Some socially responsible investment funds say there’s little choice but to invest in fossil fuels.
In some ways, socially responsible investing seems like yoga: the more people spend on it, the more commercial it becomes. Now, your average yoga studio offers Bikram and Hatha classes, but also $80 mats and $30 meditation books. While the options are great, you’re left wondering: is this still really about a peaceful yoga practice—or has the ohm gone corporate?
Similarly, investors are pouring money into socially responsible investment funds, seeking to support everything from environmental sustainability to more women on corporate boards. But the result of all that money, and the proliferation of such funds, is that the lines that once defined socially responsible investing are increasingly blurry.
Alongside the expected “good” companies are some that seem anything but. Even some of the highest-rated funds, like those run by firms such as Calvert, make calls that some experts find questionable, like owning stock in oil companies. In other cases, as investors clamour for exposure to emerging markets, the very definition of what’s socially good varies depending on a country’s specific values.
“The definition of socially responsible is changing for sure,” said David Kathman, a senior mutual fund analyst at Illinois-based investment research firm Morningstar. “Some people think that their values are getting compromised.”
Now, more than ever, investors who are concerned with exactly what’s in their funds must be particularly careful about examining socially responsible funds. In some cases, you may have to accept that even socially responsible funds hold shares of companies that aren't strictly in line with the values you want to embrace.
What's green is gray
New assets in US socially conscious funds have swelled 48% in the past five years to $87 billion according to Morningstar. These funds — there are 205 now operating in the US alone — are under increasing pressure to deliver good results in a broader array of holdings.
Sometimes, these funds lag in performance compared to non-socially responsible nes, because even with wider berths on what's considered responsible, they are still limited in the stocks they hold.
The bellweather MSCI KLD 400 Social Index, for example, has had a 6.84% annual return for the past 10 years through August 30 versus 7.66% for the S&P 500.
To keep returns from lagging significantly, some of the top-rated funds take a best-in-class approach. That means that rather than excluding entire categories of once-taboo investments (oil exploration for example) they pick the company in any given category that operates with the highest standards. Then they try to use their shareholder status to activate for change.
Calvert, whose Sage funds own oil companies and electric utilities, takes an aggressive advocacy stance, said Stu Dalheim, vice president of shareholder advocacy at Maryland-based Calvert. “We are pushing at the wheel of change.”
Avoiding stocks of fossil-fuel-related companies is not always practical, said Lauren Smart, executive director of the UK-based Trucost, a sustainability research and consulting firm. It isn’t financially responsible, she said, and the fund’s returns would be more volatile.
It’s all about disclosure
It is important to remember that funds are only as good as the reporting by the companies in which they invest. European companies are generally the best when it comes to transparent reporting standards about things like environmental, social and governance issues, said Amy Domini, CEO of New York City-based Domini Social Investments. “They leave the US in the dust,” she said.
The MSCI Europe SRI Index, which excludes the UK, was the third-best performing fund out of 19 MSCI SRI group of indexes, returning 19.39% for the past twelve months ending mid-September.
Searching for higher returns, investors have been demanding exposure to emerging markets stocks. Yet emerging markets stocks may or may not be responsible investments — it's notoriously difficult to tell, because some companies do so little reporting of environmental, social or governance issues.
Money has flowed into funds such as London-based Schroders Emerging Market Equity fund. But many emerging markets funds hold Latin American and Asian stocks, which are traditionally difficult to research. Schroders, for example, gets low overall ratings from the Heart Rating, one tool for investors that scores mutual funds on social criteria.
Transparency is also a problem for funds that invest in Chinese companies, said Kathman. “Disclosure isn’t going to be nearly as good,” he said. “Despite these drawbacks, many people would like to have emerging market exposure.”
Some funds make their calls based partly on the social norms of their countries. A social good in one place isn’t necessarily important in another. So, for instance, Rotterdam-based Robeco fund uses a best-in-class approach, which also includes owning oil and tobacco stocks. The fund, like some others in Europe, follows a UN initiative, though, that excludes weapon-makers from investments.
So what’s an investor to do?
The best solution is to find funds that mimic your values, experts said. Donald Cummings, managing partner at Blue Haven Capital LLC in Geneva, Illinois, asks his clients to write out their top 10 social issue concerns and then prioritise them. “This makes choosing a fund much easier,” he said.
Investors can then check out specific fund holdings on Morningstar’s site or with the fund itself.
Just like in yoga, what you get out of your socially responsible investments depends on mindset you bring to the practice. Know which values are important to you. At the same time, recognise that when you are investing with a dual purpose — returns and mission — it might mean giving up a little bit of both.