Socially Responsible Investing


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Socially Responsible Investing

  1. 1. Responsible Investing Responsible Investing Professor Hector R Rodriguez School of Business Mount Ida College Business, Society & Environment
  2. 2. <ul><li>Society </li></ul><ul><ul><li>The Corporation and Its Stakeholders </li></ul></ul><ul><ul><li>People for the Ethical Treatment of Animals </li></ul></ul><ul><ul><li>Corporate Citizenship </li></ul></ul><ul><ul><li>The Social Responsibility of Business </li></ul></ul><ul><ul><li>The Shareholder Primacy Norm </li></ul></ul><ul><ul><li>CSR, Citizenship and Sustainability Reporting </li></ul></ul><ul><ul><li>Responsible Investing </li></ul></ul><ul><ul><li>The Community and the Corporation </li></ul></ul><ul><ul><li>Taxation and Corporate Citizenship </li></ul></ul><ul><ul><li>Corporate Philanthropy Programs </li></ul></ul><ul><ul><li>Employees and the Corporation </li></ul></ul><ul><ul><li>Managing a Diverse Workforce </li></ul></ul><ul><li>Environment </li></ul><ul><ul><li>A Balanced Look at Climate Change </li></ul></ul><ul><ul><li>Non-anthropogenic Causes of Climate Change </li></ul></ul><ul><ul><li>Sulfates, Urban Warming and Permafrost </li></ul></ul><ul><ul><li>Conventional Energy </li></ul></ul><ul><ul><li>The Kyoto Protocol </li></ul></ul><ul><ul><li>Green Building </li></ul></ul><ul><ul><li>Green Information Technology </li></ul></ul><ul><ul><li>Transportation, Electric Vehicles and the Environment </li></ul></ul><ul><ul><li>Geo-Engineering </li></ul></ul><ul><ul><li>Carbon Capture and Storage </li></ul></ul><ul><ul><li>Renewable Energy </li></ul></ul><ul><ul><li>Solid, Toxic and Hazardous Waste </li></ul></ul><ul><ul><li>Forests, Paper and Carbon Sinks </li></ul></ul><ul><ul><li>Life Cycle Analysis </li></ul></ul><ul><ul><li>Water Use and Management </li></ul></ul><ul><ul><li>Water Pollution </li></ul></ul>Course Map – Topics Covered in Course
  3. 3. <ul><li>Stockholders (also called shareholders) </li></ul><ul><li>The legal owners of business corporations </li></ul><ul><li>Types of stockholders </li></ul><ul><ul><li>Individual stockholders are people who directly own shares of stock issued by companies </li></ul></ul><ul><ul><li>Institutions , such as pension funds, mutual funds, insurance companies, and university endowments </li></ul></ul><ul><ul><ul><li>Called institutional investors </li></ul></ul></ul>Some Background
  4. 4. <ul><li>To produce a return greater than they could receive from alternative investments </li></ul><ul><ul><li>Stockholders make money when the price of the stock rises ( capital appreciation ) and when they receive their share of the company’s earnings (called dividends ) </li></ul></ul><ul><ul><li>Bull markets (in which share prices rise overall) alternate with bear market (in which share prices fall overall) </li></ul></ul><ul><ul><li>Although stock prices can be volatile, stocks historically have produced a higher return over the long run than many other types of investments </li></ul></ul><ul><li>Some investors use stock ownership to achieve social or ethical objectives; this is known as “Responsible Investing” or RI </li></ul>Objectives of Stock Ownership
  5. 5. <ul><li>An investment process that considers the environmental, social, and governance consequences of corporate policies and practices, both positive and negative, within the context of rigorous financial analysis. </li></ul><ul><li>Responsible investing takes a longer term perspective, recognizing that environmental and social benefits and costs are rarely expressed on a quarterly cycle. </li></ul>Source: “Socially Responsible Investing: an Introduction,” Calvert: (2003) What is Responsible Investing?
  6. 6. <ul><li>Environmental issues are becoming more important with regard to economic development, trade, and worldwide demand for goods and services. Among the factors driving this change are: </li></ul><ul><ul><li>A growing political consensus that action is warranted to address the problems of global warming and climate change. </li></ul></ul><ul><ul><li>Increasing world population, growing rates of prosperity and consumption among some segments of society, and the associated demand for goods and services. </li></ul></ul><ul><ul><li>Escalating demand for closed-loop, zero-impact processes and technologies, as opposed to the use of end-of-pipe controls. </li></ul></ul><ul><ul><li>Expanding demands on a limited natural resource base, and the resulting pressure to improve resource productivity. </li></ul></ul><ul><li>The industry believes these trends will affect virtually every aspect of the economy and change how companies conduct business. </li></ul>Source: “Environmental Drivers & Shareholder Value,” ClearBridge Advisors: (2008) Underlying Thesis
  7. 7. <ul><li>Social investing has long historical roots in the U.S., dating back to the late 1600s, when religious investors elected to invest in accordance with their beliefs in human equality and nonviolence. </li></ul>Origins of Social Investing 1920’s 1960’s 1980’s Sin Stocks
  8. 8. Typical Decision Process Pax World – US$ 2.53Bi Environment Climate change Community Indigenous People Welfare Labor Relations Product Safety and Integrity Diversity Workplace healthy and safety Corporate governance Gender Empowerment Human Rights Double Diligence Financial Analysis Social Analysis Calvert – US$ 3.17Bi Governance and Ethics Workplace Environment Product Safety & Impact International Operations and Human Rights Indigenous people’s rights Community relations
  9. 9. <ul><li>Looking over the various screens that are commonly used, firms wishing to pass muster with those managing such funds should eschew lines of business that involve alcohol, gambling, nuclear power, defense contracting, animal testing, etc. </li></ul><ul><ul><li>It should be clear that there is some ambiguity here. For instance, medical research suggests that alcohol in the form of one glass of wine a day is good for one’s health. Nuclear power, with all of its challenges, is free of carbon dioxide, the predominant greenhouse gas. Dilemmas with defense contracting and animal testing also exist. </li></ul></ul><ul><li>Rather, firms should embrace shareholder advocacy, R&D, renewable energy, strong union relationships, employee empowerment and diversity. </li></ul>RI Indexes
  10. 10. Source: “ 2007 Report on Socially Responsible Investing Trends in the United States;” Social Investment Forum 2007 $2.7 trillion – the amount invested in RI-screened accounts (mutual funds, institutional investors and high-net-worth individuals) The RI Market: Exhibiting Solid Growth
  11. 11. <ul><li>Three major responsible investing (RI) indices, </li></ul><ul><ul><li>KLD’s Domini 400, </li></ul></ul><ul><ul><li>Dow Jones Sustainability Indexes (DJSI), and the </li></ul></ul><ul><ul><li>FTSE4Good </li></ul></ul><ul><li>Weighting Systems - Each of the three firms weight various aspects of financial and non-financial performance differently. </li></ul><ul><ul><li>KLD puts only 20% of its explicit points on environmental issues; the ultimate decision is made subjectively by a committee. </li></ul></ul><ul><ul><li>Dow Jones typically puts a third of its points on environmental issues </li></ul></ul><ul><ul><li>FTSE4Good includes environmental performance as part of its criteria, but does not assign it a weight. </li></ul></ul>Source: Aaron Chatterji, “Breaking Down the Wall of Codes,” UC Berkeley: (2005) RI Indexes
  12. 12. <ul><li>Integrated assessment of economic, environmental and social criteria with a strong focus on long-term shareholder value. </li></ul><ul><li>Consistent rules-based methodology, primary research (direct contact to companies). </li></ul><ul><li>Focus on best-in-class companies. Yearly review and continuous monitoring of companies. </li></ul><ul><li>Assurance of the assessment process by Deloitte. </li></ul>Dow Jones Sustainability Index
  13. 13. DJSI Assets (in million USD)
  14. 14. DJSI Assessment Criteria
  15. 15. <ul><li>Research has found that on average, RI funds do not perform any better or worse than their conventional peers… why is that? </li></ul>RI Performance
  16. 16. <ul><li>Why? Recall from the lists of screens that investments in R&D are seen as a good thing when screening for good companies, so too are the absence of pollution problems and the presence of stock ownership plans for employees. </li></ul><ul><li>These tend to be characteristics of so-called high tech firms, especially those organized around the internet and other communications and information technologies. </li></ul><ul><li>This means that many RI-managed funds tend to be tech-heavy, struggling along with NASDAQ over the last few years. </li></ul>Lackluster RI Performance
  17. 17. Responsible Investing - Domini Investments “Live Link”