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The below guidelines were provided by EuroSIF and represent the latest evolution in responsible fund management.  I believe these transparency guidelines are especially relevant during this time of financial uncertainty.  As fund managers find it difficult to attract capital, more funds will need to incorporate “confidence building strategies.”  Following the after-shocks of Monday the 15th, I am heartened by the idea that fund transparency will be permanently incorporated into the remaining financial institutions.  In the meantime, I satirically advise the Triple-G strategy: Guns, Gold, and Gas.

 

Basic Details

  • Signatories should be clear about who they are and provide background information on the fund, and the fund manager.
  • Provide the name of the fund(s) and fund manager to which these guidelines apply.
  • Provide contact details for further information regarding the funds.
  • What is the size of the fund? In currency at a specified date.
  • Where can financial performance history data about the fund be found?
  • Provide details of the content, frequency and means of communicating information to investors.
  • Additional: Briefly describe the corporate responsibility policies of the organization that manages or promotes the fund(s), or give direction to where this information can be located.

 SRI Investment Criteria

  • Signatories should be clear about their purpose and investment criteria.
  • How does the fund define SRI?
  • What are the SRI investment criteria of the fund?
  • How is the SRI criteria defined, how frequently and by whom are the criteria reviewed?
  • How are criteria changes communicated to investors?

Research Process

  • Signatories should provide information on their research process.
  • Describe your SRI research methodology and process.
  • Does the fund manager use an in-house research team and/or an external research team? Please explain.
  • Is there an external control or external verification process in place for the research process? Where an Advisory Committee is used, please state its responsibilities.
  • Does the research process include stakeholder consultation? If yes, please provide details.
  • Do companies have the opportunity to see their profile or analysis? If yes, how often?
  • How frequently is the research process reviewed?
  • What research findings are disclosed to the public? How?

Evaluation and Implementation

  • Signatories should provide information on how the research is used to build and maintain their portfolio.
  • How are the results of research integrated into the investment process, including selection and approval of companies for investment?
  • What internal or external measures are in place to ensure portfolio holdings* comply with SRI investment criteria?
  • What is the policy and procedure for divestments* on SRI grounds?
  • Are investors informed about divestments on SRI grounds? If yes, how frequently and by what means?
  • Does the fund manager inform companies of portfolio exclusions or divestments due to non-compliance with its SRI policy and criteria?

Engagement Approach

  • Signatories should explain their approach to engagement if the fund has such a policy.
  • What are the aims of the engagement policy?
  • How does the fund priorities which companies it will engage with?
  • Who undertakes engagement on behalf of the fund?
  • What methods of engagement are employed?
  • How is the effectiveness of engagement activity monitored/addressed?
  • What further steps, if any, are taken if engagement is considered unsuccessful?
  • How, and how frequently, are engagement activities communicated to investors and other stakeholders?

Voting Policy

  • Signatories should make clear their policies on voting.
  • Does the fund have a voting policy? If so, what is it?
  • Does the fund disclose its voting practices and reasoning for decisions?
  • Does the fund sponsor/co-sponsor shareholder resolutions?

Periodical Activities

  • Signatories should periodically disclose information about their activities.
  • List the fund holdings at a specified date within the last 6 months.
  • What engagement activity has been carried out on behalf of the fund during the past year?
  • What voting actions occurred that were related to the SRI fund criteria?
  • Additional What divestments occurred in the past year related to the SRI fund criteria?
  • Additional What were the amount of donations and the percentage of management fees that the fund gave to charities this past year?

Definitions of key terms used in the guidelines:

Divestments – Companies that are sold from the fund portfolio.

Engagement – A long-term process of dialogue with companies which seeks to influence company behavior in relation to their social, ethical and environmental practices.

Exclusion – The exclusion of sectors or companies from a fund if involved in certain activities based on specific SRI fund criteria (e.g. no tobacco or no animal testing).

Fund(s) – A legal entity, the purpose of which is solely the acquisition of portfolio investments.  This also includes compartments and sub-funds. 

Fund Manager – The entity responsible for overall management of the fund. 

Fund Purpose – The spirit and overall focus of the fund, but not the investment criteria employed.  Holdings – Equities and/or bonds of companies that collectively comprise the fund portfolio. 

Portfolio – A collection of investments managed by the fund manager.

Signatories – Fund(s) and/or fund manager that commits to disclose SRI information in

line with the Guidelines. 

SRI Investment Criteria – The principle or standard of judgment used to determine what the fund can Criteria and cannot invest in from a social, ethical or environmental (SEE) perspective.

Voting Policy – Policy of a fund to exercise it’s voting rights as investors to influence company behavior.

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Listed below are standout SRI funds that I feel are well positioned to gain from the current economic environment.  These mutual funds and ETFs are grouped into different categories that reflect their holdings, strategy, and geographic region.  I also include categories that are unique to responsible investing such as environmental activism, humanitarianism, community development, and alternative energy.  With over $2.71 trillion is assets subject to social criteria and over 260 socially monitored funds, it can be difficult to navigate all the options out there. 

I’ve picked the following funds based on a number of fundamental criteria such as management track record, MPT statistics, and industry outlook.  However, the “niche” nature of each SRI sub-categories must be taken with a grain of salt due to the lack of competition.  The youthful nature of many funds in this sector also hiders forecasting. 

An important litmus test for any “alternative fund” requires determining if management has jumped on the “green bandwagon” for short-run gain.  Unfortunately, this last quarter has seen a number of self proclaimed SRI funds mislead investors.  To ensure these imitation funds don’t show up on my list, I’ve dug into each fund’s holdings to confirm consistency with the fund strategy.  Ultimately, I’m looking for funds that demonstrate a long-run commitment to well articulated objectives that are consistent with socially responsible investing.        

These “top picks” are not a static snapshot of the current SRI industry.  Rather, it is an evolving list that I hope to refine over time.  I welcome suggestions and recommendations.

Alternative Energy/ Resource

  • PowerShares Wilderhill Clean Energy Portfolio Fund (PBW)
  • Van Eck Global Alternative Energy (GEX)
  • PowerShares WilderHill Progressive Energy Portfolio (PUW)

Global/International

  • Calvert International Opportunities Fund (CIOAX)

Fixed income (Bonds)

  • Calvert Social Investment Bond A (CSIBX)
  • AHA Full Maturity Fixed Income Fund – Institutional Class (AHFMX)
  • AHA Limited Maturity Fixed Income Fund – Institutional Class (AHLFX)

Equity Large Cap.

  • Calvert Large Cap Growth I (CLCIX)
  • Pax World Growth (PXWGX)
  • MMA Praxis Growth Index Fund A (MGNDX)

Balanced Funds

  • Walden Social Balanced Fund (WSBFX)
  • Calvert Social Investment Equity Fund (CSIEX )
  • Pax World Balanced (PAXWX)

Environmental

  • Winslow Green Growth (WGGFX)
  • Portfolio 21 (PORTX)

Technology

  • Clean Edge U.S. Liquid Series Index Fund (QCLN)
  • PowerShares Cleantech Portfolio (PZD)

Religious Funds

  • Guide Stone Int’l Equity GS4 (GIEZX)
  • Amana Trust Growth (AMAGX)
  • Amana Trust Income (AMANX)
  • New Covenant Funds (NCGFX)
  • Ave Maria Mutual Funds (AVEGX)
  • LKCM Aquinas Fixed Income (AQFIX)
  • LKCM Aquinas Value (AQEIX)

Copyright © 2008 David van der Roest

Following Hurricane Katrina, New Orleans and the rest of the Gulf Coast was devastated.  Access Capital Strategies, a SRI community investment firm, decided to use the tragedy of Katrina to showcase the power of community investment strategies.  The Boston-based asset management firm joined forces with Liberty Bank and Trust, a large local African American Bank.  Together, they played a key role in the reconstruction of the devastated areas by providing bridge loans, financial support, and commercial and residential rebuilding.  Other community investment groups, including The Calvert Foundation, Jewish Funds for Justice, and Hope Community Credit Union, joined in to further stimulate the region with more then $2.4 million in capital.  Hurricane Katrina provided a glimpse into an investment sector that has grown in the last 5 years from a $4 billion sector to nearly $20 billion.           

 

Historically, socially responsible investing (SRI) has referred to a set of approaches used in investment decisions that consider social, ethical, and environmental issues.  One of the latest incarnations of SRI is Community Investing.  This strategy involves using investment funds to provide capital or loans to communities that lack access to conventional funding sources or are overlooked by traditional financial institutions.  SRI values are incorporated into community based investments by concentrating capital toward housing projects, development banks, and infrastructure in order to strengthen a specific micro-economy.  Some of the successful strategies of Community Investing include micro-financing and the fortification of local credit unions.  The regions that have benefited most include Bangladesh, South Africa, sub-Sahara Africa, and the rural regions of Kentucky and Tennessee.  From a SRI perspective the primary goal of community investing is to apply responsible investing strategies to improve the standard of living within a micro-economy while earning competitive returns.  

 

Despite its rapid growth, community investing remains uncharted territory for most investors.  As world economies are experiencing inflationary pressure on food and increased energy prices, fragile economies are suffering the most.  Paradoxically, these struggling economies will act as proving-grounds for community investment strategies in the coming years.  Of the 84 Community Investment funds currently operating, listed below are a few that I think represent the best positioned funds to take advantage of the current economic climate.

 

Partners with international micro-finance institutions; accepts individual investments

Calvert Foundation – http://www.calvertfoundation.org

Offers community investment notes where investors can specify that their capital be directed to international loans or one of seven U.S. regions e+Co.

http://www.energyhouse.com

Offers investments based on loans to clean

energy entrepreneurs in developing countries

 

Finca International – http://www.villagebanking.org

Manages village banking programs in Africa, Latin America, Asia and Eastern Europe; offers investments that fund village banks

Fonkoze USA – http://www.fonkoze.org

Manages a socially responsible loan fund that lends to Haiti’s largest micro-finance bank

Shared interest – http://www.sharedinterest.org

Guarantees bank loans for low-income communities in South Africa; accepts investments for periods of three to ten years

Underdog ventures – http://www.underdogventures.com

Designs and manages customized single-investor social venture funds for HNW investors

Coalition of Community Development Financial Institutions – http://www.cdfi.org

Offers facts and figures on community investing

Community Investing Centerhttp://www.communityinvest.org

Accion international – www.accion.org

 

Copyright © 2008 David van der Roest

South Africa: SRI Index Beats Market

The JSE socially responsible investment (SRI) index outperformed the Johannesburg all share index by 5%.  As the world economy navigates the doldrums, many have suggested that SRI strategies are a luxury we can’t afford.  The JSE SRI index is a wake up call!  If an emerging economy, yoked to a small stock exchange and heavy industry, can afford to care about SRI, so can we. 

Created in 2004, the sustainability index is comprised of companies on the JSE that meet the highest social, environmental, and economic standards.  It is the first of its kind in an emerging market, and the first to be launched by an exchange.  The objectives of this management style are summarized by the term “triple bottom line” (TBL). TBL organize SRI objectives into a hierarchy consisting of “people, planet, and profit.” 

When considering the criteria, location, and economic climate, this is a huge achievement for the ethical investing community.  Many onlookers, however, aren’t surprised.  They believe the index’s success reflect a higher SRI exposure (weighted 62%) to resource stocks.  Compared to the SRI index’s 10.8% YTD return, the JSE resource index has reeled in a whopping 28% year to date.  

Resource Stocks: Has the boat left the Harbor?

Along with the energy sector, resource stocks have been one of the few winners of 2008. Unfortunately, current economic indicators suggest resource stocks can no longer offer investors refuge.  Fears are mounting that growing oil prices are slowing world growth and lessening demand for raw materials and resources.  Fund managers are increasing their cash reserves (highest since 2002) and banks are paying more then 8% (normally 6.2-7%) to raise money.

June was the first month this year that saw a net loss (1.5%) in the resource sector.  Is the boat sinking or just adjusting course?  One thing is for sure, an exposure rate of 62% (as in the JSE index) to resources may be too risky considering the times.  At this time, I would not jump onboard.

Bottom Line

Tempting SRI funds should have no more then 40% of assets in the resource sector.  Early 2008 SRI gains may have been riding on the wave of energy speculation.  Regardless, South Africa is setting a high bar for emerging markets.

Copyright © 2008 David van der Roest

While writing this blog, a barrel of crude oil is currently trading at an all time high: $140.39.  This is bad news for socially responsible funds.  Socially responsible investment (SRI) strategies typically avoid industries that add to Earth’s environmental woes.  The energy industry’s connection to issues like global warming has kept it on the “sin list” since the mid 1980s.  This conviction was easier to stand behind when crude oil was floating around $50. 

I’m not saying alpha and altruism can’t be friends, but it’s going to take an extra amount of creativity to hedge against black gold.  As the energy sector soars, there are a number of green industries that will indirectly benefit.  The first green industry that comes-to-mind is the struggling automotive industry.  With car sales down, automakers are finally willing to invest in alternative technologies to woo consumers.  These investments are being thrown at battery, energy reclamation, and hydrogen technologies.  While things like hydrogen cells and cold fusion may be decades away from the market place, enhanced batteries could make affordable improvements to our MPG within a year. 

Investors blessed with cash and conscience should look into firms that rank well in the 2007 Environmental Performance Automaker Rankings Report.  Honda, at the top of the list, offers investors with a wonderful long-term opportunity.  Their market share continues to rise in both the undeveloped and developed markets. While Honda is pioneering practical alternatives to wean cars off of petroleum, they continue to improve the little things that make an ordinary car greener.  Through improved transmissions, engines, and aerodynamics, Honda is demonstrating a technical and mechanical prowess that surpasses the competition.

Hedging against the energy sector may require looking at societal habits rather than a specific industry.  What I mean by this is that different cultures will be affected and respond differently to changes in energy costs.  For example, North American industry consumes 3 times as much petroleum per capita than Europe.  Any guess on who’s economy will weather-the-storm better?  In general, a portfolio with euro stocks should perform better than their North American counterparts.     

Copyright © 2008 David van der Roest

   

As bond funds and foreign debt are becoming more accessible to the average-Joe investor, the fixed income industry has overlooked some fundamental social considerations.  In many cases, fixed income is seen as a more passive alternative when compared to equity markets.  Upon further inspection, it becomes clear that a lack of social due diligence regarding your bond portfolio can lead to the same social pitfalls as a hastily selected stock portfolio.    

 

In my opinion, there are two main mistakes that even the sincerest investor could make when selecting bonds.  Fortunately, there are some valuable resources available to help prevent oversight.  The following examine the social pitfalls and then looks at practical solutions for every-day investors:

  

                Corporate Debt:

It is important to be wary of corporate debt that may support firms that leverage questionable labor practices.  This is most prevalent in unregulated emerging economies where astronomical GDP growth is overshadowing labor issues that include high risk activities and child labor.  Today, the returns coming from developing economies can cloud even the most grounded fund manager’s judgment. 

 

Many international organizations and think-tanks are striving to keep pace with developing economies by creating new and updated labor indices to assist investors with ethical decision making.  I have aggregated some of the leading labor indices and databases for reference:   

 

·        International Labour Organization Child Labour Database

·        The US Bureau of International Labor Affairs

·        Calvert Social Index (great for on-shore portfolios) 

 

Emerging Sovereign Debt:

The second pitfall looks at emerging sovereign debt and examines how government policies affect humanitarian issues within their state.  It is important to realize that taking on the debt of emerging counties indirectly supports their human rights policies and foreign policies.  As responsible investors, we need to be aware of a nation’s humanitarian track record before picking up foreign treasuries or similar types of debt.  Listed below are some useful resources to assist in the social due diligence process:

 

        ·       Universal Human Rights Index of the United Nations

·        Freedom of the press Scale

·        Political Terror Scale 

 

I’m currently aggregating a list of my 10 favorite socially responsible funds and portfolio managers.  I’m hoping to get these posted soon.  These two top-ten lists will be a great way to augment the social and political indexes listed in this post. 

 

Copyright © 2008 David van der Roest