New alternative energy and green funds fuel expansion of socially responsible investing; climate change is pushed to the forefront; community development organisations flourish despite the subprime mortgage debacle; consumers demand healthy products and work environments; and SEC limits shareholder rights.
In 2007, socially responsible investing gained momentum through the passion of shareholders, the demands of the consumers worldwide, and companies, governments and non-governmental organisations (NGOs) working toward common goals around the globe. Mainstream media and investors trumpeted what SRI investors have known for years: businesses need to address climate change now. When toxic toys hit the shelves around the holidays, the mainstream media picked up on another topic where social investors have been active: improving product and workplace safety. When the subprime mortgage scandal made the front page, community development organisations and investors continued working to promote and offer fair lending practices. Shareholder activists faced a setback, however, when the SEC limited their rights to nominate directors. With the SRI movement leading the way, it is no surprise that so many green, alternative energy and socially responsible funds and indices were introduced in 2007.
1. Socially Responsible Investment Options Continue to Expand
A wave of new socially responsible funds, indexes and green mutual funds were launched in 2007, largely in response to climate change. As investors looked to address the shift from oil to other energy sources, the demand for alternative energy funds also heated up.
Starting from February 2007, English investors need go no farther than their neighbourhood M&S to invest responsibly as Marks & Spencer Money launched its new Ethical Fund, marking a huge leap into the mainstream for the SRI investing movement.
Two SRI mutual fund pioneers launched new funds in 2007. In October, the Portsmouth, NH-based Pax World added the Pax World Value Fund that invests in undervalued large-cap companies. Calvert, based in Bethesda, MD, launched the Calvert International Opportunities Fund.
Other SRI funds launched in 2007 include the Gabelli SRI Fund, MMA Praxis Small Cap and Growth Index Funds, Domini PacAsia Social Equity Fund and the Domini EuroPacific Social Equity Fund.
Winslow launched the Winslow Green Solutions Fund in November, investing in mid-cap domestic and international companies that pass Winslow's green screens. Calvert's Global Alternative Energy Fund and the Spectra Green were two other green funds launched over 2007.
Four mainstream financial players – Deutsche Bank, F&C, HSBC, and Schroders – launched climate funds as well, with Virgin Money planning to launch its climate fund in 2008.
On 1 October, KLD Research & Analytics launched the KLD Global Sustainability Index and three area-specific sub-indexes. The Merrill Lynch Energy Efficiency Index was launched with a universe of 40 global companies found in four sectors that should benefit from improved energy efficiency. The Merrill Lynch EEI is possibly the first index to focus solely on energy efficiency. Index giant Standard and Poor's (S&P) launched its Global Thematic Index Series, which includes the S&P Global Clean Energy Index, the S&P Global Water Index and the S&P Global Infrastructure Index.
2. Investors, Businesses, Governments and NGOs Join to Address Climate Change
When Al Gore and the UN's Intergovernmental Panel on Climate Change were awarded the 2007 Nobel Peace Prize for their work on educating the world on the causes and consequences of the Earth's rising temperatures, the business community was listening. Many companies in 2007 put their names, expertise and money to help mitigate climate change.
At the beginning of 2007, the US Climate Action Partnership (USCAP) released a report that urged the federal government to create legislation to cut gas emissions that lead to the warming of the atmosphere. USCAP's members include Alcoa, BP America, Caterpillar, Duke Energy, DuPont, FPL Group, General Electric, Lehman Brothers, PG&E and PNM Resources, along with four NGOs – Environmental Defense, Natural Resources Defense Council, Pew Center on Global Climate Change and World Resources Institute.
In March, a group of 65 institutional investors and US companies called on Congress to pass federal legislation to cut greenhouse gasses that lead to global warming. Organised by Ceres and the Investor Network on Climate Risk (INCR), Investors and Business for US Climate Action presented a "Climate Policy Call to Action" with detailed explanations of responses to climate change they believe need to happen on a nationwide scale. This was the largest group of pension funds, state treasurers, state/city comptrollers, financial service firms, asset managers, foundation endowments and US companies ever to ask the Congress and federal government to act on this issue.
The US's two largest banks also pledged substantial investments to help mitigate climate change. Bank of America's announced in March a pledge of US$20 billion to support environmentally sustainable businesses and combat climate change. Citigroup committed US$50 billion in investments and financing to mitigate climate change over the next decade.
The Carbon Disclosure Project (CDP) released its fifth Global Corporate Climate Change Report that tracks carbon disclosure and attitudes toward climate change in the world's largest companies. The CDP welds the strength of over 315 global institutional investors with more than US$41 trillion in assets under management. This collaboration includes some of the largest US and foreign institutional investors, including CalPERS, Merrill Lynch and Goldman Sachs. The CDP has collected 90 new signatories and almost US$10 trillion in assets since its 2006 report.
3. Community Development Organisations Support Home Ownership
A report from the Center for Responsible Lending indicated that more than 36 subprime mortgage companies failed in just the first four months of 2007. However, in 2007, community development financial institutions (CDFIs) continued their work supporting homeownership, small businesses and non-profits, surfing above the subprime crash.
Hundreds of CDFIs around the country work to bring capital to the low-income areas they serve by providing banking, credit and other services to people who might not have access to mainstream financial institutions. CDFIs can take several forms, including community development banks, credit unions and loan funds.
CDFIs support their clients by offering technical assistance, below market rate loans and other programmes and mortgage products alongside of traditional banking services. CDFIs themselves are supported through a combination of federal programmes and tax credits from the US Department of Treasury and private sector investments and donations. CFDIs rely on thousands of donors and investors including foundations, churches, businesses, community groups, partners and individuals.
The default rate for mortgages issued by CDFIs is incredibly low compared to all mortgages and subprime mortgages. For example, one of the most well known CDFIs, Self-Help Credit Union with headquarters in Durham, NC, had a foreclosure rate of 0.62% as of the end of September 2007, which mirrors many CDFIs' default rates. To put this rate in perspective, the US Federal Reserve listed the default rate in residential mortgages for the first quarter of 2007 as 2.07% for loans through all banks. More relevant perhaps is a report by Friedman, Billings, Ramsey, an investment bank with offices in Arlington, VA, which states that as of August 2007 default rate on adjustable-rate subprime mortgages had reached 8.05%.
CDFIs also got a boost of cash and recognition in 2007 from the Wachovia NEXT Awards for Opportunity Finance, created and financed by Wachovia Bank and Opportunity Finance, in partnership with the John D and Catherine T MacArthur Foundation. In December 2007, ACCION Texas and the Latino Community Credit Union were announced as 2007 winners of US$8.25 million in awards.
4. From Factory Floor to Store, People are Demanding Safe Products
Toys were flying off the shelves this holiday season, but not into the hands of children. The huge toy recalls from Mattel and other manufacturers highlighted the growing dangers of toxic components in consumer products. Issues regarding toxic chemicals not only threaten a company's brand image, but the health of consumers and workers alike.
Concerns over toxic chemicals in products come from recent scientific studies of the effects of chemicals on the body. The common plastic ingredient phthalate has been linked to underdeveloped reproductive organs in males. Nano-particles can enter the bloodstream and cause tissue damage. Polyvinyl chloride (PVC) can contain toxic metals like lead and cadmium and the waste products of PVC are toxic due to the chemical properties of chlorine.
Shareholders worked with companies that produce everything from foodstuffs to household products to automobiles to reduce toxics in products. The Investor Environmental Health Network (IEHN), a group of investment managers that work with their portfolio companies concerning the toxic chemicals in their products, reported that proxy votes in 2007 in favour of shareholder resolutions on sustainability reporting and toxic chemical reporting were very strong. In 2007, shareholders submitted 13 resolutions concerning chemicals in products, up from ten the previous year.
IEHN also reported that many resolutions regarding the safety of products and toxic reporting were withdrawn as companies made commitments to act, including Apple on PVCs and brominated flame-retardants, Sears on PVC, Mohawk Industries on PVC and CVS on regulating cosmetics.
Over 500 personal healthcare and cosmetic companies have signed the Campaign for Safe Cosmetics' pledge Compact for Global Production of Safe Health and Beauty Products. When companies sign the pledge, they promise to replace hazardous materials with safer alternatives within three years.
Three major reports on toxic chemicals were released at beginning of the year including IEHN's report, entitled "Beneath the Skin: Hidden Liabilities, Market Risk and Drivers of Change in the Cosmetics and Personal Care Products Industry" and Innovest Strategic Value Advisors' report called, "Cross-Cutting Effects of Chemical Liability from Products" that examines four major industries and the loss of market share if companies don't address toxic chemicals in products.
The third report, "Toxic Chemicals, Asian Investors are at Risk," was released in January 2007 by the Association for Sustainable & Responsible Investment in Asia (ASrIA). This report looks at Asia's lack of response to chemical reforms passed in other areas of the world. The report warns investors that Asian companies could face loss of market share unless they start to address chemicals found in products.
5. The SEC Ends 2007 Curtailing Shareholders' Rights
After spending the year flip-flopping on the shareholder right to nominate directors, the Securities and Exchange Commission (SEC) finally ended the year withdrawing the privilege.
SEC director Christopher Cox gave several reasons for the ruling, which include the potential conflict of interests. Cox also cited anti-fraud concerns.
The SEC ruling in December took place against a background of shareholder activism, which worked against this final ruling limiting shareholder rights. The Social Investment Forum (SIF) and the Interfaith Center on Corporate Responsibility (ICCR), with the support of Ceres, worked diligently to oppose the SEC proposals.
SEC's new rulings go above and beyond an earlier attempt in 1997-1998 by the SEC to limit shareholders' rights. These earlier attempts were withdrawn.
In July 2007, the five-member SEC commission divided their votes on shareholder resolutions plans, following party lines, with SEC Republican chairperson Christopher Cox supporting proposals by both parties.
This article first appeared in www.socialfunds.com on 8 January 2008. Article reprinted with permission from the GreenMoney Journal, a socially responsible investing newsletter publishing since 1992. For more information, visit GreenMoney Journal online at www.greenmoney.com.