Robert Topham recycles everything, drives a fuel-efficient car and supports environmental charities. Last summer he took his activism to another level, opening an account with a “green” mutual fund.
The 36-year-old dermatologist doesn’t think his investment in the Sierra Club Balanced fund will save the world. But by directing part of his portfolio to a fund that invests only in environmentally responsible companies, he hopes to do some good, and perhaps collect some guilt-free returns while sending a message to big business.
“I know it’s a small voice, I’m just a small part of it,” said Topham, of Salt Lake City. “But maybe every little bit does help.”
Difficult diversity
Socially responsible investment funds, like the two launched by the Sierra Club last year, are aimed at people who want their portfolios to mirror their principles. But because they’re only a tiny fraction of the industry, about 1 percent of funds tracked by Morningstar Inc., it may be difficult to construct a truly diverse portfolio with SRI funds alone.
SRI funds screen companies for a variety of factors, from their environmental record and treatment of employees to their honesty in advertising or reflection of certain religious values. Since “socially responsible” can mean different things to different people, the assets held by these funds vary significantly.
For example, the Sierra Club screens out most tobacco companies because of what it calls dirty agricultural practices, but has no prohibition on investing in alcohol and gambling stocks. Many other SRI funds would exclude all three industries because of the negative impact they have on society.
The vast majority of SRI funds conduct some level of environmental screening, but funds specifically focused on green investing may have more rigorous requirements. Advocates argue that companies operating in an environmentally responsible way are more forward-thinking, more efficient and less vulnerable to costly litigation related to pollution or labor disputes. Such virtues will ultimately be reflected in the bottom line, they say.
“Any management team that has been thoughtful about the impact they’re having on the environment has also been thoughtful about how they structure their business, recruit and train employees and produce investor returns,” said Matthew Patsky, portfolio manager of the Winslow Green Growth fund. “Absolutely, it’s connected.”
Valuing beliefs, returns
From a style perspective, SRI funds often lean toward growth, because companies in traditional value sectors, such as industrial materials, energy and utilities, are often excluded for pollution issues. That makes for a limited number of value offerings. The options for small-cap and international funds are even leaner, said William Rocco, senior analyst with Morningstar.
“You have fewer choices in certain parts of the market ... so you could look for nonscreened funds that are close, but that might require some compromises for you,” Rocco said. “It’s a value question. It depends on how important your beliefs are versus how badly you want to get maximum returns.”
Some funds will bend rules to get broader sector exposure by investing in companies that have made positive strides in traditionally problematic industries. One of the Winslow fund’s biggest holdings is banana producer Chiquita Brands International, which Patsky praised for dramatically reducing its use of herbicides and pesticides and improving labor conditions.
Other funds are more strict. The Sierra Club limits its portfolio to companies it finds to be outstanding environmental citizens. Its top holdings include Dell Inc., which eliminated the use of hazardous glue by snapping its computer chips together; Estee Lauder, which shuns animal testing; and Bank of America Corp., which has developed environmental policies and remained in compliance with a long list of criteria.
As part of its screening process, the fund excludes mining and timber operations, any company that produces hazardous waste or emissions, all oil concerns and car makers and any business that uses genetically modified foods.
This leaves out some notable names: Coca-Cola Co., because it uses genetically modified corn syrup, Citigroup and Morgan Stanley, because they were involved in funding a controversial project to dam a large river in China, and Merck & Co., which faces liabilities related to the cleanup of several polluted sites around the country.
“There’s no question we limit some of these really profitable companies,” said Garvin Jabusch, director of research for the Sierra Club Funds. “But they’re companies that may pose the biggest risks and that are more likely to have adverse bottom line consequences as a result of their behavior than green companies.”
Higher fees likely
Expenses are another concern for investors considering SRI funds, Rocco said. Because they tend to be offered by smaller shops and have lower asset levels, SRI funds often bear higher management fees.
SRI funds from larger families include the TIAA-CREF Social Choice Equity fund, the Vanguard Calvert Social Index — the product of a partnership between index giant Vanguard Group and Calvert, the SRI industry’s biggest asset manager — and the Neuberger Berman Socially Responsible Investor fund. All three have lower expenses and broad sector exposure, making them decent core options for socially conscious investors, Rocco said.
The Pax World Balanced fund is another offering with a longer track record and low expenses. Other well-known SRI shops include Citizens, Domini and Ariel.