 Personal
Finance Best Practices
Ethical Investing
No Longer an
Oxymoron
Provided by John Hamerlinck
UBS Financial Services, Inc.
A growing number of people are investing to achieve
change – change in the future of their communities, the
environment and the world. As a result, over the last
ten years the amount of assets managed according to
socially responsible criteria grew at a faster rate than
the entire universe of managed assets in the United
States. Socially responsible investing (SRI) assets rose
more than 258 percent from $639 billion in 1995 to $2.29
trillion in 2005.
SRI is an investment process that considers the social
and environmental consequences of investments, both
positive and negative, within the context of rigorous
financial analysis. Social investment managers often
overlay a qualitative analysis of corporate policies,
practices and impacts onto the traditional quantitative
analysis of profit potential.
Today, nearly one out of every ten dollars under
professional management in the United States is involved
in socially responsible investing. According to the
Social Investment Forum’s most recent biennial report1,
$2.3 trillion out of the $24.4 trillion in total assets
under management are in professionally managed
portfolios utilizing one or more of the three core
strategies that define SRI: Screening, Shareholder
Advocacy and Community Investing.
Screening
Screening is the process of
including or excluding securities from a portfolio based
on social or environmental criteria. There are two types
of screening: positive and negative.
Positive screening attempts to identify profitable
companies with a history of excellent employee
relations, community involvement, and environmentally
conscious policies and practices. Respect for human
rights and safe, useful products are also often
considered. Investors use positive screening to invest
in industry leaders, despite the reputation of an
industry as a whole, in the hopes that the general
standard of business practices will improve.
Conversely, negative screening identifies companies with
poor records in these areas. These companies are then
excluded from an investor’s portfolio.
Shareholder Advocacy
Shareholder advocacy goes
beyond screening. Shareholder advocates will purposely
invest in companies with poor social or environmental
records and actively work with the company’s management
to improve its practices. These activities may include
filing, co-filing and voting on shareholder resolutions
that focus on social and corporate-governance issues.
They generally intend to improve a company’s policies
and practices, encouraging management to exercise good
corporate citizenship and promote long-term shareholder
value and financial performance. Thanks to the efforts
of socially responsible investing advocacy, shareholder
resolutions implemented on social and environmental
issues increased by more than 16 percent, from 299
proposals in 2003 to 348 in 2005. Additionally, social
resolutions reaching a vote rose by more than 22
percent, from 145 in 2003 to 177 in 2005.
Community Investing
This form of SRI provides
investment capital to communities not served, or
underserved, by traditional financial institutions.
Community investing gives these communities direct
access to credit, equity, capital and basic banking
products they would otherwise lack.
Community investing allows local organizations to
provide financial services to low-income residents and
supplies capital for small businesses and community
services, such as affordable housing, child care and
healthcare.
According to the Social Investment Forum, assets in
community investing institutions rose by 40 percent,
from $14 billion in 2003 to $20 billion in 2005.
Community investing assets have nearly quintupled from
the $4 billion identified a decade ago.1
What’s Behind the Growth?
SRI is one of the fastest
growing types of asset management. There are a number of
factors potentially contributing to this growth:
-
Performance. Many people
assume that SRI results in underperformance. However,
research has shown that, when properly managed,
risk-adjusted and controlled for investment style,
socially screened portfolios perform comparably to their
unscreened peers.1 In addition, a 2002 study of
international SRI mutual funds found little evidence of
significant differences in risk-adjusted returns between
ethical and conventional funds for the 1990–2001 period.
However, past performance is not an indication of future
results.
-
Information. Today,
investors can easily access a wealth of information
about SRI.
Investors are better educated and informed about social
and environmental issues. Also,
SRI organizations are better able to provide more
sophisticated information to a receptive audience.
-
Corporate scandals.
Corporate scandals involving accounting fraud and other
issues have eroded trust in company leadership. These
scandals have resulted in calls for reforms that require
more transparency, stricter corporate governance and
accountability, and greater disclosure of information.
-
Sustainability. As the
general public’s concerns about global warming,
alternative energy sources, human rights, corporate
scandals and other issues grow, new and
expanded opportunities will likely be offered to
socially-aware investors.
For More Information
If you would like to learn
more about developing an investment portfolio that
reflects your social concerns, please contact your
Financial Advisor.
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This article was provided by
John Hamerlinck, financial advisor for UBS Financial
Services Inc. Drawing on 20 years of management and
financial experience John works with business owners and
individuals that need sophisticated financial planning
and investment strategies. He recently joined UBS
Financial, one of the leading global financial firms. A
former Marine Corps veteran he holds a MBA from Lewis
University. You can contact John at 727-892-2516 or
www.ubs.com/fa/johnhamerlinck
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1“2005 Report on Socially
Responsible Investing Trends in the United States,
10-Year Review,” Social Investment Forum, January 24,
2006
2"International Evidence on Ethical Mutual Fund
Performance and Investment Style," Rob Bauer, University
of Maastricht – Limburg Institute of Financial Economics
(LIFE); ABP Investments, Kees C.G. Koedijk, Erasmus
University Rotterdam (EUR) - Department of
Financial Management; Erasmus University Rotterdam (EUR)
- Erasmus Research Institute of Management (ERIM);
Centre for Economic Policy Research (CEPR) and Roger
Otten, University of Maastricht - Limburg Institute of
Financial Economics (LIFE), July 2002.
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