January 14, 2003
Top Five Social Investing News Stories of 2002
by William Baue
The major social investing news stories of the year include significant corporate governance
reforms and the success of community investment.
When investors assess the significant events of 2002, many will likely fixate on financial woes.
However, these very difficulties created opportunities for socially responsible investing (SRI) and
exposed many underlying SRI strengths.
1. Corporate Governance Reforms
in late 2001 with the meltdown of Enron and extending through 2002, a handful of well-known
companies succumbed to corporate governance scandals that eroded investor confidence and raided
employee retirement savings.
The Sarbanes-Oxley Act, passed by Congress and
signed by the President in July, aims to improve auditor independence, corporate responsibility,
financial disclosure, and corporate accountability while guarding against conflicts of interest.
Also in the summer of 2002, the New York Stock
Exchange (NYSE) proposed stricter corporate governance standards for its listed companies.
While the SRI community applauded these reforms, it also pointed out that such reforms do
not go far enough to solve the pervasive corporate governance problems, which will persist until
deeper systemic reforms are enacted. Both the proposed NYSE standards and the Sarbanes-Oxley Act
retain loopholes or remain silent on such vital issues as abolishing staggered boards, expensing
stock options, and disclosing corporate environmental and social liabilities.
tragedy sometimes comes good, as these debacles finally inspired legislators and regulators to
enact some of the corporate governance reforms that are welcomed by all investors," said SRI World
Group President Jay Falk. SocialFunds.com is a network site of SRI World Group.
Related Corporate Governance Articles:
The Strengths and Inadequacies
of the Sarbanes-Oxley Act
New York Stock Exchange Calls
for Tighter Corporate Governance Standards
2. SRI Mutual Funds Weather the Bear
The year 2002 was a dismal year for the financial markets. At the close of the
year, the S&P 500 was down a whopping 23.4%, and the Dow Industrials were down 16.8%.
Nevertheless, socially responsible mutual funds performed as well as their non-SRI peer funds.
In an analysis of the mutual funds tracked on SocialFunds.com, SRI World Group found that
over the last year 32 of 62 SRI funds had returns that beat more than half of their peer non-SRI
mutual funds. Looking at three-year performance results, 30 of 52 SRI funds topped more than half
of their peer non-SRI mutual funds.
Regarding individual funds in 2002, SRI fixed-income
funds outperformed other classes of SRI mutual funds by a wide margin. The top performing funds
were the Parnassus Fixed Income Fund
(PRFIX) at 12.20% and the New Covenant Income Fund
(NCICX) at 9.61%. Reflecting general market performance, SRI balanced and equity funds were all in
negative territory. The top performing SRI balanced fund was the New Covenant Balanced Income
Fund (NCBIX) at -1.99%, and the two top performing SRI equity funds were the Parnassus Equity Income
(PRBLX) at -3.69% and the Ariel Fund (ARGFX) at -5.18%.
In the first half of 2002 many investors reacted to the ongoing bear market by pulling
assets out of mutual funds. According to an analysis of Lipper data commissioned by the Social Investment
Forum, between January and June 2002 there was a net outflow from U.S. diversified funds of
approximately 9.5 percent of total assets. However, the opposite occurred with SRI mutual funds.
According to that same analysis of Lipper data, SRI mutual funds experienced a net inflow of 3
percent during the same time period. Lipper is a Reuters-owned firm that tracks 80,000 mutual
"Social investors tend to be 'sticky'-in other words, they trust that
the financial, social, and environmental strengths of their investments will create long-term
value, even when bearish short-term prospects scare other investors," said Mr. Falk.
Related SRI Mutual Fund Articles:
Investors Continue to Put Money
into SRI Mutual Funds
3. Community Investment Pays
In a year that saw
the stock market drop for the third year in a row and 1-year CD rates fall below 2 percent,
investors who had assets allocated to community investing looked very wise. Many community
investments offered investors a 2 or 3 percent return or possibly higher. At the same time, since
community investments have such a good payback rate, those who participated in community investing
in 2002 avoided the minefield of the corporate bond market. Indeed, by helping create affordable
housing and new jobs, community investing generated some of the best double bottom line returns of
The California Public
Employees' Retirement System (CalPERS) made community investing pay not only in 2002 but
throughout the whole decade. Last month CalPERS, the nation's largest pension fund (with more than
$132 billion in assets), announced that its Single Family Housing Program has been its highest
returning investment category over the last decade. The program has returned more than 20 percent
annually since its inception in 1992, earning the pension fund and its members more than $500
million throughout that period. Other institutional investors, such as the General Board of Pension and Health Benefits of the United Methodist
Church, experienced similarly strong returns on their community investments.
addition, a study debunked the myth that community investment has greater risk than other asset
classes. The study, conducted by the National Community Capital Association (NCCA) found
that community development financial institutions (CDFIs), which serve low- and middle-income
communities, actually have a better payback rate than commercial banks.
Related Community Investment Articles:
Investment in Affordable Housing
Generates Market-beating Returns
4. Shareowner Action Successes
This year saw the highest
shareowner vote ever on a social policy resolution. At the CBRL Group (the parent company of
Cracker Barrel) annual meeting, 58 percent of voting shareowners supported a resolution that called
for the adoption of an equal employment opportunity (EEO) policy that bars sexual orientation
discrimination. Cracker Barrel's decade-long opposition to the policy finally crumbled because of
shareowner pressure. Lockheed Martin (ticker:
LMT)similarly banned sexual orientation discrimination in 2002, just one year after shareowners
began pressing the company on the issue.
"These significant victories demonstrate that
persistence pays," Mr. Falk said. "It may take a decade or it may achieve immediate success, but
shareowner action does effect the kind of corporate change that ultimately enhances
However, victories on specific shareowner resolutions or proposed
actions do not necessarily represent the end of shareowner vigilance regarding particular corporate
policies and practices. This year, the oil companies Talisman Energy (TLM) and Occidental
Petroleum (OXY) pulled out of Sudan and Colombia, respectively, where each company had been
heavily criticized for their records regarding human rights. However, the SRI community will
continue to monitor both companies' human rights records, and many social investors will continue
to exclude these companies from their portfolios due to ongoing concerns.
Related Shareowner Action Articles:
Record Shareowner Vote Prompts
Cracker Barrel to Bar Sexual Orientation Discrimination
Talisman Leaves Sudan But
Remains on Social Investment Nix List
5. SRI Continues to Expand
The adoption of SRI principles by investors and legislators is continuing
to gain momentum around the world. In February, the French Parliament published its new economic
regulations (nouvelles régulations économiques, or NRE). Besides increasing the transparency of
take-over bids, improving corporate governance, and fortifying antitrust regulation, the NRE also
require companies to report on their social and environmental performance.
In March, the
Australian government passed the Financial Services Reform Act. The act requires investment firms
to report on the extent to which they take into account issues associated with SRI, such as
environmental and social considerations. The law does not mandate SRI practice, but it requires
that investment firms who claim to practice SRI must disclose their methods.
bellwether of the globalization of SRI is the proliferation of SRI indexes. The Italian financial
firm E. Capital
Partners launched seven SRI indexes covering both equity and bond markets, and the Belgian
nonprofit Ethibel introduced four
sustainability indexes covering different geographic regions.
"Around the world and here
in the United States, socially responsible investing is becoming recognized in the mainstream for
its leadership in corporate governance reform, its ability to see beyond short-term market
downturns, and its power in effecting corporate change," concluded Mr. Falk.
Related International SRI Articles:
Australia To Require Investment
Firms to Disclose How They Take SRI into Account
New French Law Mandates
Corporate Social and Environmental Reporting