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October 17, 2008
Sustainable Investment Strategies Earn Respect in Aftermath of the Financial Crisis
    by Robert Kropp

Having sounded warnings for years about the causes of the economic crisis, sustainable and responsible investment may be embraced by more mainstream investors.


“The lessons of the current financial crisis clearly benefit sustainable investing.” So says Joe Keefe, CEO of Pax World, a leading mutual fund company specializing in sustainable investing,

"Some of the major causes of the crisis—predatory lending, excessive CEO compensation, corporate governance—have been SRI issues for years. I expect the mainstream market will come to embrace long-term investment strategies and stability. Sustainable investing has answers to why the breakdown happened, and lessons for the economic future," said Keefe.

"For most of the year, the net inflow of our mutual funds indicated that we were outperforming the market. Now, everyone has outflows, but I believe sustainable portfolios continue to do better," he added.

Lloyd Kurtz of Nelson Capital Management, an investment management firm with extensive experience in socially responsible investing, agrees with Keefe. "SRI has earned attention because of the warnings it has given over the years, especially pertaining to corporate governance and CEO compensation." Viewing what he sees as the "carnage" in the market, Kurtz said, "I'm astonished at the lack of oversight at a number of companies who maintained relationships with shareholders that were harmful and dangerous. The dishonesty of management was supported by the many Boards of Directors that accepted at face value the word of management, when a little research often would have revealed otherwise."

"Because you can't do social investing without consideration of corporate governance," Kurtz said, "The SRI funds we manage at Nelson have outperformed the market. We look carefully at such issues of governance as the quality of a corporation's management. Rewards will accrue to the fund manager who looks deeply," he said.

Kurtz believes that other SRI funds, particularly those that rely primarily on negative screening for such corporate activities as alcohol, tobacco, and defense, have performed no better than the market at large during the current crisis. Furthermore, as the price of oil plummets to below $70 a barrel, solar stocks and exchange-traded funds that focus on clean energy have taken a beating as well.

When positive screens such as those for corporate governance are employed, Kurtz finds that "A case can be made that there is a benefit to investing in SRI funds. Much depends on the fund managers themselves; whether or not they possess the knowledge to come to a holistic understanding of the relationships that companies have with their stakeholders."

Socially responsible lenders point up their consistent profitability during the current crisis, and attribute it to practices that set them apart from the predatory lenders that largely precipitated it.

Jean Pogge, Executive Vice President of Consumer and Community Banking for ShoreBank, a community development bank headquartered in Chicago, told SocialFunds.com, "The world has never been in this economic situation before, but we 'stick to our knitting' by continuing to provide good old-fashioned community banking."

Pogge added, "I drive through sections of Chicago today, and because of foreclosures the number of abandoned buildings rival that of the days of redlining practices. This situation can only be avoided when banks have confidence in the community as a business partner. Banks must act as partners for the good of its customers."

ShoreBank's performance record over its 35-year history includes loans totaling $213 million to low- and moderate-income individuals, as well as small businesses. Pogge observed, "Despite the fact that we lend to the same low income, often minority groups that have been exploited by predatory lenders, we continue to be profitable, with a capital base that continues to grow."

Alyssa Greenspan is Senior Vice President and Portfolio Manager of Community Capital Management (CCM), the registered investment advisor to the Community Reinvestment Act's, CRA Qualified Investment Fund, one of the largest community development investment vehicles. She told SocialFunds.com, "Relative to market conditions, the fund had its best performance ever during the third quarter of 2008." As of September 30, 2008, the CRA Fund’s one year total return was a positive 4.6%.

Todd Cohen, President and CIO of CCM, added, "One reason for our current success is that we did not invest in corporate bonds, which have been hit especially hard by the current turmoil. Our agency-backed fixed-income loans to low-income single-family and Section 8 multi-family housing have outperformed the market."

It is noteworthy for investors that both Pogge of ShoreBank and Cohen of CCM attribute their success to their social mission of providing affordable housing loans to underserved markets in low-income and minority communities.

However, Cohen of CCM did warn that "The further tightening of the credit market in a deteriorating economy could lead to reduced performance by our investment vehicles."

But Keefe of Pax World prefers to see the glass as half-full. "The next administration will have to tackle alternative energy and the rebuilding of the nation's infrastructure. These are core SRI values, and will lead to more sustainable investing."

Responsible investors who are following the presidential campaign will have noted that among Barack Obama's plans for addressing the current economic crisis is a plan for investments in renewable energy industries that will, he says, create "five million new, high-wage jobs."

Investment in alternative energy could be rewarded by clauses in the recent federal bailout bill that extend tax credits for companies that produce and invest in solar and wind energy. Tax credits for solar have been extended for eight years, and for wind energy for one year. For the first time, the bailout bill extends credits to utility companies as well.

 

 
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