SALT LAKE CITY — In the 1980s, Amy Domini was working as a Boston stockbroker when she realized something that surprised her: while all of her clients were interested in making a profit, many had ethical boundaries which kept them from investing in certain businesses.
Some clients avoided tobacco companies, for example, because a loved one had died of lung cancer. Others wouldn't invest in lumber companies because of a love of birding.
Such was the impetus for the Domini 400, the first index of “socially responsible” stocks. Think S&P 500 with investment decisions based on social, environmental and corporate governance criteria. Launched in 1990, the index added momentum to the budding investment philosophy called socially responsible investing (SRI), also known as sustainable investing.
Amy Domini, who has been called "The First Lady of Sustainable Investing", speaks with the conviction of a pioneer. “We were forging new ground,” she says in a video on her website. "Oh, Wall Street thought we were completely nuts. They didn’t think we could ever get the same kind of returns while including ethical standards in our investment decisions. And they didn’t think investors, at the end of the day, really cared.”
As for the million-dollar question?
Over the twenty-two years since its inception, the Domini index, now known as the MSCI KLD 400 Social Index, has managed to keep pace with the S&P 500. In fact, over that period, it has delivered an average annual return of 9.6 percent, versus 8.9 percent for the S&P, according to Bloomberg.
Where your treasure is
Religion played a fundamental role in the birth of SRI in America. Years before the Revolutionary War, Methodists and Quakers were formally shunning investments in the liquor, tobacco and slave trades.
John Wesley, one of the founders of Methodism, invoked scripture to frame a gospel of ethical investing. In his mid-18th century sermon, The Use of Money, Wesley told followers that “we ought to gain all we can gain, but this it is certain we ought not to do; we ought not to gain money at the expense of life, nor at the expense of our health.”
Ethical investing found a new wave of adherents during the political ferment of the 1960s and 70s. The Civil Rights Movement, Vietnam and the proposed Equal Rights Amendment all contributed to a wider questioning of both government policies and certain business practices.
By 1995, SRI assets under management (AUM) comprised nine percent of the U.S. total, or $639 billion. In 2010, SRI investing pushed past the $3 trillion mark, rising to 12 percent of all assets under management ($25 trillion).
A Tipping Point?
Growing from nine percent to 12 percent over 15 years qualifies as modest growth. Yet, several qualitative factors point to a possible tipping point for SRI. The financial crisis, Occupy Wall Street, and the debate surrounding Bain Capital and redistribution all have people paying more attention to how money is made.
Such a person is 64-year-old Gray Woodward, a retired teacher from Raleigh, North Carolina. Four years ago, a series of conversations with a fellow community volunteer started her down the road of sustainable investing.
“Four years ago, I’d never thought about it,” Woodward says. “I knew nothing about it. Then I learned about it and got to thinking, ‘Gosh, how do I feel about owning Exxon Mobil?’”
Over the past two years, Woodward has, with the help of her financial advisor, gradually transitioned from a traditional portfolio that she inherited from her mother, to what she calls “a more sustainable one.” In addition to eliminating oil stocks, she’s invested in a real estate investment trust focused on sustainability practices such as energy efficient buildings. She’s also put money in a Calvert SRI mutual fund, which invests in socially responsible companies and Self-Help Credit Union, a non-profit entity serving “individuals, nonprofit and religious organizations, and other socially responsible people and institutions.”
“Performance is a bit off,” she concedes, “but I’m willing to give up a little. It feels good to make even a small difference. It takes so little effort. It’s worth taking a look so you can feel better about your investments.”
Vice vs. nice
Gerald Sullivan stares at the Grey Goose Vodka truck sitting in front of him on the New Jersey Turnpike. Traffic is stuck and Sullivan, portfolio manager for the Vice Fund, is on his cell phone defending his investments in alcohol, tobacco, gaming and defense companies. To him, it all comes down to return on investment.
“SRI is basically a nice story,” he says. “They’re probably well-meaning people, but on average they don’t do very well. If SRI funds can say you’ll feel better even if they underperform the market, then they’ve found the magic elixir. That’s great marketing. Academic research shows that the vice sector mostly outperforms the S&P 500 over the long-run.”
Some research does, indeed, bear this out. In his 2005 book, The Future for Investors, Wharton professor and investment guru Jeremy Siegel shows that a $1,000 investment in Philip Morris in 1957 would have returned $4.6 million in 2003. A similar investment in the S&P 500 would have returned $124,000.
The wages of sin
In addition to strong returns, so-called “sin” companies also provide tens of thousands of jobs and billions of dollars in tax revenue. Yet, what about the costs these businesses pass on to society?
For example, in the U.S., healthcare costs due to tobacco and alcohol consumption total nearly $275 billion a year. These costs inevitably show up in insurance premiums and taxes.
There is the human cost to consider as well. The Centers for Disease Control and Prevention estimates that smoking causes one in five deaths in the U.S. each year, and that 25 million Americans alive today will die prematurely from smoking-related illnesses. According to the World Health Organization, the harmful use of alcohol causes 2.5 million deaths each year worldwide. This is more than AIDS, tuberculosis or violence.
Sullivan responds that these companies are all legal. “If you think of what happened when we went to prohibition,” he says, “more people died from drinking because they drank poorly made bathtub gin. So by making it legal, you’ve made it safer. You and I can drink Grey Goose properly, but that one [irresponsible drinker] can’t.”
But legality and ethicality are not the same thing, are they?
“What it comes down to,” Sullivan says, “is if you don’t invest in a stock, will they miss you?”
True enough, especially for the small, individual investor. But the reverse can also be asked: “If you don’t invest in a stock, will you miss them?”
The great debate
Joe Keefe, of course, sees it differently than Sullivan. Keefe is President and CEO of Pax World, originator of the first socially responsible mutual fund in the U.S.
“We need to move away from a system,” Keefe says, “where short-term profits are valued regardless of the long-term consequences of that activity. There is a great debate going on. Fundamentally, it’s a debate about the future of capitalism.”
For his part, Keefe calls for a transition from “growth capitalism” to “sustainable capitalism”.
“One thing sustainable investing stands for,” Keefe says, “is empowering shareholders and I don’t know how anyone who believes in capitalism could not believe in that.”
In 1970, a year before Pax World launched the first SRI fund, economist Milton Friedman published his landmark essay, The Social Responsibility of Business is to Increase its Profits. Friedman won a Nobel Prize in 1976 and critics of SRI often cite his essay to point out that business executives’ responsibility is to the shareholders who’ve entrusted them with capital, not to outside special interests.
But what if shareholders themselves decide that profits aren’t the only thing that matters?
It is this sentiment that Keefe latches onto. “You can’t say on one hand that the sole duty of the corporation is to its shareholders and then oppose the right of those shareholders to weigh in on the direction of the corporation. You can’t have it both ways.
“You have all these emerging economies with growing middle classes that want to have higher standards of living and you cannot have infinite growth on a finite planet. We’re going to need to find more sustainable ways of doing business. If we don’t, frankly, we’re in a lot of trouble.”
Making an impact
Patrick Mullen is one of those working to find more sustainable ways of doing business. Mullen is a principal with the University of Utah’s University Impact Fund, one of the first student-run impact venture capital funds in the U.S. He has worked on multiple micro-finance projects in India, China and Tanzania. He’s also just 24 years old.
Mullen is part of a rising generation of social entrepreneurs, impact venture capitalists, and triple-bottom line private equity investors looking to do well by doing good. Like socially responsible mutual funds, they are looking for a healthy return, but not at all costs.
“In our space of impact investing,” Mullen says, “what we try to say is that regardless of the type of organization you run you need to be efficient and you need to be sustainable.”
For one recent project, Mullen and some student associates helped a group of women in a rural Indian village expand their handicraft business by providing them with small, working capital loans. With these loans, the women went from making a dozen banana-rope bags and baskets each month to making thousands. Seeing these women significantly increase their income and the effect that it had on the community was a rewarding experience for Mullen.
“Four billion people in developing markets live on less than two dollars a day and lack access to basic goods and services," Mullen says. "So the ability to build a socially responsible business that meets the needs of those consumers in a very responsible way not only presents an attractive impact opportunity, but it also presents a very, very attractive investment opportunity as well.”
A world apart?
Traffic crawls forward and Gerald Sullivan’s Jeep Patriot inches along the turnpike toward New York City. Tomorrow he’s flying to England for a brewery tour. He’s thinking about the term “sustainable investing” in the context of global population growth. In 2050, the world will have nine billion people, half-a-world more than there was in 2000.
“Population growth of that magnitude,” Sullivan muses. “It’s going be difficult for various parts of the world to feed those people and provide clean water. It’s hard to be negative on that.”
When discussing the ethics of investing, it’s virtually impossible to draw one common line. It’s only natural. Politics and religion enter the equation and the question inevitably arises, “Whose ethics, whose morals?” Yet, just about everyone can see that sustainable investing, in some shape or form, does have a future. Even a vice investor.
Sullivan sees it this way: “Anything that an entity can do to put itself in position to hopefully, theoretically make more money and solve those problems is beneficial. Can a Monsanto make a genetically engineered grain that can resist certain kinds of blight? I would say that’s good business. Is that sustainability? I would guess so.”
David Ward can be reached at firstname.lastname@example.org
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