By Ellie Winninghoff
Customer satisfaction, employee access to health care, and carbon emissions per unit of revenue aren't the sorts of metrics you find in a company's financial statements. But they represent non-financial impacts companies create. And they are among the 30 or so environmental, social and governance indicators that HIP Investor Inc. says can lead to higher profits.
"These are not ethical values but leading indicators of performance," says Paul Herman, CEO of HIP, which stands for Human Impact + Profit. The San Francisco-based registered investment advisor and asset manager employs a multi-disciplinary approach that marries finances with sustainability. Among other things, the company offers separately-managed accounts for client portfolios and has developed a handful of investment indexes based on its sustainability ethos.
That includes its HIP 100 portfolio that uses the company's proprietary sustainability criteria to re-weight the S&P 100 index, which is based on market capitalization.
"You own more of the leading sustainability companies and less of the laggards," Herman says. "This allows you to be more diversified [than if you invest in a traditional SRI fund.]"
In terms of how companies are weighted, the difference between the S&P 100 and the HIP 100 can be significant. The HIP 100's top three holdings are Intel, Hewlett-Packard and Cisco Systems, which are numbers 17, 42 and 23 in S&P's index, respectively. They account for 4.8% in the HIP portfolio versus 3.9% in the S&P index.
In contrast, the top three firms in S&P's index are Exxon, Apple and IBM, which rank as numbers 28, 37 and 11 in HIP's portfolio. They account for 13.5% of S&P's capitalization versus just 3.73% of HIP's portfolio.
Since inception on July 30, 2009, the HIP 100 return as of Dec. 31, 2011 was 32.5% compared to 29.7% for its benchmark S&P iShares ETF.
Now HIP has applied its sustainability scoring system to preferred stocks and real estate investment trusts. In December, it introduced HIP Preferred, a portfolio of 60 preferred stocks yielding 5.75%. And the HIP Sustainable Real Estate, a portfolio consisting of 45 securities expected to yield 4.2%, will go live in this year's first quarter.
While HIP's weighting of common stocks since inception has outperformed the S&P 100, the firm's performance was weakest last year. Herman attributes this at least in part to an overweighting of banks, which he notes were taking customer deposits and using them to take investment banking risks. "A lot of banks have systemic risk due to the way they're operating," he says, "and they are not treating the customer in a HIP way."