January 05, 2006
Top Five Socially Responsible Investing News Stories of 2005
by William Baue
Socially responsible investing, corporate social responsibility, and microfinance embraced by the
mainstream; shareowner advocates withdraw several climate change resolutions as companies agree to
report; and exchange traded funds apply SRI strategies.
After more than a quarter century of building credibility, socially responsible investing (SRI) and
corporate social responsibility (CSR) took the final steps crossing over from the periphery into
the mainstream in 2005. Household names such as Citigroup (ticker: C) and GE (GE) went public with initiatives
confirming that SRI and CSR considerations can steer investment and business strategies,
respectively. Recognizing these watershed events, SocialFunds.com chooses these developments as
its top two news stories of 2005. Rounding out the top five SRI stories of the year are
microfinance emerging as a new asset class, the withdrawal of shareowner resolutions on climate
change after companies agree to issue climate change reports, and exchange traded funds (ETFs)
adopting SRI strategies.
1. Mainstream Firms Adopt SRI Strategies
How do you know when SRI has entered the mainstream? When traditional brokerages, investment
consultants, and law firms embrace SRI, and when illogical opposition lashes out.
past year, at least four mainstream investment banks issued research reports utilizing SRI
analytical lenses spanning the gamut of social investment research strategies. Citigroup
subsidiary Smith Barney issued a report that took a decidedly qualitative approach, assessing
sustainability issues across 28 sectors. Goldman Sachs (GS) sailed the opposite tack,
taking a quantitative approach by correlating 42 environmental, social, and governance (ESG)
criteria in the energy sector to financial performance as well as exposure to "new legacy assets,"
or newly discovered oil and gas reserves.
UBS (UBS) sought to quantify that which
is qualitative by establishing a framework to measure corporate social liabilities across nine
sectors in its SRI report. Finally, Merrill Lynch (MER) partnered with an
environmental nongovernmental organization (NGO)--the World Resources Institute (WRI)--to produce a report analyzing investment
opportunities due to climate change in the auto sector, making specific stock recommendations on
Consulting stepped into the SRI fray by releasing a survey of mainstream investment managers' approaches to SRI in March. Then in
October, Mercer's SRI consulting team launched an ongoing
research stream rating investment manager capacity to assess corporate ESG performance and
conduct active shareholder engagement and proxy voting.
The conventional wisdom that
fiduciary duty precludes the consideration of ESG issues was turned on its head this past
year. A report from
the uber-mainstream law firm Freshfields Bruckhaus Deringer commissioned by the
United Nations Environment Programme Finance Initiative (UNEP FI) established that fiduciary duty not only allows
ESG considerations, it sometimes requires them!
Perhaps inevitably, the
mainstreaming of SRI met some opposition. In a December move widely viewed as a capitulation to
big business, UK Chancellor of
the Exchequer Gordon Brown unexpectedly killed the Operating and Financial Review (OFR), a regulation
mandating annual corporate disclosure of environmental, social, and governance information.
Incomprehensibly, Mr. Brown cited concern over "goldplating" (or blind adoption of European Union
regulations) when the OFR was homegrown, the product of a multi-year, multi-stakeholder
consultation overseen by the Department of Trade and Industry (DTI).
"With such major players embracing and validating
social investing strategies, it is clear that mainstream financial institutions are finally seeing
the light regarding the merits of SRI and sustainability investing," said Jay Falk, president of
SRI World Group, which publishes
SocialFunds articles on the mainstreaming of SRI:
Barney Report Seeks to Bridge Divide Between SRI and Traditional Analysis
from UBS Strikes Balance Between Ethics and Economics
Spreading SRI: Goldman Sachs
Adds Its Own Twist in Social and Environmental Assessment
Merrill Lynch and World
Resources Institute Analyze Climate Change Investment Opportunities
Institutional Investors Drive
Research on Mainstreaming of SRI by Investment Managers
Fiduciary Duty Redefined to Allow (and
Sometimes Require) Environmental, Social and Governance Considerations
UK Kills Operating and Financial
Review of Environmental and Social Information
2. Mainstream Companies
Embrace CSR Strategies
If irrational opposition is a testament of success, 2005
started with a bang for corporate social responsibility when The Economist issued its diatribe against CSR in
January. Apparently, the markets did not agree with the magazine's assessment, as several of the
world's most influential corporations adopted significant CSR initiatives and policies this past
In May, GE launched its "Ecomagination" environmental responsibility initiative,
a move that reverberated widely. When a corporate giant such as GE places its stamp of approval on
CSR as a legitimate mainstream business strategy, it suddenly becomes much harder to invalidate
CSR. The fact that GE made the announcement on the eve of the second Institutional Investor Summit on Climate Risk at the
United Nations Headquarters demonstrates the company's recognition of the importance of corporate
environmental responsibility to the investment markets.
Wal-Mart (WMT), infamous for its truculence
on CSR, astounded observers with its October announcement of broad
commitments to environmental and social responsibility. These included 100 percent renewable
energy, zero waste, and reducing greenhouse gas emissions by 20 percent by 2012, as well as
increasing the percentages of women and minority managers.
And in November, Goldman Sachs
became the first major investment bank to adopt a comprehensive environmental policy--and the fourth major US financial institution to do so, after
JPMorgan Chase (JPM) earlier in 2005 and Bank of
America (BAC) and
Citigroup in previous years.
"2005 was the year of announcements embedding CSR as a
valid mainstream business strategy," Mr. Falk said. "2006 and beyond will be the litmus test years
for companies to demonstrate action on CSR and critics to assess if these actions measure up."
SocialFunds articles on the mainstreaming of CSR:
Institutional Investors Call on
SEC, Wall Street, and Companies to Address Climate Risk
Institutional Investor Summit on Climate Risk
Sustainability: Does the SRI Community Buy It?
A Light Bulb Turns On: Goldman Sachs
First Investment Bank to Adopt Environmental Policy
JPMorgan Chase Environmental Policy
Triggers Tipping Point for US Bank Sustainability
Emerging as a New Asset Class
The United Nations (UN) dubbed 2005 the "Year of Microcredit," and the markets reflected this
by ushering in microfinance (which provides small loans to the poor for starting up small
businesses) as an emerging new asset class. The most significant development advancing this trend
was the November launch of the Global Commercial Microfinance Consortium. Deutsche Bank (DB) not only
coordinates the consortium, which also includes the Calvert Social Investment Foundation, Merrill Lynch,
and Munich Re, but also manages its $75
million fund that provides financing to microfinance institutions (MFIs) around the world.
"Social investors' portfolios have included microfinance for years, so the emerging recognition
of microfinance as a distinct asset class with a host of different vehicles and strategies is a
welcome development," said Mr. Falk.
SocialFunds articles on
microfinance as new asset class:
Consortium Advances Microfinance as an
Emerging New Asset Class
4. Climate Change Resolutions Withdrawn as
Companies Agree to Report and Act
This past year, shareowner advocates solidified
momentum toward convincing companies to address climate change. This progress stems from a
campaign coordinated by Ceres and the
Interfaith Center on Corporate Responsibility (ICCR). This past March saw the withdrawal of shareowner
resolutions after Apache (APA), Anadarko Petroleum (APC), Chevron (CVX), Marathon Oil
agreed to issue reports measuring climate change impacts and presenting plans for mitigation. Five
companies who made similar commitments leading to resolution withdrawals in 2004--American Electric
Reliant Energy (REI), Southern Company (SO) and TXU (TXU)--issued their
reports or enacted increased disclosure this past year.
"In the matter of a few years,
shareowner advocates have used the resolution-filing process to shift climate change from the
periphery to a priority on the corporate agenda, compelling companies to disclose information on
how they plan to track and minimize their environmental impacts," said Mr. Falk.
SocialFunds articles on climate change resolution withdrawals:
Environmentalist Shareowners Withdraw Climate Change Resolutions at Six Companies
5. SRI Exchange Traded Funds Launched
One of many signs of the maturation
of SRI is the adoption of increasingly sophisticated investment strategies. One such strategy is
the exchange traded fund (ETF), which resembles a mutual fund by bundling securities but differs by
allowing trades all day to exploit market flux instead of setting net asset value (NAV) once daily.
One measure of the explosive growth of interest in ETFs is the rise in assets under management by
ETF provider PowerShares Capital
Management, which mushroomed from $280 million at year-end 2004 to exceed $3 billion before the
end of 2005.
Early in 2005, Barclays Global Investors launched the iShares KLD Select
Social Index Fund (KLD) on the New
York Stock Exchange (NYSE). KLD Research & Analytics devised the underlying index to utilize an
"optimization" technique that overweights companies with strong social and environmental
performance and underweights companies with weaker social and environmental performance.
Mainstream institutional investors appreciated this strategy, judging by the list of top institutional holders, which
includes JPMorgan Chase, Merrill Lynch, Goldman Sachs, and UBS.
Soon thereafter, the
American Stock Exchange (Amex) began listing the
PowerShares WilderHill Clean Energy Portfolio (PBW), comprised of companies that promote renewable and
alternative energy. The fund clearly appeals to social investors, as the top institutional holder is Trillium Asset Management and the top mutual fund holder
is the Winslow Green Growth Fund (WGGFX), but mainstream
institutions such as Merrill Lynch and Wells Fargo (WFC) also find it attractive.
PowerShares subsequently launched other ETFs that overlap into the SRI space, including one focused
on nanotechnology and another on water.
SocialFunds articles on SRI
exchange traded funds:
Two Socially Responsible Investment
Exchange Traded Funds Launch
New Index and Exchange Traded Fund
Expose Risks and Potentials in Nanotech