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Introduction to Sustainable, Responsible, Impact Investing
Transcript of Introduction to Sustainable, Responsible, Impact Investing
Vice President, Investment Solutions
First Affirmative Financial Network, LLC I do not own shares of any of the specific companies mentioned in this presentation.
Nothing in this presentation should be interpreted as investment advice, or as an offer to buy or sell securities.
Any performance figures contained herein are based on information sources believed to be reliable, and are not to be interpreted as a guarantee of future results.
The views expressed are my own, and not those of First Affirmative Financial Network, LLC, or of anyone else associated with First Affirmative. A Few Quick Disclaimers: PhD, Philosophy (Ethics & Social Philosophy)
Accredited Investment Fiduciary (TM)
Certified Financial Planner (TM) Johann A. Klaassen Investment Advisory Representative and
Vice President of Investment Services First Affirmative Financial Network is an Independent
Registered Investment Advisory firm. We work to support
investment professionals who focus their efforts on
environmental, social, and corporate governance issues --
helping our clients to vote with their dollars for a positive
transformation of our economy and society, toward a
socially just and environmentally sustainable world! What IS "SRI"? Don't be confused ... Socially Responsible Investing (“SRI”)
Socially Conscious Investing
Socially Aware Investing
Values-Based Investing Mission-Related Investing
ESG (Environment, Social, Governance)
Sustainable and Responsible Investing (“SRI”)
Transformative Investing These all amount to something like: We create and manage investment portfolios that align personal values and/or institutional mission with an investment strategy tailored to the specific needs and goals of each investor. Traditional Investment Advice Process: Investors Investment Managers Quantitative Financial Research Diversified Portfolios Stocks - Bonds - Cash
Alternative Strategies SRI Investment Advice Process: Investors Investment Managers Quantitative Financial Research Diversified Portfolios Stocks - Bonds - Cash
Alternative Strategies Extra Value Qualitative, "Extra-Financial" Research Three Key SRI Strategies: Screening (positive and negative)
Community Investments / Microfinance Screening - Positive and Negative Negative Screening Avoid companies involved in: Tobacco - Alcohol - Firearms - Gambling
Problematic environmental practices
Nuclear power Positive Screening Seek out companies involved in: Positive environmental practices - Animal Welfare
Consumer safety / protection - Human Rights
Corporate governance / Equal opportunity Shareholder Advocacy Most corporations simply don't care
whether they're included in any
particular client's portfolio or not.
So how can we change their behavior? If we own the shares of a company, we
have certain kinds of rights:
Dialogue with corporate management
File shareholder resolutions
Vote proxies Community Investing and
Microfinance Sustainable, Responsible,
Impact Investing Creating opportunities for the economically disadvantaged
Focuses on those underserved by traditional financial institutions
Affordable housing and child care
Locally-owned and minority-owned businesses (micro-enterprise)
Living Wage Jobs 2006 Nobel Peace Prize Awarded to Muhammad Yunus, founder of the Grameen Bank, a microcredit pioneer in Bangladesh “We must address the root causes of terrorism to end it for all time. I believe putting resources into improving the lives of poor people is a better strategy than spending it on guns.” So ... Why doesn't
invest this way? The Performance Question If you were to ask most professional investment advisors to do SRI investing in your portfolio, they'd probably tell you that they wont ... or can't ... because "it's just a way to lose money".
This is an unfortunately outmoded way to think about SRI. The Moskowitz Prize www.SRIStudies.org 2004: "Corporate Social and Financial Performance: A Meta-Analysis"
Marc Orlitzky, Frank Schmidt, Sara Rynes Scrutinized more than 50 academic reports and concluded that “there is a positive association between corporate social performance and financial performance across industries and across study contexts.”
This link varies from highly positive to modestly positive because of contingencies such as reputation effects, market measures of financial performance, or corporate social performance disclosures. 2007: "Does the Stock Market Fully Value Intangibles? Employee Satisfaction and Equity Prices"
Alex Edmans, Professor, The Wharton School Screening for employee satisfaction can improve returns
Best Companies to Work for in America 1995 – 2005 earned over twice the market return while outperforming industry benchmark Index Performance Client Performance Quick Historical Questions: Q: How long have “limited liability corporations” existed? A: The laws enabling the creation of LLCs, and so of the modern corporate structure, were created in the mid-1800s – most notably Great Britain’s “Companies Act” of 1862. Q: What was the average daily trading volume on the NYSE in 2008? In 1958? In 1908? Earlier points of interest? A: 2008: ~3.8 Billion shares;
1958: ~3.2 Million; 1908: ~410k.
First day with more than 1 Million shares traded: 1886.
Worst single day in history: March 6, 1830: 31 shares. Q: When was the Dow Jones Industrial Average first published? A: May 26, 1896. The Point? Almost anything you hear about “long-term historical averages” is based on either
(a) actual data from the last ~150 years or less, or (b) estimates of longer term history.
Marx was wrong to proclaim the “death of capitalism”; it evolved, in part due to his critique. Can we induce a similar moment of evolution, toward a truly sustainable capitalism? Sustainability and the Long Now How long is “long term”?
One year? (IRS definition of long-term capital gains and losses)
Ten years? (Most investment advisors / financial planners)
One generation / 30 years? (Longest US Treasury bond)
Seven generations / ~210 years? (Six Nations Iroquois Confederacy)
Ten thousand years? (Long Now Foundation) I believe that if we plan our economic activity out beyond the next quarter, the next year, the next ten years … If we look at the impact of our economic activity on the next generation, on our own children, we MUST pay attention to issues of environmental sustainability and social justice.
What might such an economy look like? Resources: First Affirmative Financial Network: www.firstaffirmative.com
Social Investment Forum: www.socialinvest.org
Markowitz Prize Papers: www.sristudies.org
KLD Analytics: www.kld.com
IW Financial: www.IWFinancial.com
UN Principles for Responsible Investment:
www.unepfi.org/work_programme/investment/principles/index.html Redacted for Compliance reasons 2011: "Does Corporate Social Responsibility Affect the Cost of Capital?"
Sadok El Ghoul, Omrane Guedhami, Chuck C. Y. Kwok, and Dev R. Mishra Firms with strong corporate social responsibility (CSR) scores enjoy consistently lower costs of capital financing than firms with weaker CSR track records Part of an answer is in my article, “Sustainability and Social Justice”, rececntly published in the collection “Responsible Investment in Times of Turmoil”, edited by Wim Vandekerckhove, et al. (Springer, 2011), available on request. "Move Your Money" "The Move Your Money project is a nonprofit campaign that encourages individuals and institutions to divest from the nation's largest Wall Street banks and move to local financial institutions. Little has changed to prevent another financial crisis or to end 'Too Big To Fail,' and with Congress unwilling to act, we are encouraging individuals to take power into their own hands by voting with their dollars and no longer contributing to a financial system that has led our country astray. We are a campaign that gives people real, concrete actions they can take to create a more sane, stable and localized banking system. "