Socially Responsible Investing

Sustainability and the Stock Market

A game changer for company value?

By Jeff Zelkowitz

United States retirement plans have lost trillions of dollars since the subprime meltdown began. The ultimate flight to quality is under way as investors search for safety. The repercussions of this crisis are likely to be far-reaching in how shareowners assess future risks and how they view long-term corporate sustainability.

Taking sustainability beyond the universe of socially responsible investment (SRI) and into the institutional mainstream is a potential game changer. And it has major implications for corporate strategy, reporting systems and communication.

It’s been quite a decade for investors. Corporate scandals and greater recognition of environmental and energy impacts have already taught them to think differently about risk and opportunity. When former Vice President Al Gore teamed up with David Blood of Goldman Sachs to launch Generation Investment Management, their intention was to establish a model that recognizes the materiality of environmental, social and governance (ESG) factors as long-term value drivers.

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Capturing Responsible Investment

Jerry MoskowitzCorporation’s role in mitigating risk to attract investor assets

By Jerry Moskowitz

A great deal of attention has been focused lately on the idea of socially responsible investment (SRI). According to an annual report from the Social Investment Forum, approximately $1 of every nine under professional management in the U.S. is involved in SRI. Assets under management linked to SRI in the U.S. alone reached $2.71 trillion by the end of 2007. This number represents 18 percent growth from since 2005, compared with 3 percent growth across the broader investment universe, according to the same report.

Many U.S. companies have already identified the trend toward responsible investment and are well aware of the fact that capturing these assets depends on pursuing a corporate responsibility policy. The challenge is to identify what types of “responsibility” investors care about most.

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Fidelity, Mutual Fund Industry Feel Shareholder Heat on Darfur

Management opposes first resolution in the sector on Sudan genocide

By James C. Hyatt

Fidelity Investments finds itself facing the mutual fund industry’s first shareholder resolution campaign, a drive generating a lot of heated rhetoric and investor protests.

The objective: a demand to drop investments in companies that, “in the judgment of the (fund) Board, substantially contribute to genocide, patterns of extraordinary and egregious violations of human rights, or crimes against humanity.”

The Investors Against Genocide campaign asserts that two Chinese oil companies, PetroChina and its parent China National Petroleum Co., by doing business with Sudan, are providing funding that the Sudanese government uses to “conduct genocide in Darfur.” (Two other companies, ONGC of India and Petronas of Malaysia, also help provide oil money that supports Sudan, the campaign asserts.)

The campaign notes that 24 states and 60 colleges already have made a decision to divest investments in companies operating in Sudan, and that 200,000 people have “registered complaints against Fidelity for investing in genocide.

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Socially Responsible Fund Assets on Rise

Shareholders show increased resolve to support proxy ballotsgraph

By James Hyatt

Total assets of professionally managed socially responsible funds rose more than 18 percent between 2005 and 2007, the Social Investment Forum reported.

The study identified $2.71 trillion in total assets invested in one or more core strategies—screening, shareholder advocacy and community investing.

Socially and environmentally screened funds rose 13 percent over the two years, and the number of such funds rose to 260 from 201. The study, for the first time, identified eight exchange traded funds (ETF) with $2.25 billion in total net assets. While ETFs accounted for only one percent of the total assets of screened funds in the study, “they promise to be a dynamic catalyst for SRI growth in the future,” the report said.

The average level of shareholder support for resolutions on social and environmental issues increased 57 percent from 9.

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Shareholder Year in Review

Institutional Shareholder Services tracks the trends and changes for the 2007 proxy season in report.

By Danielle Lee

Institutional Shareholder Services (ISS) discovered a focus on accountability, engagement, proposals for takeover defenses and social issues in their report on the 2007 U.S. proxy season. Overall, ISS found that individual investors had a good season in terms of attracting investor support.

Specific shareholder proposals targeting takeover defenses made headway, such as the “poison pills” proposal that won 73.4 percent at Hewlett-Packard and the proposal at Walt Disney for a 75 percent independent director vote to adopt or amend a pill plan, which was later adopted by the company after modification and 58 percent support. Conversely, ISS found that pill-related proposals received 47.8 percent support across eight meetings where results are known, a drop from 55.6 percent support last year.

Investors did show great support for proposals asking companies to abolish classified boards and hold annual elections for all directors and proposals asking companies to eliminate supermajority requirements to approve bylaw changes.

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Green Is Gold, According to Goldman Sachs Study

Recent report finds corporations that lead in corporate responsibility also lead in the market.

By Margo Alderton

A new report, released by investment bank Goldman Sachs at the UN Global Compact Summit July 5-6, found that companies that are considered leaders in environmental, social and governance (ESG) policies are also leading the pack in stock performance—by an average of 25 percent.

In an analysis of more than 120 ESG leaders from five different industries—energy, metals and mining, food and beverage, pharmaceuticals and European media—Goldman found that companies in four of the sectors for which it had published reports (energy, mining and steel, food and beverages, and media) outperformed the MSCI world Index by an average of 25 percent since August 2005. 72 percent of the companies on the list outperformed industry peers.

Goldman’s findings are contrary to other findings that “ethical” indices, such as the FSTE4Good and Dow Jones Sustainability Index, have underperformed in recent years.

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Choices Expand for “Green” Investors

Investment indexes with a socially responsible tone abound, but it appears there is always room forGreen more.

By James Hyatt

In February, JPMorgan and Innovest Strategic Value Advisors announced the first bond index “designed to address the risks of global warming.”

The new JPMorgan Environmental Index-Carbon Beta is intended to take into account risks and opportunities bond issuers face as they address climate change.

The new index is based on JPMorgan’s U.S. Liquid Index, a benchmark for the U.S. investment-grade corporate bond market. Then the calculations are adjusted using Innovest’s environmental analysis.

“For example,” the companies said, “within the automotive sector, an automaker that has curbed emissions from its plants and produces a fleet of vehicles with relatively high fuel efficiency might be overweighted compared to an automaker that has not taken such steps.

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Rates of Return

How best to accomplish a foundation’s mission? Passive investment vs. shareholder activism

By Michael Connor

Bill and Melinda Gates may not be that unusual after all—at least when it comes to the investment policies of their eponymous foundation. The Gates Foundation is the largest in the world, with an endowment larger than the gross domestic products of 70 percent of the world’s nations.

Amidst general praise for its work on social issues, the foundation found itself in the spotlight in January following the publication of a two-part Los Angeles Times investigation, which claimed that hundreds of Gates Foundation investments have been in companies that “contribute to the problems of health, housing and social welfare that the foundation tries to solve.”

Among examples cited by the Times: a polio and measles vaccination program in Nigeria that takes place amidst pollution filled with “toxic byproducts” from nearby petroleum plants—owned by oil companies in which the Gates Foundation has invested $423 million.

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5 Tips for Talking to Shareholders

CommunicationsInvestors are listening—is your company’s investor relations team prepared to talk about corporate responsibility?

By Karin Kane

A recent thomson Financial survey showed that 89 percent of institutional investors rate corporate responsibility as a primary or secondary influence in their decision making. In North America alone, portfolio managers representing more than $13 trillion in assets take corporate responsibility concerns into consideration. With the investor relations department as the main point of contact for this group, investor relations officers (IROs) must be aware of current trends in corporate responsibility and be prepared to deal with investors’ concerns. Unfort­unately, IROs are rarely aware of shareholder concerns in this area or how to address them when they arise.

In fact, although 66 percent of investment relations professionals believe their board is not paying enough attention to shareholders’ corporate responsibility concerns, few know what steps to take or how best to communicate the company’s practices in the area.

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Vote Blue, Invest Blue?

DonkeyJust days before the November elections, advertisements began popping up on the liberal political website Daily Kos promoting the Blue Fund, described as the “The First No-Load, No Republican Mutual Fund.”

The Fund, actually a pair of funds, takes social investing to a new level, adding what it calls “political factors” to the more commonly used social issues. “We build our portfolios on core Democratic values like environmental sustainability, community participation and respect for human rights,” the Fund says. “Then we go a step further, investing only in those companies whose political contributions demonstrate a sincere commitment to these values.” Joe Andrew, chairman of the Blue Fund board, is a former chairman of the Democratic National Committee.

The fund excludes companies selling firearms and tobacco products, and screens for companies that give more than 50 percent of their political donations to Democratic organizations or candidates.

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