Editor’s note: Turns out we don’t just share content with Low Impact Living; we also share writers. Today’s post (by Cassie Walker) takes a look at the basics of putting your money where your values are: green and socially responsible investing. This post was originally published on Sunday, May 4, 2008.
One of the primary imperatives for being an environmentally conscious consumer is to vote with your dollars – support companies that have a positive impact on society and the environment by purchasing their products and services. In the minds of many, that concept is easy to apply to the day-to-day stuff we buy at the grocery store or retail outlets. But some folks forget that our longer term investments can speak just as loudly.
Enter Socially Responsible Investing (SRI). SRI takes into account the impact that companies have on society and the planet, and recognizes that we can factor these concerns into our investment choices. Now our decisions as investors, which used to be determined solely on corporate financial performance – perhaps based on short-term and short-sighted goals – can now be based on the whole of a company’s standing, including their impact on the environment.
Once only a small piece of the total investment market, SRI now represents $2.71 trillion, more than 10% of all investments. That figure is up from $639 billion in 1995, an increase of more than 300%. As SRI has matured, green investing specifically has taken much of the limelight – as demand for clean technology, alternative and renewable energy, green building and other environmentally driven businesses rise, so does the desire to invest in them.
With this growth, opportunities for us as individuals to get into green investing and SRI abound. There are the usual suspects like stocks and bonds, mutual funds and venture capital. For example, dozens of mutual funds exist for investors looking to put their money where their mouth is, and support companies who share their values. And many of these funds focus on green companies, with large numbers of them joining the ranks within the last year or two.
Ins and outs of screening
To determine which companies should be included in a green or SRI fund or index, both positive and negative screens, or criteria, are applied. Positive screens bring in companies that have good records in areas like environmental safety, and employee and human relations. Negative screens exclude companies whose businesses involve things like alcohol, tobacco, firearms, gambling, nuclear power and military weapons.
But, we likey the wine
It’s in setting these screening factors that SRI can get a little subjective. Some people feel that certain categories should not be excluded. Alcohol, for example, is enjoyed responsibly by a wide variety of people. Others don’t feel that military weapons are worthy of exclusion, as these include projects needed for our defense. The Social Investment Forum has a handy chart that includes a number of SRI funds and the criteria that they use for screening purposes, as well as their performance.
In the green realm, most funds use positive screens to include companies focused on environmental products/services, or conduct their business in a sustainable manner. Some focus on specific industries, like the Calvert Global Alternative Energy Fund. Others feature a mix of sectors in their funds, like the Winslow Green Growth Fund and includes Green Mountain Coffee Roasters and First Solar among its holdings.
Show me the money
What’s that you say? There’s a giant elephant in the room? Ah, yes, of course: returns. The goal for any investor is to make money, no way around that one. The good news is that as SRI has grown, so have the returns available. According to a number of academic studies, SRI mutual funds perform competitively with non-SRI funds over time. In addition, an increasing number of state pension funds, university endowments and foundations are turning to SRI. This is telling because fiduciaries like these are required to seek competitive returns for their portfolios – it’s the law. So if it’s good enough for them, it might be good enough for you, too.
If you’re a savvy investor, you’re probably familiar with a method used by traditional mutual funds to track and measure returns: the index. This tool is in use with SRI as well, benchmarking the returns of SRI funds compared to non-SRI funds to measure performance.
The oldest of these, the Domini 400 Social Index, was established in 1991. It compares the returns of 400 mostly large cap companies to the S&P 500. The main difference between the Domini 400 and the S&P is that the former has been screened to include companies that provide a positive contribution to society.
So how has SRI fared? Since the index’s inception, it has shown 10.83% returns, compared to the S&P 500 with 10.33% total returns. Of course, there are investments out there that do better than both of those, but considering the added benefits, it’s not too shabby.
On the green investing front, the Winslow Green Growth Fund has seen a five-year annual average return of around 18%. In the same family, the Winslow Green Solutions fund targets larger, more established companies that provide green solutions, like pollution reduction. Only recently established in November of 2007, this fund has suffered along with the downturn in the economy, with returns of -14.5% since inception. Similarly, the relatively new Calvert Global Alternative Energy Fund has seen losses so far this year, despite growing interest in this sector.
A few other noteworthy funds include Spectra Green, which chooses companies that exhibit growth potential, while operating in an environmentally sustainable manner — and it sports a five-year annual average return of 15.29%. The New Alternatives Fund, which has achieved a five-year annual average return of 20.18% (no, that’s not a typo) by selecting holdings in alternative energy, natural foods, recycling, and other environmentally-friendly sectors.
The Green Century family of funds focuses primarily on environmentally responsible investing. They have two funds to choose from. The first, the Green Century Balanced Fund has outperformed its benchmark (the Lippor Balanced Fund Index) with a five-year annual average return of 11.84%. On the other hand, the Green Century Equity Fund hasn’t seen quite the same success, with five-year annual average returns of 8.55%.
One issue to take note of: All of these funds do some screening for you based on their goals, but you should still review each fund’s holdings to ensure a solid fit with your beliefs. Some funds, like Spectra Green, shoot for having a percentage of their holdings pass the positive screen for sustainability. As a result, this fund includes Apple, which has been in the news lately for the less than stellar environmental impact of their products.
If you’re into the stock market and want to select your own individual investments, there are a number of companies that might be worth a look. Of course, as with any investment, you should always do your homework – a good place to start is a company’s Corporate Social Responsibility (CSR) Report. Generally available on a company’s website, you can also find a database of CSR reports here. Some companies that have strengthened their commitment to the environment even have separate Environmental Reports, like Wal-Mart’s Sustainability Progress Report, and Disney’s Enviroport.
You might also consider joining a group of like-minded folks in an investment group, like the RainFrog Ethical Investment Partnership. Some people prefer groups like these to striking out on your own, as information and money are pooled. There are also many sites that compile information and research for you, like Responsible Shopper and Renewable Energy Stocks. Did we mention to make sure and do your homework?
Regardless of the investment that you choose, shareholder advocacy is a way to have your voice heard and influence the direction that companies take. As an investor, you own a piece of the company – why not use that power for good?
Advocacy efforts can include “dialoguing” (normally called “talking”) with companies about social, environmental, or governance concerns. You can also file shareholder resolutions on a host of issues, which are then presented to the entire stable of owners for a vote. Investor coalitions, like the Investor Network on Climate Risk, allow investment professionals to make known their concerns about the risks and opportunities associated with issues like climate change.
These methods create investor pressure on companies, and can even garner media attention. As an SRI investor, your actions work to improve policies and practices, encourage good corporate citizenship and promote long-term shareholder value.
Green investing can be a good way to align your finances with your values. Determine what’s most important to you, do your homework, and consider letting your money work for the good of the planet.
My complaint with Calvert is the 5% front-end load the fund charges and 1.25% expense ratio. Index ETFs from PowerShares (PBW, PBD) or Market Vectors (GEX) have no load and half the expense ratio.
Hrmm, I’ve been looking for a good green investment firm to work with. Thanks for the article.
I made a post (albeit in much less depth) about this on my blog, but it’s important to really look into the holdings that so-called SRIs actually have.
I was disgusted to find that the fund my portfolio manager recommended to me (likely on the basis of its strong returns) had major holdings in large oil and gas companies, including one of the largest tar sands developers in Alberta!
Before you hop on the bandwagon, make sure you do your research, or you’ll only be perpetuating the problem under the guise of green. I’ll all for sustainable investments, but be careful.
Andrew – I have to agree with you. If you don’t do your research, you might end up with a portfolio like Michael Moore’s:
I still wonder why so many greens give celebrities a pass when they proclaim to be green, but live grossly otherwise.
SRI, green investments, ethical asset management!
Indeed, investment in photovoltaic and wind energy for example is a great idea.
We remain optimistic because sustainable development in the broad sense has unsuspected reserves of growth while reducing the impact on Man and Nature.
The Green Century Balanced Fund seeks to invest in both large and small companies. Investment in small companies involves greater risk than investing in the stocks of larger, more established companies. Investments may be more heavily weighted in growth stocks, which offer greater opportunities for growth as well as greater risk for price fluctuation. The bonds that the Green Century Balanced Fund invests in may be of any maturity and are generally of investment grade credit quality, although the Fund may invest up to 35% of its net assets in high yield, below investment grade bonds,******commonly known as junk bonds,***** which involves risk greater than investing in more highly rated bonds.
Just FYi on the Green Century Balanced fund…