Insights into Socially Responsible Investing by Frederick Ravid, Chartered Financial Services, Inc.

We find ourselves in an era when everyday choices are changing because we want our actions to embrace sustainability. This leads us to activities like recycling, conservation of natural resources and rethinking how the built environment, homes, business, transportation, agriculture and energy systems should be aligned in support of a healthier natural world. Many of us see ourselves as change-agents who understand our impact beyond our own lives. We desire all of the components of our lives to be exemplary, but our Wall Street relationship often gets left behind. Why? While investing for short-term financial gain has become popular, we’ve learned that approach can run counter to long-range objectives. That’s where Socially Responsible Investing (SRI) provides a most apt solution.

SRI began in the 1980s as a small group of investors asked questions. They wondered what might happen to portfolio returns if industries they felt were distasteful, like tobacco or weapons, were “screened” out of portfolios. They also asked questions about what responsibility shareholders ought to take for the holdings, and about how to exercise good stewardship. A number of privately managed portfolios, followed by publicly traded funds, emerged, screening methods and shareholder governance protocols were refined and relevant indexes were developed. Then, major studies began to circulate in support of this approach not only for its financial merits, but also improved environmental and social performance. SRI has attracted the attention of institutional investors responsible for retirement funds, foundations, endowments and trusts. Private investors attracted to a holistic and longer-term approach have also taken note.

The SRI industry has flourished as organizations and private investors have grown to trust the SRI-screened approach more than the “traditional Wall Street” approach of managing money for financial gain alone. Today, over $2.7 Trillion is invested in SRI portfolios. This represents approximately 13 cents of every dollar on Wall Street, where SRI’s piece of the pie continues to grow.

A look at the psychographics of America reveals that about 75 million Americans are trying to make positive steps towards improvement in areas of sustainability. Amazingly, these 75 million people come from all camps - they are politically, racially, religiously, and economically diverse. SRI is often seen as a powerful tool for progress. Screened stock ownership can offer positive short-and-long-term impact. SRI investors recognize that the forces of competition, combined with the opportunity for reward, are some of the most powerful ingredients towards change. Many believe SRI can foster the kind of change that bureaucracies are unwilling or reluctant to address, and thus, create bona-fide sustainability as our era’s legacy.

Skeptics say SRI is a ticket to “unjustified higher costs” or receiving “significantly less total return” on investments. Authoritative studies and comparison of indices seem to refute such claims. Many studies have been conducted in which SRI investments have been compared in total return in both bond and stock portfolios. SRI portfolios under talented managers tend to perform quite effectively next to comparable portfolios of un-screened investments, and SRI portfolios can be proud of benefits beyond the single, financial bottom line.

Investment managers narrow potential securities that match their portfolio’s objective into a “universe.” Companies are ranked by financial excellence, and securities are ranked. SRI managers further screen for non-financial quality in about 18 objective categories. While there are no “perfect” corporations, movement in a positive direction can be measured. Once companies are added to the portfolio, the management process moves toward governance issues.

Annual voting of the shares via proxy, on the investors’ behalf, is a key function of SRI as the proxy voting process can have powerful effects on corporate governance. Outside third party research experts are often brought in by the manager to help with proxy issues. On occasion, an initiative will be placed before all shareholders, and if a sufficient percentage of shareholders approve an initiative, the course of corporate conduct could change. Outside the SRI world, bear in mind that the majority of public investment advisors vote with corporate management instead of proxy voting.
SRI advocates suggest that you vote with your money when it comes to what investments you own. SRI-screened Wall Street investments can reflect your values, and deliver competitive returns. Realize that many Wall Street communicators including the media and financial intermediaries are not familiar with the language of sustainability. But SRI investors are serious about sustainability and willing to invest in it.

Wall Street responds to demand. Educated investors can create a tipping point where sustainability protocols are followed by a majority of public companies.
To transition a portfolio to SRI, most people consult a professional advisor who is conversant in SRI and who can also handle hybrid accounts including legacy investments and SRI investments. Hybrid accounts can help investors manage tax consequences of portfolio restructuring. Transition does not need to happen all at once. Selecting managers, crafting a close fit to your own investment objectives and keeping your money safe are crucial advisor functions. Recommendations you receive should be based on your circumstances, objectives, personality, tax situation and holdings. Once you are invested, a quarterly review process may enhance your success, because supervision of financial investments can help avoid pitfalls. Investors in SRI should understand that SRI’s three components, namely the money manager, proxy voting process and ongoing due diligence are what it takes to make SRI successful.

SRI can be appropriate for accounts of all sizes, applied to stock or bond investments, and held in Retail Accounts, IRAs, Education Funding, Retirement Plans, Managed Accounts and Tax-Deferred Accounts. Most SRI investments can be obtained under fee-based, or traditional brokerage arrangements, depending on account size.
Frederick Ravid, President, Chartered Financial Services, Inc. — www.moneygrow.com

— A Registered Investment Advisor with a focus on sustainability, financial & estate planning and tax, and a registered principal. Securities offered exclusively through Raymond James Financial Services, Inc. Member NASD/SIPC. To ask questions, email ravid@moneygrow.com.