines as "the full integration of environmental, social and governance (ESG) factors into investment analysis and decision-making."

Driving Change
In addition to voting with their dollars by choosing investments, investors are empowered but may not be using their power to influence the actions of the companies in which they are invested. Both Calvert and Pax are using their power as an institutional investors (representing more people than individual investors) to drive increased environmental and governance-related initiatives. Pax added its voice to several shareholder initiatives to improve public policies or company protocols and disclosures with respect to gender and human rights, financial reform and workplace practices.

Calvert also offers Calvert Sage Funds recognizing that some companies may have corporate responsibility leadership in some areas but are still working on their approaches in others. By actively engaging with these companies Calvert hopes to provide incentives for them to continue to make progress in their weaker areas (A process I described and supported in "Saving the Sinners.")

Other than these actions, what of the financial sector itself? Freeman concedes that one area where SRIs have not had an easy time evaluating is the financial sector, particularly the big banks. "We were well aware of governance problems at some companies and as a result they did not meet our criteria and we did not hold them in our portfolio," he says. But at the same time, it has also been challenging analytical perspective. "It is really difficult because it is one thing to feel in your gut that there are unethical cultures in these companies, it's another thing to make decisions based on analytical analysis of your criteria."

From Values-Based Decisions to Sound Business Strategy
Freeman points out that thinking has evolved from looking at ESG (environmental, social and governance) strictly in values into recognition by that companies that are managed well and have stayed true to their values have been better investments. "While we continue to believe that there are values dimensions to these issues, we see these issues as risk and opportunity factors. The rest of the investment community is starting to catch up with (those of us in SRI)."

Keefe also points out that people are gravitating toward SRI "probably more as a result of the financial sector meltdown that triggered the recession than the recession itself." He explains that "I think many investors have come to understand that there is an inherent tension between the short-term thinking of the hyper traders moving the financial markets and the long-term investment horizons of average investors saving for their retirement or their kids' college tuition."

Freeman sees "two converging, irreversible movements; first is investors gaining greater understanding of SRI investing. The much larger phenomenon is the mainstreaming of CSR and sustainability."

Keefe says:

Increasingly investors are coming to the conclusion that companies with strong governance and ethics, who are committed to being responsible corporate citizens, are also better long-term investments. That is fundamentally the case for sustainable investing and why we believe it's a better long-term investment strategy that is right for the times we live in.

It makes sense. Sustainability as a business model is designed to create and maintain long-term viability based on a combination of sound management and stakeholder goodwill ought to be a sound investment strategy. "People's wallets and their consciousness need not be in conflict but can be in alignment," says Keefe.

All this said, I do not know enough about you, or your individual values, financial priorities, age and lifestyle to make recommendations regarding specific investments. Nor do I know enough to recommend that you keep your money with a particular advisor or make a change or go it alone. What I can, and do recommend is that you have a discussion with your financial advisor to make sure that your investments match your needs, including your values. And if you don't understand your investments, and your advisor cannot (or will not) explain them to you in a manner that makes sense, than perhaps you have to ask yourself if your interests are being served.

What basic questions should every investor ask themselves?
  1. What is your risk tolerance?
  2. Are there some investments you wouldn't consider -- i.e., tobacco or firearms companies, companies that do business with Burma, mining companies, etc.
  3. Do you believe that the products and services the company provides are sound long-term businesses?
  4. What do you know about the companies you're considering giving your money?
  5. Perhaps most importantly, does you investment advisor listen to your questions and give you clear answers you can understand?

With apologies to the multi-talented Jim Henson and each of his remarkable creations for the continued use of this analogy that demeans his brilliant creations to make the point.