"We do not go to the extreme of calling all oil companies bad," says Tessie Petion, an analyst at Domini Social Investments. "But we try to take a balanced view by considering what companies are doing to mitigate the impact they have on the environment."
To that end, Petion and her group typically prefer gas companies for energy exposure because they produce a cleaner form of energy than oil companies. In addition to using environmental screens, Domini also monitors companies' human rights track records-a big area of concern in these industries, since the work is labor-intensive and often goes on in countries with lax regulation. Domini works with other SRI investors in advocating for these rights.
Domini also weeds out environmental slackers from its portfolio. One company that got the boot from the firm's approved list in late 2009 was oil and gas exploration company Statoil. For years, the company took steps to reduce greenhouse gas emissions. But its environmental track record has taken a turn for the worse with its more recent forays into oil sands production, which requires a large amount of energy. By contrast, Energen, a diversified energy company, gets the nod because it derives more than 40% of its revenue from the distribution of natural gas, generally considered to be more clean-burning than fossil fuels.
Other SRI funds invest in what they consider environmentally responsible materials companies whose fortunes are tied closely to commodity prices. Portfolio 21, for example, likes metals manufacturer Nucor. Although steel manufacturing is a polluting, energy-intensive endeavor, Nucor is one of the largest users of scrap steel in the U.S., and the average amount of recycled content in its products is more than 85%. The Parnassus Fund, meanwhile, has a stake in Valero, the largest U.S. independent petroleum refiner. Valero has taken steps to reduce sulfur dioxide emissions and has implemented a low-sulfur gasoline and diesel program.
The Appleseed Fund, another SRI offering, has had holdings in traditional energy companies as well as a substantial allocation to precious metals. Among the former is Noble Corp., the only offshore contract driller that produces a sustainability report. According to fund manager Adam Strauss, Noble is "the only company among its peers that posts a proactive policy to address climate change. We have also looked at their environmental record in regards to emissions, spills and EPA fines, and Noble matches up very well against its peers in terms of the environmental impact of their operations."
Appleseed also owns a substantial position in gold through ETFs such as the SPDR Gold Trust and the iShares COMEX Gold Trust. Since both are backed by gold bullion held by a bank custodian on behalf of the respective trusts, Strauss says they follow gold prices well and provide an effective portfolio hedge while buffering investors from the poor environmental and labor practices of many gold mining companies.
Since ETFs have become the entry point of choice for many commodity investors, it's become critical for SRI investors to examine how such funds gain exposure to the markets. Some ETFs use stores of metal or futures contracts to mimic commodity prices-a strategy deemed acceptable to some socially responsible investors because it is not a direct investment in the companies themselves. Other ETFs, however, may take a stake in a mining company, even though it doesn't have a stellar environmental track record.
The MarketVectors Gold Miners ETF, for example, seeks to closely replicate the performance of the NYSE Arca Gold Miners Index, which is composed of publicly traded companies worldwide involved primarily in gold mining. The fund's top holding is Barrick Gold, a major Canadian miner. Barrick faces environmental litigation related to its subsidiary Placer Dome, which, before it was bought by Barrick, was involved in a well-publicized mining disaster in the Philippines that had a devastating impact on the area's waterways.
The lesson here is, when it comes to commodity investments, environmental track records are relevant not only to green investors, but to anyone concerned about the long-term risk to a company's business.