October 22, 2009
Book Review: Up from Wall Street: The Responsible Investment Alternative
by Robert Kropp
Author Tom Croft, in describing evolution of asset allocation strategies by pension funds, notes
damage done by economic crisis, but sees in economically targeted investments a way to realize
returns while fulfilling stewardship mandate.
Pension funds and other institutional investors "actually own a lion's share of the economy,"
according to Tom Croft's new book, Up from Wall Street: The Responsible Investment Alternative.
Croft, Executive Director of the Steel Valley
Authority, a Pittsburgh-based economic development agency, reports that in 2008, US
institutional investors owned $24 trillion in equities, and pension funds owned an additional $9.4
Because the holdings of institutional investors and pension funds are so
large, they have the potential for exerting a tremendous influence on global investment practices.
Particularly in the case of pension funds, the responsibility for making effective investment is
great, because the money they manage is intended for the funding of workers' retirement as well as
the welfare of their beneficiaries.
Therefore, the necessity for responsible capital
stewardship on the part of pension funds is high. Defined by the AFL-CIO as "investing based on
the principle that the long-term, sustainable value of any investment requires mutually beneficial
cooperation among all those involved," capital stewardship by pension funds prioritizes investments
"that support working families and their communities."
Traditionally, pension funds
focused their investment strategies on public equity and bonds. Increasingly throughout the last
decade, however, they have turned to alternative investment vehicles in an effort to diversify
their portfolios. According to Croft, alternative investments "include real estate, private equity
and venture capital, commodities, financial derivatives, and hedge strategies," or hedge funds. He
cites research showing that "alternative investments managed on behalf of pension funds by the
world's 99 largest investment managers grew by 40%" in a single year, from $586 billion in 2006 to
$822 billion in 2007.
Although most alternative investments carry more risk than do
investments in stocks and bonds, those that are especially heavily leveragedósuch as hedge funds
and leveraged buyouts of corporationsócarry substantially more risk than other alternative
investments. And when the economic crisis struck in mid-2008, pension funds that had increased
their holdings in private equity and hedge funds found their losses to be considerable. The 100
largest corporate pension funds lost a record $300 billion in 2008, erasing five years of gains.
Croft does identify some alternative investments that potentially offer competitive rates
of return, while fulfilling the pension funds' mission of capital stewardship by investing in
projects that benefit communities. He calls these investments economically-targeted investments
(ETIs), and defines them as seeking "competitive rates of return on investments that also provide
collateral benefits." ETIs are investments that fill capital gaps in certain alternative asset
classes, and allow pension funds to "promote positive economic development by investing a portion
of their portfolios in real estate projects and privately held companies that have trouble getting
access to capital."
Croft lists some of the sector targets for ETI, including renewable
energy and clean tech, urban and rural revitalization, infrastructure and project financing, and
micro-finance and development finance. Indentifying ETI as a component of a philosophy of
Responsible Capital that "provides new tools to engage in the economy at a time when the gospel of
efficient markets has failed working people and economies," Croft asserts that the capital stewards
of pension funds have succeeded in making long-term investments with good returns and important
collateral benefits. He urges capital stewards to redouble their efforts to adopt responsible
investment (RI) practices.
Croft places the RI activities of pension funds in the context
of a worldwide movement of institutional investors toward the incorporation of environmental,
social, and governance (ESG) criteria into investment decision-making. This movement has led to a
rapidly growing membership in the United Nations' Principles for Responsible Investment (PRI). Founded in 2005, the
PRI currently has over 600 signatories, representing over $18 trillion in assets under management.
Part Two of Up from Wall Street, entitled "A Field Guide to Responsible Capital,"
describes responsible investment funds that together manage over $30 billion in assets, as well as
detailed analyses of some of the companies and projects in which they invest. Six responsible
private equity and venture capital funds, and seven responsible real estate and fixed income funds,
are profiled. An appendix further describes five projects that, by focusing on financial
profitability, sustainability, and worker-friendly standards, highlight the benefits of RI.
Throughout Up from Wall Street, Croft's long experience with RI practices, both through Steel
Valley and his role as Project Director of the Heartland Labor Capital Network, is in evidence. Not
only does he display an assured understanding of alternative financial products that often seem
designed to confound. His range of associates within the responsible investment field is truly
impressive as well, leading to a Field Guide that actually proves to be of practical assistance to
institutional investors wishing to gain ESG benefits as well as healthy financial returns.