Compelling Returns E-Book

Scott J. Budde

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Sprache: Englisch

Seitenzahl: 280

Veröffentlichungsjahr: 2008

Beschreibung

Achieve competitive financial returns and make a difference at the same time by applying the information in Compelling Returns: A Practical Guide to Socially Responsible Investing, a well-rounded guide to socially responsible investing (SRI). Understand the basics of SRI and discover how you can align your values with your investments by choosing from three basic strategies. Learn to implement these strategies in your investment portfolios and combine your newfound knowledge with the basic principles of successful investing. An up-to-date directory of companies involved with SRI is included.

Leseprobe

Table of Contents

Title Page

Copyright Page

Dedication

Preface

TIAA-CREF and Compelling Returns

Compelling Change and Growth

What’s in a Name?

Laying the Groundwork

Acknowledgements

CHAPTER 1 - Getting Started with Socially Responsible Investing

The Key SRI Strategies

The SRI Response

Perspectives on SRI Returns

CHAPTER 2 - Sensible Investing Habits for SRI

Keys to Successful Investing

Where to Put Your Money: Starting to Weigh Your SRI Options

CHAPTER 3 - Lining up SRI Goals with Strategies

Pairing Goals and Strategies

Aligning Values through Social Screening

Affecting Direct Change through Community and Proactive Investing

Sending Clear Signals through Shareholder Activism

CHAPTER 4 - Social Screening Strategies

Trends in Social Screening

How Does Social Screening Work?

Building a Socially Screened Equity Portfolio

Successful Investing through Social Screening

The Importance of Benchmarks

Getting Started with Socially Screened Funds

CHAPTER 5 - Community and Proactive Investing Strategies

Trends and Myths of Community Investing

Opting for the Community

Below Market Rate Alternatives

Community Investing and the Keys to Successful Investing

CHAPTER 6 - Shareholder Activism Through Proxy Voting and Engagement

Got Vote?

Proxy Basics

The Proxy Options for Individual Investors

Sample Proxy Voting Guidelines and Votes

Shareholder Activism through Engagement

Shareholder Activism and Keys to Successful Investing

CHAPTER 7 - SRI Strategies for Institutional Investors

Individual Concerns for Institutional Investing

Types of Institutional Investors

Distinguishing Characteristics of Institutional Investors

The Additional SRI Options for Institutions

CHAPTER 8 - Responses to External Critics and Key Questions within the SRI Field

External Critiques of SRI

Internal Debates within the SRI Field

CHAPTER 9 - Yielding to Compelling Returns

APPENDIX A - Social, Environmental, and Governance Resources

APPENDIX B - Financial Advisors and Planners with SRI Experience

APPENDIX C - Social Screening Resources

APPENDIX D - Community Development and Environmental Investing Resources

APPENDIX E - International Microfinance Resources

APPENDIX F - Shareholder Activism and Proxy Voting Resources

APPENDIX G - Added SRI Resources for Institutional Investors

Notes

About the Author

Index

Copyright © 2008 by Scott J. Budde. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

Published simultaneously in Canada.

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Library of Congress Cataloging-in-Publication Data:

Budde, Scott J. Compelling returns : a practical guide to socially responsible investing / Scott J. Budde. p. cm. Includes bibliographical references and index.

eISBN : 978-0-470-43245-7

1. Investments—Moral and ethical aspects. I. Title. HG4515.13.B83 2008 332.6—dc22 2008008354

To my parents, Ray and Pat Budde,whose dinner table conversation sowedthe earliest seeds for this book.

Preface

WHAT’S SO COMPELLING?

In early 2008, a librarian at a leading non-profit in New York City called me with a surprisingly common question: how can she invest in a socially-responsible way? In her case, an inheritance from her parents was compelling her to make several financial decisions. She had sizeable resources to invest at her discretion for the first time, only 10 years before retirement. Also, her own inclination compelled her to want to consider Socially Responsible Investing strategies. Importantly, I did not have the impression that she needed to be convinced of the world’s problems; this was a given. She was concerned about the practical responses available to investors—how her resources could be utilized to secure her future while contributing to a better world. Compelling Returns was written for investors like this.

Like this librarian, I came to socially responsible investing somewhat later in life. Despite growing up as the son of two educators in the relatively progressive college towns of East Lansing, MI and Amherst, MA, the bulk of my career has been spent in the mainstream of commercial banking and investment management, first in Boston and now in New York City. Starting in 2000, however, my career brought me straight back to my college-town roots through working directly with the clients of TIAA-CREF. These clients were both the many institutions that offer TIAA-CREF funds as options under their retirement plans and the employees that use those funds. In fact, there are about 3.5 million employees of academic, medical, and cultural institutions saving for retirement in these funds.

For five years I spoke with a wide range of investors about TIAA-CREF’S approach to investing. These meetings—from informal conversations to formal presentations—led to my current interest in socially responsible investing (SRI) strategies. Simply put, these clients consistently asked a wide range of questions about SRI strategies. Apart from their basic interest in financial returns and risk, they wanted to know about the social impact of TIAA-CREF investment strategies. Why did we own certain stocks? How did social screening work? Does TIAA-CREF proactively invest in certain areas? What is TIAA-CREF doing about the environment and climate change or human rights? Why can’t we fix the ethical/ accounting/compensation problems of corporate America?

The list of questions grew continually. At the end of five years, the scope of socially oriented investment questions seemed remarkably similar to dinner-table conversation at my parents’ home in Amherst, Massachusetts. It is the compelling nature of these questions that prompted me to write Compelling Returns as a practical guide to the SRI solutions available.

In 2006, TIAA-CREF confirmed the interest of its investors in socially responsible investing through an extensive survey. The survey was conducted of both the broad universe of TIAA-CREF investors and investors who used the organization’s CREF Social Choice Account—the largest fund for individual investors in the United States that uses comprehensive social criteria to eliminate some stocks from the fund and to include others. While both groups ranked financial return as their highest priority, even the broad group of investors who did not use the CREF Social Choice Account supported several SRI-related strategies and statements. For example, 81 percent of investors in the CREF Social Choice Account agreed or strongly agreed with the statement:

“When making investment decisions, what is most important to me is ensuring that my investment decisions reflect my personal values about social and environmental impacts.”1

However, 67 percent of the broad population of TIAA-CREF investors agreed or strongly agreed with this statement as well. At this point, the data were now compelling both to me and to TIAA-CREF.

Finished in 2006, this same survey also prompted the creation of my current job as head of TIAA-CREF’s Global Social and Community Investing Department—a newly formed department within TIAA-CREF Asset Management. In this role, I oversee a number of SRI strategies for TIAA-CREF including Community Investing programs in Microfinance, Affordable Housing, Community Bank Deposits, and Green Building Technology as well as extensive work on our socially screened funds (like CREF Social Choice). Also, as part of the organization’s overall approach to SRI, I work closely with TIAA-CREF’s Corporate Governance Department.

Thus, my experience is a product of my work at TIAA-CREF and the company’s own history with SRI. Fortunately, I have also had the privilege of representing TIAA-CREF in our work with a broad range of individuals, organizations, and companies that also implement or use various SRI strategies. This work in the SRI field has been critical to expanding my knowledge of SRI. I am very thankful to my colleagues at TIAA-CREF and at other organizations for taking the time to explain their history and approaches to SRI.

TIAA-CREF andCompelling Returns

While Compelling Returns includes references to TIAA-CREF’s experience and approach, the views expressed in the book are my own and do not necessarily represent the views of TIAA-CREF.

All royalties and advances from the sale of Compelling Returns will go to the Social Performance Management Center of the Grameen Foundation. This project aims to track the effectiveness of microfinance lending at reducing poverty by creating and analyzing data at the level of the individual loans. Microfinance is experiencing rapid growth and many related challenges. The Grameen Foundation has been a leader in promoting microfinance and in developing tools to measure its effectiveness at reducing poverty.

Compelling Change and Growth

Compelling Returns is designed to be a practical guide to socially responsible investing strategies. It does this by leading readers through a few basic questions:

• What is socially responsible investing (SRI)?

• What socially oriented goals do you have as an investor?

• What SRI strategies can help you meet your goals? and

• Can you implement those SRI strategies and still get competitive returns?

In fact, the last question is related to a reoccurring theme of Compelling Returns: that generating competitive returns in SRI strategies is critical. Competitive returns have helped increase the level of interest in SRI in the past. More importantly, I believe, SRI strategies will attract more investors in the future and achieve a broader impact if the underlying investment strategies continue to deliver competitive returns.

Thus, while widespread concern over social, environmental, and governance (ESG) issues has led many investors to consider SRI options, competitive returns are required to convert this interest into action. In fact, an expanding pool of individual and institutional investors is already moving SRI from a specialized investing niche to a more widely used investment strategy. This same expansion has also moved SRI from a business strategy for smaller, specialized SRI firms to an important niche business within larger investment firms, such as TIAA-CREF.

The increased momentum and demand for SRI certainly has other drivers. These include:

1. Increasing consensus on certain issues. The newfound consensus across the political spectrum on issues such as climate change and excessive executive compensation has broadened the potential customer base for SRI strategies.

2. Expanding range of ESG issues. The issues of concern to investors have expanded from general faith-based issues (i.e., avoidance of “sin” stocks) to include a wider range of ESG issues, often shaped by specific events. Some examples include increasing emphasis on social issues shaped by apartheid in South Africa or civil war in the Sudan; environmental issues shaped by the Valdez oil spill or Bhopal chemical disaster; and governance issues shaped by Enron’s bankruptcy.

3. Lack of progress on ESG issues. While the number of issues of concern has continued to increase, with the exception of apartheid, few issues have dropped off the list. Thus, from the perspective of an SRI-oriented investor, there are only more issues of concern, not fewer. In fact, the coining of terms such as ESG reflects the broadening nature of SRI strategies over time to include corporate governance and environmental issues as well.

4. Rapid dissemination of information. Technological advances (from cell phones to the Internet) have meant much faster dissemination of data and images of the underlying ESG issues. This dissemination has helped to galvanize support for social change more quickly and broadly than previously was possible. For example, the global response to issues such as climate change has gained traction more quickly than responses to earlier issues such as apartheid.

5. Greater awareness of corporate social responsibility. Corporations are increasingly concerned about and aware of their performance on environmental, social, and governance issues. Importantly, their concern often stems from purely business-oriented objectives, such as increased efficiency, reduction of risk, and enhanced marketing.

6. Convergence with conventional investing. New SRI strategies and techniques, such as environmental footprint analyses and governance rankings, are becoming useful to “conventional” investors. This convergence of some SRI strategies with the mainstream appears to be accelerating and leads both to increased demand for SRI-related funds and services such as social investing research.

7. Improving economies of scale. Many SRI strategies, from socially screened stock funds to community investing, are now large enough and profitable enough to operate at an efficient scale. This development lays a solid foundation for future growth by helping to keep costs low and returns to investors competitive.

8. Greater institutional involvement. From pension plans to philanthropic foundations to large money managers, there are more large institutional investors involved in SRI strategies. The involvement of large investors, such as a pension plan adopting some type of social screening in its investment funds, has both helped legitimize a wide range of SRI strategies and helped improve economies of scale.

These factors all contribute to an increasing demand for SRI-RELATED strategies by individual investors. However, one can still also find a wide spectrum of attitudes toward SRI. This spectrum ranges from highly skeptical to highly committed, with most investors falling somewhere between these extremes. Compelling Returns is designed mainly for those investors in the middle who may have only limited experience with SRI but are amenable to learning more and willing to consider applying the strategies in their own portfolios. Also, while Compelling Returns is not written for the two extreme points of view on SRI, each warrants a brief comment.

The highly committed investors include the many individuals who have used SRI strategies and are some of the pioneers of the field. The latter would include the founders of key institutions that are now established leaders. Two of many examples would be ShoreBank (Milton Davis, James Fletcher, Ron Grzywinski, and Mary Houghton) in the field of community investing or KLD Research and Analytics (Amy Domini, Peter Kinder, and Steve Lydenberg) in the field of social screening. These and many similar firms around the world had the foresight to build impressive foundations for future SRI growth.

Some of the specific objections of the investors who are highly skeptical of SRI strategies are addressed in Chapter 8. Up front, however, I will simply say that their dominant objections to SRI are based mainly on viewing the combination of positive social impact and competitive returns as a zero-sum game. Simply put, some believe that positive social impact must entail some sacrifice of investment returns. I believe the examples and logic laid out in Compelling Returns will indicate otherwise.

What’s in a Name?

Though Chapter 1 defines some common SRI terms—including ones that may eventually replace the term SRI itself—it is worth commenting on why I have used the term SRI. This explanation is necessary because the words Social and Responsible are inherently subjective and some practitioners even consider them a bit dated.

Most importantly, the term SRI has long, respectable roots in faith-based investing and these investors remain an important base of support for the field. In addition, the term now has widespread use and is generally perceived positively. Finally, other related terms, such as ESG (Environmental Social Governance) and sustainability fit well under an overall SRI umbrella and may even evolve to replace the SRI term entirely. Thus and until then, Compelling Returns sticks with SRI as a common term and uses it throughout the book.

Laying the Groundwork

After Chapter 1’s introduction to SRI and some of its terms, Chapter 2 introduces the broad goals that various SRI strategies can achieve and sorts out which goals might align well with which SRI strategies. While I assume that most investors reading CompellingReturns have some desire “to make a difference,” different SRI strategies lead to different types of impact in different ways, and Chapter 2 makes these connections.

Chapter 3 lays down some basic tenets of successful investing. It does so both to help investors view their SRI options as part of an effective overall investment strategy and to evaluate each of the broad SRI strategies in terms of these same tenets. Also, Chapter 3 underscores a recurring theme: that continued growth in SRI will rest on it delivering competitive returns and risks commensurate with conventional investing strategies that do not have any nonfinancial considerations. Chapters 4, 5, and 6 cover the three main SRI strategies: social screening, community investing, and shareholder activism. Each chapter is designed to give investors an idea of the basics, some investment options available, and how the strategies can work within a successful investment portfolio.

Chapter 7 includes some comments designed for institutional investors, such as endowments and foundations that are interested in SRI. There are many individual investors with strong connections to institutions where they work, to which they belong, or from which they have graduated. Chapter 7 explains some of the options and issues associated with institutions using SRI strategies.

Chapter 8 includes some rebuttals to some common criticisms of SRI. Chapter 8 also includes some of the current questions being debated within the SRI field and the author’s opinions.

Throughout Compelling Returns, I have assumed that most investors do not need to be convinced about the pressing nature of the social, environmental, and governance issues facing society. The importance of these issues and their connection to SRI is covered quite thoroughly in earlier SRI books, often by some of the pioneers of SRI in the United States. One example is Amy Domini’s Socially Responsible Investing: Making Money and Making a Difference,2 which includes many case studies of the underlying problems and their tie-ins to SRI solutions. Also, Appendix A of Compelling Returns includes a brief list of references on social, environmental, and governance issues.

My hope is that Compelling Returns helps some investors to adopt SRI strategies with their own investment funds. Even in a world with seemingly limitless investment options, there are compelling reasons to consider SRI strategies.

Acknowledgments

Writing a book while working a day job depends on the help and support of many. Within TIAA-CREF, I would have to start by thanking my boss Ed Grzybowski (TIAA-CREF’s Chief Investment Officer) and Scott Evans (head of TIAA-CREF Asset Management) for supporting this effort. Along with Herb Allison, the organization’s chairman from 2003 to 2008, these three were key supporters of TIAA-CREF adopting a more proactive SRI strategy.

In this respect, I also extend particular thanks to Amy O’Brien who works with me in the Global Social and Community Investment Department within TIAA-CREF Asset Management. Hiring Amy to work with me in this area was a major advance for the organization and I hope for Amy as well. In addition to many thoughtful comments on Compelling Returns, Amy has been an articulate, knowledgeable ally in our work to enhance the organization’s SRI strategies.

Also within TIAA-CREF, I am very appreciative of help from my colleagues in the Corporate Governance Department including John Wilcox, Hye-Won Choi, John Wilson, Peter Reali, Sonal Mahida, and Mathew Diguiseppe for their thoughts and guidance in the areas of proxy voting and shareholder engagement. Within TIAA-CREF’s marketing and communications areas, Adam Schaffer, Glen Weiner, and Brian Browdie were helpful in keeping the book on track and within the guidelines of a large organization. In this regard, Lisa Heller and Rajul Mathur spent a great deal of time giving Compelling Returns the necessary legal review and providing several helpful edits. Natasha O. Dunkley was also helpful in coordinating this review and for generally keeping me on track in my day job.

I relied on several people for help with data and research including C. Suzanne Cole, Drew Tulchin, Len Govia, Emeka Okoro, and Robin Sanders. Each responded to a number of requests in a prompt and accurate manner—and not always with the most lead time. Two readers who were helpful beyond the call of duty were my wife, Charlotte Cole (who helped proof the entire text) and my son, Luis Budde Santana, who checked all the web site references to make sure they lead to where I intended.

I am also indebted to many people across the SRI field who have taken the time to talk to me about the field and their approach. These include several individuals working for companies or on projects mentioned in this book including Jean Pogge at ShoreBank Corporation, Helen Alexander at ProCredit Holding, Josh Humphreys at Harvard University, Steven Godeke and Douglas Bauer (doing work under a grant from the Rockefeller Philanthropy Advisors), Michael Passoff of the As You Sow Foundation, and Mike Wallace at TruCost PLC. Beyond these specific individuals, certainly Shari Barenbach at the Calvert Foundation, Tim Smith at Walden Asset Management, and Tom Kuh at KLD Research and Analytics have also been particularly gracious with their time and thoughts.

Finally, I would like to thank the team at John Wiley & Sons: Debra Englander, Kelly O’Connor, Kevin Holm, and Stacey Small. I appreciate that they persevered through a long, involved planning process and provided helpful editing advice to make Compelling Returns a more compelling read.