After watching "An Inconvenient Truth," Al Gore's stunningly effective film about global warming, financial advisors may leave the theater wondering if green investments could translate into greener customer accounts. For instance, should advisors recommend investing in solar power, wind power, pollution control equipment, water filters, smokestack scrubbers and recycling plants, among other related prospects? Can you make a profit this way? Let's face it, everyone wants to keep the planet from burning up, so let's not add the customers' investments to the bonfire.
"Socially responsible investing used to be for tree huggers and had a 'lefty' agenda, but now it's moving into the mainstream," says Marc Lane, who runs a Chicago law firm, brokerage company and investment advisory firm dealing in advocacy investing. In the investment world, "about $2 trillion is invested in some type of social screening, but that's nothing." Just a beginning, says Lane, who wrote a book about SRI titled Profitable Socially Responsible Investing.
Susan S. Hansen, a Fayetteville, N.Y. advisor who manages $600 million for 600 clients, says she asks half her customers if they are interested in SRI, and the other half ask her. "I didn't use to ask them, but now I don't have to tell them they'll get less of a return," says Hansen, who heads her own financial advisory firm.
A long, hard look says SRI and high returns are possible, but like any investments, hardly certain. At the end of the first quarter of this year, Morningstar reported that there were 109 socially conscious funds with $43.44 billion in assets. The funds invest according to non-economic guidelines. Ten years ago, there were 51 such funds with $6.05 billion in assets.
During the same time frame, socially conscious large-cap-blend funds had an average return of 3.98 percent or an annualized return of 11.18 percent, which is an annualized three-year average return of 15.88 percent--as good as or better than similar large-cap funds.
"In the 1970s, there was a small universe of companies making socially responsible investments, so investors felt they had to sacrifice return," says Matt Patsky, manager of the New York-based Winslow Green Growth Fund. Thus, financial advisors used to tell clients requesting SRI investments, "Ok, that's great. I'll make a lot of money with your investments, and then you can give some to charity."
Today, "the performance gap is narrowing," says Gregg Fisher, president and Chief Investment Officer for Gerstein, Fisher & Associates, Inc., a New York financial advisory firm. "Now, you have lots of products and flexibility," Fisher adds. For instance, he likes Calvert's World Value International Equity Fund and prefers the following socially screened small-cap stocks that do well: Bisys Group Inc., Brinks, Hancock Holding Co. and Green Mountain Coffee.
Meanwhile, the SRI universe has expanded all the way to Bentonville, Ark. There, Wal-Mart, the liberal's b?te noire, is developing a wide-ranging program to teach its 1.3 million U.S. employees how to take better care of themselves and the environment. The program is designed to turn Wal-Mart's work force--the country's largest--into a model for its customers on issues like energy, the New York Times reported. Sounds like a company headed for SRI.
Maybe, says Hansen, who thinks Wal-Mart is moving in the right direction but hasn't reached the SRI goal. For that company, "Profit is the almighty. It hasn't figured out how to give employee benefits and still make a good profit." In comparison, Wal-Mart competitor Costco, "pays more attention to the human element," which is evident through its employees' attitude, Hansen says.
Framed against these encouraging steps is the chilling fact that the nation's premier science policy body just voiced a "high level of confidence" that Earth is the hot test it has been in at least 400 years, and possibly even in the last 2,000 years. A panel convened by the National Research Council reached that conclusion in a broad review of scientific studies, reporting that evidence indicates "recent warmth is unprecedented for at least the last 400 years."
That affects everyone--whether you live in Malibu or Manhattan. In fact Malibu should be better known for the billions of fecal microbes flowing through the town's storm drains than for movie stars and the babes of "Baywatch." The combination of bad water, bad air and too much heat could steal the joy in life from hundreds of swimmers and beachgoers, obscuring and ruining those magnificent sunsets off the Carmel coast, or the beautiful mountain vistas in Boulder, Col.
Perhaps SRI investments could slow this ruinous trend. While SRI has expanded greatly, it is still a small portion of mutual fund investments--less than 5 percent. But 10 years from now, Patsky predicts, every traditional mutual fund will have 10 percent of its portfolio in SRI because of reasoning from the heart and the head: Save the planet and simultaneously grow your portfolio.
Even now, more and more companies are engaged in pollution control investments aimed at cleaning up the air, water or energy plants. That this high technology field is a growth area with vast potential is evidenced by firms such as Goldman Sachs, which is investing $1 billion in environmentally friendly projects.
Years ago, "Propeller heads pushed new technology that was never funded and never got off the ground," says John Deacon, a partner working in the London office of international law firm Hunton & Williams. Now, many renewable power projects using wind and solar sources make economic sense and are coming to fruition. "I'm not an eco-warrior. I've never hugged a tree in my life," says Deacon. Instead, he says, these projects are market-led because they make sense. "We've gone from sandal wearers to corporate executives."
For instance, Patsky points to Fuel Tech, Inc., a clean-coal player which uses its technology to both clean smokestacks from coal-fired plants and inject material into the plant's furnaces to make them burn cleaner and more efficiently. Two years ago, Patsky bought the stock at $4, watched it soar to $18, trimmed his investment, and bought it back when the stock tumbled. When he spoke to Wealth Manager in the summer, the stock was at around $12 a share, still a three-fold increase.
For Fisher, many small-cap stocks ooze with SRI. These are the entrepreneurial firms, the ones willing to take a chance. For example, did General Motors start Google? No, it was a couple of guys in a Silicon Valley garage.
"In the 1990s, you had small tech stocks using socially responsible investing. They weren't large companies drilling for oil in the ocean," Fisher says. Small-cap companies form the crucible of innovation. "It's hard for a big boat to turn around, but easier for a sailboat," Fisher adds.
These small caps are popular with Fisher's clients, who all think they practice SRI. "I ask customers, `What do you mean by socially responsible investing?'" To some, it means not investing in U.S. Treasury Bonds because they don't want to support military spending, so these customers avoid companies like Halliburton. Instead, the same investor may prefer corporate bonds--with the right company.
Another customer made a counterintuitive SRI move. He invested in Altria Group Inc., formerly the Philip Morris Companies, which is heavily into tobacco. When Fisher asked why, the investor explained, "I want to get a big position, so I can influence the company."
Other investors refuse to invest in tobacco. "Not one size fits all," Fisher says.
"Many people are doing positive screens, instead of just negative screens," says Hansen, the Fayetteville, N.Y. advisor. For most, the big three to avoid are alcohol, tobacco and gambling, but many financial advisors screen for positives through companies that deal in the environment, recycling, re-use and emissions control.
In Chicago, Lane--who requires a minimum $500,000 investment--develops an extensive matrix on social screens by talking with his clients and giving them questionnaires to create a specific SRI portfolio of stocks and bonds. "We find out their core beliefs," Lane says. After eliminating the usual suspects--alcohol, tobacco and gambling--the clients develop their own portfolio. Some might want to invest heavily in environmental stocks but less on recycling and don't care about solar. Others might avoid U.S. Treasuries because of the Iraq war, but approve of different U.S. agency paper because it's unrelated to the war. For SRI, Lane invests only in stocks and bonds, not mutual funds.
If you invest $2 million to $3 million, it's easy to construct a pitch-perfect SRI portfolio, Fisher explains. That way, you can eliminate gambling, alcohol and tobacco, get some high tech company cleaning scrubbers and another firm trying to clean water, and add a dash of solar power there. For others, investing just $200,000 to $300,000, investors might buy a mutual fund that is solely SRI, but not invested in the specific industries the customer prefers. Of Fisher's 600 customers, about 20 percent to 30 percent are completely SRI investors, with the remainder to varying degrees. Fisher manages $600 million.
September 11 also comes into play. After that attack and the resulting disruption of all services, citizens and investors alike became more aware of the nation's energy vulnerability. Whether they were on the far right or far left, people wanted less reliance on foreign energy sources. Consequently, renewable energy and energy efficiency in existing energy plants, created more opportunities for SRI.
And more people are becoming interested in starting SRI funds. For example, former Democratic chairman Joe Andrew is starting a mutual fund investing in companies that support progressive policies and Democratic candidates, the Wall Street Journal reported. The Blue Fund's SEC registration statement said investments would go to firms that protect the environment and treat employees fairly.
SRI "used to be just for liberals," says Fisher. But no more. Around the country there are some staunch Republicans investing in SRI. Let's say you love George W. Bush and have a summer home in Maine, close to the Bush family compound at Kennebunkport. But now you're worried about devastating storms like Katrina or rising temperatures ruining Maine's cool weather and destroying your own home. SRI makes sense even if you always pull the GOP lever.
Still, it's not easy finding the right SRI companies. Patsky rejects four out of every five "SRI" businesses he investigates, undertaking a two- to three-week vetting process that involves looking through public information to see if the company violated environmental law in addition to performing traditional analysis of the company's fundamentals and prospects for annual growth of 20 percent. Patsky also travels to the firm's major points of operation, even if that means overseas like a recent trip to Hungary. There he interviews the management on site, doing an environmental and governance review. Patsky looks for management's depth and experience. Sometimes that means asking managers how they will, say, minimize a waste stream. "You'd be surprised," he says, "how many times they say, `I have no idea.'"
When choosing a company, Green Growth will only invest 5 percent of its $400 million portfolio, or $20 million. The fund turns over its investments 100 percent every year. That may mean--as in the case of Fuel Tech--trimming the investment. Or the stock may be valuation sensitive and has met the fund's price target. In the case of another company which Patsky won't name, it may mean dropping the firm. Unfortunately, like several companies, this one backdated its options for management.
Hansen vets her SRI investments like any others--checking for the results, the returns and looking at all the statements in addition to SRI screening, both negative and positive. For her SRI customers, she invests in mutual funds; one of her favorites is Pax World Balance which, she says, gives competitive returns.
About 20 years ago, advisors used to gather for SRI workshops and 30 people attended, but these days, financial advisors favoring SRI have plenty of company Attendance is up to 500, Hansen says, and they gather for a day-and-a-half in the Rockies just to discuss SRI.
What better place than a beautiful mountain setting to talk about making a profit for your clients as well as saving the planet.
Alan Gersten, a freelance writer based in Brooklyn, wrote about reaching the Latino market in June.
