Many clients want their money invested in profitable companies they perceive as socially responsible. But they may also want to change those companies that aren't: the ones that pollute, those that produce goods with potentially harmful chemicals, those that manufacture in countries with child labor or those that pay exorbitant CEO salaries.
Enter the socially responsible investment manager, whose job is not only to pick companies doing the right thing, but also to "engage" others on environmental, social and governance concerns. This means working as a shareholder advocate-writing to executives and holding meetings with them, attending shareholder meetings, filing shareholder resolutions or partnering with other activists to push corporations to change bad environmental or social practices.
A manager who can pick responsible, strong performers and can goad other companies has a better chance of winning business from those clients with an ethical bent. Because what those clients get is strength in numbers. An offending company doing business in the Sudan, for example, is more likely to stop its practices when facing a money manager and his like-minded clients with millions of dollars than it is likely to bow to one lonely shareholder.
Joanne Dowdell, the director of corporate responsibility at Sentinel Financial Services Company in Montpelier, Vt., says some investors specifically seek SRI firms knowing they will act as shareholder advocates, not just stock pickers. Sentinel itself, shepherding $5 billion in assets under management and more than 100,000 investors, has two full-time shareholder advocacy analysts.
Dowdell adds that sophisticated investors push for their rights through face-to-face meetings with senior executives and regular conference calls. Among the groups sponsoring these types of calls is SIRAN (the Sustainable Investment Research Analyst Network), a working group of the Social Investment Forum, a nonprofit that represents money managers and others who support socially responsible investing. SRI managers also take the initiative themselves by reaching out directly to shareholders and stakeholders for opinions, Dowdell says.
Stu Dalheim, director of shareholder advocacy at Calvert Investments, a Bethesda, Md., investment management company with a strong SRI focus that manages more than $13 billion in assets, says access to the Internet has given investors a powerful research tool that makes them increasingly savvy. For instance, he cites the Web site proxydemocracy.com, which tracks how a variety of different investment managers and asset owners vote their proxies. As more of these tools are put out there," Dalheim says, "the general awareness [among shareholders] will increase." Calvert itself has 18 analysts in mutual funds research and shareholder advocacy.
According to the latest figures from the Social Investment Forum, 11% of the estimated $25.1 trillion in total assets under professional management goes toward socially responsible investments. The leading areas for advocacy are climate change; the environment; human rights and diversity; health care; and corporate governance and accountability, which involve CEO pay, company political contributions and proxy voting.
"Many clients are interested in what banks and other institutions are paying out in executive compensation," says Lauren Compere, a senior vice president in charge of shareholder advocacy at Boston Common Asset Management, a socially responsible investing firm in Boston with $983 million in assets under management. About half of the firm's clients are high-net-worth individuals and the rest are institutions. "I think every investor wants a well-run company, good corporate governance, real oversight of executive compensation and disclosure," she adds.
Meanwhile, the government is listening to those investors willing to agitate for what they want: The Securities and Exchange Commission's Chairman Mary Schapiro said the economic crisis and concerns about corporate accountability prompted the SEC in May to propose proxy rule changes. That proposal would make it easier for institutional shareholders, such as pension and mutual funds, to have their candidates for boards of directors listed on proxy material without added cost to the shareholders.
"This proposal represents nearly seven years of debate about whether the federal proxy rules should support-or stand in the way of-shareholders exercising their fundamental right to nominate directors," Schapiro says.