Some advisors are focusing their practices on socially conscious investing.
Mary C. Rinehart, a certified financial planner,
founder and president of Rinehart & Associates in Charlotte, N.C.,
describes herself as a "tree hugger from way back." Now, she heads a
financial planning and asset management firm that puts that same "tree
hugging" philosophy into practice for her clients through socially
conscious investing, which she calls, "Investing with your values."
Although her description of herself might be a bit
cliched, it fits a growing number of financial planners who have turned
their personal beliefs into a business philosophy for their clients, as
they navigate the rewards and risks of investing with a goal of
advancing social causes as well as making money.
The phenomenon of investing for a purpose, as well
as for profits, has grown from a fledgling industry dismissed by
serious financial planners to become a significant share of the
investing community that planners and corporations can no longer
ignore. A growing number of financial planners are dealing
predominantly with socially conscious investing, while some are
developing an expertise in it because of personal beliefs. Others are
just beginning to get their feet wet through clients who inquire about
putting their money to work for their values.
"I started thinking about socially responsible
investing a long time ago," says Rinehart, "when I had to take care of
my family's financial affairs. That is how I eventually ended up here,"
as a CFP who advertises services for socially conscience clients and
whose SRI clientele is growing. Along the way, Rinehart has served as
president of the local chapter of the Institute of Certified Financial
Planners and received a Business Achievement Award from The Business
Journal of Charlotte.
"Before I was a financial planner, I helped
establish a tree commission and helped divert a road to save trees, so
I have always worked for the environment. Now, as a planner, I
feel if someone has a passion for values, I have to help them put their
money where their mouths are. But this is a new way of thinking about
investing money, and it is not a decision to be made quickly. I have to
get to know someone first and determine what they want," says Rinehart.
Those who dismiss socially conscious financial
planners as being a fringe element of the financial community, or those
who think an investor has to sacrifice returns in order to promote his
or her values, are wrong, Rinehart and other SRI planners say.
According to the Social Investment Forum, an
industry organization that tracks social investments and releases a
study on the status of SRI every two years, socially responsible
investments climbed to $2.14 trillion in 2003, an increase over 2001,
and a dramatic growth from its small beginnings in 1972 of $200
million. Investment portfolios screened for social or moral
responsibility grew 7% from 2001 to 2003, while all professionally
managed portfolios fell 4% during the same period, the Forum's most
recent study says.
Like investment returns in general, SRI investments
can be up or down, depending upon the particular investments or time
periods quoted. Although SRI domestic stock funds have not done quite
as well as non-SRI domestic stock funds in recent years, according to
Morningstar Inc., even those numbers can be deceiving. SRI domestic
stock funds returned 9.93% in 2004 compared with 11.95% for non-SRI
funds. In the worst market year, SRI stocks lost 20.8% while non-SRI
stocks lost 20.37%, according to Morningstar.
"Those numbers can be misleading. Like any other
stock you have to look at what SRI stock you are buying," says Greg
Carlson, Morningstar fund analyst. "This is a broad group. There are
single-issue funds that focus on, say, the environment, or that are
oriented toward a particular religion, Christian or Islamic, that do
just as well as overall funds. Investors should not lump all SRI funds
together."
Tom Roseen, senior research analyst with Lipper, a
Reuters company that tracks investing, agreed. "Not all SRI funds are
created equal. It depends on what the focus is. If we are involved in a
war, and you do not want to invest in armaments, you will miss out on
that. But when the war is over, and we de-escalate, those with military
investors may be stuck with excess baggage.
"You have to consider the stickiness of the assets.
Most who invest for a cause stay the course, and in the end they will
have a positive net flow," Roseen says.
The returns for the past year for SRI stocks averaged 3.51%, compared
with returns for all U.S. diversified stocks of 4.13%, but the range
for individual SRI stocks is wide, everything from 1% and 2% losses to
10% and 12% increases, according to detailed calculations by Lipper.
No matter what the returns are, more and more
investors are beginning to question where their money is going and what
it is doing, says Lincoln Pain, a certified financial planner in
Berkeley, Calif., who is a representative of First Affirmative
Financial Network, a Colorado-based investment advisory firm that
specializes in serving socially conscious investors. Like Rinehart,
Pain, a civil rights worker in the 1960s, describes himself as a
lifelong social activist. In the financial field, he has been a board
member of the Social Investment Forum and is now chairman of the
Northern California chapter of the association.
"The Calvert Group, which manages several SRI funds,
commissioned several studies recently that showed that 71% of investors
say they are more likely to invest in mutual funds that invest in
companies involved in the community, 67% say they are more likely to
invest in mutual funds if one of its principles is concerned with the
environment, and 63% who do not have an SRI option in their 401K said
they would like one made available," Pain says.
"The message is that everywhere across America,
financial planners are serving clients who have social concerns," he
concludes. "Planners need to ask investors what their social concerns
are, such as tobacco addicting children, pollution, nuclear weapons, or
corporations that discriminate or use sweat shops, rather than simply
asking if they are SRI."
Planners who serve clients' social concerns, whether
the client initially acknowledges those concerns or not, are better
serving the client and themselves, Pain argues. "When I involved
clients in shareholder activism, they stayed with me, even during the
down years of 2000 to 2002."
Some SRI funds have come under criticism recently
for not being responsible enough. Paul Hawken, author, environmentalist
and entrepreneur, has lead recent attacks saying SRI funds have no real
standards and their investment portfolios do not differ much from
standard portfolios. A recent story in Fortune magazine questioned how
green environmental funds really are, even as they gain market share
and meet performance goals. Creators of the funds defend their
investment choices and some work to change the less-than-perfect
companies where investments are placed.
"Every dollar you invest is doing two things:
working for you financially and helping to capitalize the corporations
that are creating the future in which that money will be spent. This is
always happening, whether you pay attention or not," Pain warns. "SRI
is in the process of taking responsibility for both of these things. If
we capitalize pollution, how much will that clean-up cost our children?
It is a myth to think SRI has no effect on the corporations. Nelson
Mandela thanked social investors for helping to end apartheid."
Moore of First Affirmative says she was engaged in
shareholder advocacy before she even knew there was a term for her
activities.
"I am a product of the '60s, so my interest in
social causes came before I became a professional planner," Moore says.
"I inherited some stocks and started with that. Then when I decided to
become a CFP®, I knew that was the approach I would take. As it turns
out there are a lot of people in the Portland area who want to be
conscientious in what they buy. I do not turn people down if they are
not interested. I follow the client's lead, but a lot of the process is
having that conversation with the client. Sometimes they are vague and
sometimes it is quantifiable. Sometimes there are compromises that have
to be made. For instance, a company's history of labor relations may be
harder to measure than their effect on the environment, and the SRI
universe is smaller, so you have to substitute. I put real estate
investments in the mix to diversify. But there are a lot of Web sites
and publications to help the planner learn about funds and learn to
balance portfolios."
Each of the planners interviewed noted the growing
number of outlets for information and for exchanging tips and sharing
questions. These include First Affirmative, the Social Investment
Forum, GreenMoneyJournal.com, shareholderaction.org, coopamerica.org
and socialfunds.com, and the growing number of SRI funds
themselves-Domini, Pax, Portfolio 21, Calvert, Citizens Fund, the
Parnassus Equity Income Fund and many others. The main factor for those
involved in SRI advising is to present it as an option to clients.
"We cannot be afraid to present it as an option,"
advises Kathleen M. Rehl, of Rehl Financial Advisors in Land O'Lakes,
Fla., who also arrived at socially conscious investing via a personal
route. A former college professor and employee of not-for-profits for
ten years, she is married to a minister and accepts only clergy and
others of "generous spirit" for clients.
"I work with middle-income clients, doing a number
of different screens for investments. I call what I do 'values-based
planning, but the financial returns are quite similar to other
investments. Perhaps these types of companies are less litigious in
nature and therefore have lower costs."
Portfolios can be created by eliminating some
companies through negative screening or including others through
positive screens, but what those screens include and the goals of the
investor can vary drastically from one client to another. For that
reason, the client needs to take the lead in setting the standards, not
the financial advisor.
For Jerry Wade of Wade Financial Group Inc.,
in Minneapolis, the process includes both socially responsible and
morally responsible screening, if the client wishes, so that the
investments can reflect environmental or labor concerns and
conservative Christian values, as well.
"We tried this ten years ago and it fell flat on its
face, but then recently we had a client ask for it and he refused to
invest with us unless we could construct a socially and morally
responsible portfolio," Wade says. "We created Integrity 100, 100
stocks that screen out morally offensive investments, such as
antifamily entertainment or abortion advocates, and it has been a
winner."
Wade's other passion is corporate malfeasance and
corporate scandals, and he has created the Fundpolice.com, where anyone
can research corporate governance before investing.
Wade's morally responsible investments are becoming
more popular, although people may select different items to be part of
the screen. The most popular one, which crosses religious
denominations, is screening out any company that deals in anti-family
entertainment, such as offensive rap music or pornography. Others who
are against abortion will not invest in pharmaceutical companies that
produce the RU46 abortion pill, or any companies that provide support
for Planned Parenthood. Screens can also be added to eliminate
gambling, tobacco and alcohol.
"The most difficult is companies that aggressively
promote nonfamily lifestyles, such as providing health care benefits
for unmarried couples. That eliminates about 50% of the S&P 500 now
and some say it will be 90 percent soon. I tell clients they have to
think carefully about how important that issue is to them," Wade says.
However, many small and mid-cap stocks are still available to these investors, he said.
In many instances, investment advisors and
organizations that screen for religious values, as well as social
issues, are becoming more active as stockholders, putting pressure on
companies that do not strictly adhere to the values the investors would
like. Members of the Interfaith Center on Corporate Responsibility, an
association of 275 faith-based institutional investors, recently filed
shareholder resolutions demanding more accountability from
pharmaceutical companies about where their political contributions go.
Likewise, Christian Brothers Investment Services
Inc., based in New York City, works with companies it invests in to
promote human rights or other issues.
"We have had great success in changing companies.
The goal is to open a dialogue with the company, but, if we can't, we
encourage shareholder resolutions," said John Wilson, director of
socially responsible investing for Christian Brothers. The organization
invests for Catholic institutions based on the guidelines of the Roman
Catholic Church and has $3.5 billion in assets under management for
more than 1,000 Catholic institutions.
Christian Brothers investments are screened to
eliminate companies that promote abortion or contraception. Companies
that support embryonic stem cell research were recently added to the
ban. Major military contractors are eliminated, as are those that
support the use of landmines or make firearms.
First Affirmative representative Jim Frazin, founder
of Your Money and Your Life in San Francisco, maintains that screening
out companies that are poorly or criminally governed, as well as ones
that treat employees or the environment poorly, improves the bottom
line for investors.
"I started in the '70s managing cooperatives and
credit unions, socially responsible organizations, so that is also the
way I approached investing from the beginning, and the Bay area seemed
ripe for that type of financial planning," Frazin says.
"People with any kind of conscience want to do this,
and they fare reasonably well financially. SRI is rapidly approaching
the mainstream; 75% of the people have heard about it or thought about
it, and stressing corporate responsibility has had a huge impact. When
shareholders take action to bring changes to a company, even if they
are voted down, it at least means the issues are being discussed.
Instead of talking about the bottom line, they are talking about how to
improve the world, and that in turn often translates into bottom line
improvements," Frazin argued.
Paul Winter, on the other hand, did not set out to
do SRI and was taken by surprise when he opened a new practice and two
clients asked him about it. Founder of Five Seasons Financial
Planning in Holladay, Utah, he noted that many of his clients moved to
Utah to be closer to nature, so environmentally responsible investing
is a niche he wants to cultivate, although he acknowledged SRI makes
the advisor's job more difficult.
"Sometimes it is a lack of education on the client's
part about the availability of funds that keeps people from asking. At
the same time, one of the weaknesses currently of SRI is the lack of
international funds to invest in, but I think that will develop
eventually," Winter noted. "But that brings up a question: If there are
funds available that do not quite meet a planner's financial criteria,
should we be relaxing our investment philosophies or biases somewhat to
accommodate the values or desires of our socially conscious clients?"
It is a question Winter says he will have to confront as he develops a socially conscious client base.
Karen DeMasters is a freelance writer
based in New Jersey who is a regular contributor to The New York Times
and various business publications.