High Oil Prices and Socially Responsible Investing

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

   

Read Full Post »

Fixed Income and Social Due Diligence

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

 

Read Full Post »