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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

Starting 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.

"Out of 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. 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 Market

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, 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 funds worldwide.

"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 year.

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.

In 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
Community Investing Pays

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 shareowner value."

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 Internationally

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.

Another 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


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