If portfolio managers push companies to be socially aware are they doing so at the expense of their investors? It depends on whom is asked but the notion of patronizing companies that have aligned themselves with broader and more subjective values has been getting a lot of attention lately.
The buzz is centered on environmental, social and governance issues -- matters that touch at the very heart of the utility business. The thinking behind such shareholder activism is that by channeling their investment dollars to those enterprises that allocate them to green fuels and technologies, they will make a difference. Corporations would thus adjust their business strategies accordingly.
“During the last three years of prolonged financial and economic turmoil, investors voted with their dollars, showing that they understand the value incorporating environmental, social and governance factors in the investment process,” says Cheryl Smith, chair of the Social Investment Forum.
The group says that about $1 in every $8 under professional management is involved with a “socially responsible investment.” That equates to about 12.2 percent of the $25.2 trillion in total assets under management that is tracked by Thomson Reuters Nelson. The value of those investments have risen by 13 percent “in the current economic downturn,” it says.
The institutional investors such as pension funds are the primary holders of those assets. They control $2.3 trillion of the $2.5 trillion in those socially-minded funds.
Critics point out that those large funds manage the monies of ordinary citizens who rely on them to retire. Pubic pensions, for example, invest the money of school teachers and fire fighters. Individual investors, by contrast, have much less sway with corporate boards and company managers.
Professional money managers, though, have a fiduciary obligation to achieve the best results in the most prudent manner. And by extension, forcing companies into questionable and unproven energy investments might very well run counter to their assignments. Critics maintain that the verdict is still out as to whether socially responsible investments do any better or any worse than those that follow fundamental market analysis.
“We respectfully disagree with that view,” responds Rick Wetmore, a certified financial analyst with Turner Investments, in a blog. “We think the stronger counterargument is that environmental, sustainability and governance issues can have a huge impact on a company’s profitability and share price, so that to ignore those issues is itself a dereliction of fiduciary responsibility.”
Indeed, doing good and achieving investment returns do equate. International Shareholder Services says that the issue has expanded beyond one of regulatory compliance to one that is now a business imperative. Two-thirds of global institutional investors that it surveyed said that good governance is both the right thing to do and that it also gives enterprises a leg up.
The evolution is occurring because activists, regulators and investors have united to make companies live up to higher standards. Major U.S. firms that include Wal-Mart, General Electric and Dow Chemical have championed the cause of sustainability. The efforts, they collectively say, are not just environmentally beneficially but also economically prosperous. GE, for example, says that its "eco-imagination" campaign is lucrative.
The United Nations has established its Principles for Responsible Investment Initiative, which works with multinational corporations and mainstream investors to better integrate environmental, social and governance issues into valuations and investment processes. The group has more than 3,000 companies that participate, all of which have agreed to report their activities and progress.
“Time and again investors have seen how environmental, social and governance issues can affect investment performance, and there is now a critical mass of institutional investors who know good management of these issues is an important factor in the long‐term financial success of their investments,” says Don MacDonald, chair of the initiative.
While corporate altruism has its cynics, the reality is that businesses must now appeal to a broad range of constituencies. By being good citizens, they are endearing themselves to their own corporate families and to the communities where they serve. In turn, they are validating their corporate images and adding value to their enterprises.