December 31, 2007
Whistling Past the Graveyard—Socially Responsible Investing and the Financial Crisis
by Bill Baue
SRI thought leaders analyze the potential impacts of the widespread economic downturn caused by the
subprime meltdown and deflating dollar.
Signposts pointing toward a significant economic downturn, triggered by the confluence of the subprime meltdown,
the resulting credit crunch, the precipitous plummet in the US dollar’s value, and predictions of
crashing stock markets, are popping up all over the place.
Morgan Stanley Head of
US Credit Strategy Gregory Peters recently forecast a
greater than 50 percent probability that the financial system “will come to a grinding halt”
because of losses from mortgages, according to Bloomberg. At about the same time, Bank of
England Governor Mervyn King “ issued an extremely unusual warning on world stock markets, indicating that shares
may be heading for a major fall," according to the Telegraph. And perhaps the most telltale
sign of economic woes is the fact that Gisele Bundchen, the world's richest supermodel, recently insisted on being
paid in euros instead of US dollars, according to Bloomberg.
“We’re now six months
into this financial crisis, and it’s not getting better,” Lloyd Kurtz, socially responsible
investing (SRI) portfolio manager at Nelson Capital, told me. Kurtz also teaches in the Haas
School of Business at the University of California, Berkeley, where he administers the Moskowitz
Prize for empirical research on SRI and manages the SRIStudies database of SRI research. “If
you look at any of the indicators that are bellwethers for seeing progress, the credit crisis is
still very much with us.”
“As Warren Buffet said in his 2006 letter to investors, his successor
needs to be prepared for financial crises--‘including those never before encountered’--and I think
a global liquidity lockup connected with derivatives is a perfect example of that kind of crisis,”
Financial institutions that engaged in questionable subprime lending are both
the culprits behind many of the current problems and the victims. Citigroup, Merrill Lynch, and
Morgan Stanley have been forced to
writedown more than $40 billion collectively, with Deutsche Bank analysts predicting up to $400
billion in global subprime losses.
“And SRI portfolios tend to be overweighted in the
financial sector, because most financial companies, at least by the old reckoning, aren’t doing
things that are that objectionable,” explained Kurtz. “I wouldn’t be surprised if social investors
have been disproportionately impacted by the credit crisis.”
“As a firm, we are
underweight in the finance sector,” said Kurtz. “We cut our Goldman Sachs stake in half, we sold
our Wachovia, we sold our Citigroup in our non-SRI accounts--we never owned it in our SRI
What are other SRI firms doing to insulate their investors from risks
associated with the credit crunch, such as exposure to structured investment vehicles (SIVs), or
complex debt derivates that underpinned the subprime market and exacerbated its blowup.
“Obviously, no equity or fixed income fund can totally insulate itself from a falling stock
market (market risk) or the current subprime mortgage crisis and related credit crunch,” Pax World CEO Joe Keefe told me. “However, we
have virtually no direct exposure to the subprime market or SIVs, and our portfolio managers
carefully manage risk by staying diversified, maintaining a global perspective and, frankly,
remaining somewhat conservative.”
The global perspective also buffets against risks
associated with the declining dollar.
“All of our funds have healthy exposures to foreign
securities, and some of our largest holdings are in fact foreign securities,” said Keefe. “This
has not only helped our shareholders against a depreciating dollar, but has also exposed them to
faster growing economies, markets and individual stocks versus the US market.”
Nichols, vice president for equities at Calvert, another SRI market leader that recently launched the
Calvert International Opportunities Fund (ticker: CIOAX), is experiencing a similar dynamic.
“Until very recently, we saw the local returns of foreign markets being better than US market
returns, and the declining dollar has added a substantial dollop of icing on that cake,” Nichols
told me. “More recently, local market returns in foreign markets haven’t been much different that
US market returns, so the weakness of the US dollar has been the cake and the icing.”
weak dollar can also help US-based multinationals, according to both Nichols and Kurtz.
“US-based companies that sell their goods and services overseas have become more competitive
against their foreign peers, and the weak dollar has placed pricing and margin pressure on foreign
companies selling their goods in America,” Nichols said. “So, where we find socially responsible
US companies that have a global presence and solid financial fundamentals, we expect that those
companies will prosper in these difficult times.”
Kurtz cites the example of Boeing,
“which now has a significant cost advantage over its only global competitor, AirBus. The CEO of
AirBus has addressed its employees saying, ‘Our ability to survive is at stake here, because of the
Kurtz also points out that the darkest time is just before the
reemergence of light: “If you look at the history of currency meltdowns, often they precede periods
of pretty positive economic health.”
“Indeed, a supermodel’s demand for payment in a
currency other than dollars could be seen as the type of event that occurs just as markets start to
turn,” Nichols pointed out.