The Socially Responsible
Investment Boom

Megatrends 2010::
The Rise of Conscious Capitalism

Do It Yourself

Some of us are very independent. We enjoy doing our own investment research; we already have strong opinions on who the corporate good (and bad) guys are and insist on coming up with our own stocks. We think it’s fun to track our stock picks and, as a Conscious Capitalist, to attend the annual meetings of companies we believe in.

But how on earth do we wade through the SRI universe and cobble together a customized portfolio? Here are a few simple ideas to get you started. (By the way, even if you don’t do it yourself, the ideas on these pages will make you a better fund investor. You weren’t going to hand your money over to a portfolio manager—even a SRI manager—without some notion of how to evaluate the stocks he or she picks, were you? I didn’t think so.)

1. Your broker vs. the “100 Best.” If you have a broker, compare its Recommend List against the 100 firms on the Business Ethics “100 Best Corporate Citizens” list. It will be interesting—and illustrative—to see if your broker likes companies (Wal-Mart? ExxonMobil?) that fail to make the Best Citizens list. Try the same tack with the Fortune “100 Best Companies to Work For” list. I did that once and was relieved to see how many of my broker’s picks were great places to work. Any company that shows up on the Biz Ethics 100, Fortune’s Best Places to Work list and your broker’s top picks is definitely worth another look.

2. Raid the experts’ picks. Dan Boone, for example, manager of the Calvert Social Investment Fund (CSIF) Equity Portfolio, holds a nice little gem in his mostly large cap fund: EOG Resources Inc., a natural gas and crude oil producer, is one of the fund’s top ten holdings (3.86 percent of the portfolio in spring 2005), even though the size of its market cap makes it a smallish pick for Boone’s fund. But the stock’s performance is a knockout. EOG soared 58 percent for the year ending September 30, 2004. Then, like many stocks in the energy sector, it just kept going. EOG began 2005 at around $33 and hit $50 by spring.

And get this: The company is a former Enron subsidiary! All the more reason Calvert’s research team would subject EOG to rigorous environmental and governance criteria. Fortunately for investors, the company passed—with flying colors.

On the environmental front, natural gas—about 85 percent of EOG’s total production—is much cleaner than petroleum, and that means less air pollution and greenhouse gas. While EOG’s record is not “blemish free,” admits Calvert, the company won awards for safety and land reclamation, and conducts its operations in an “environmentally friendly” way.

3. Hit the “Sustainable Business 20.” Every year, The Progressive Investor, Rona Fried’s dynamic online newsletter, surveys top SRI advisors, folks like Winslow Management’s Jack Robinson or Portfolio 21’s Carsten Henningsen. Together these SRI brains ask a simple question: Which companies stand out as the world’s leaders both in terms of sustainability and financial strength? The result is Progressive Investor’s annual list of the top 20 sustainable businesses, the “SB20.” And that’s really saying something.

Why? Because Fried’s website, SustainableBusiness.com, already follows more than 100 sustainable stocks. The SB20 are the cream of a universe of stocks from 16 Earth-friendly industries: Bioproducts, Components, Financial, Flywheels, Fuel Cells, Geothermal, Healthcare, Materials, Microturbines, Natural Foods, Natural Products, Solar, Superconductors, Transportation, Water and Wind.

The 2004 SB20 features two names that just thrilled me: Wainwright Bank and my grocer, Whole Foods. You may also recognize Timberland, insurance giant Swiss Re and the Swedish sustainability pioneer Electrolux, as well as 2004 newcomers, Canon and Philips Electronics N.V.

Fried’s longer list of sustainable favorites are a lot less familiar, which only goes to show how much opportunity lies here. (Quick, name a flywheel company!) I, an admitted CNBC junkie, had heard of fewer than ten.

The SB20, cautions Fried, is not “a diversified portfolio based on industry, market cap or country allocations.” On the other hand, the SB20 excludes companies that are not financially stable. You might decide to follow these stocks for six months or so to get a feel for how they perform. Study their P/Es, Beta ratings, analysts rankings and all the rest. Pay particular attention to companies that make the grade year after year.

Research who else owns them? Calvert? Domini? Winslow Green Growth? The SB20 might alert you to the next Microsoft. That said, the SB20 raises and explores some interesting conflicts, such

as how do you define a sustainable company? Fuel Cell Energy, whose fuel cells will be employed in buildings and power plants, and Ballard Power Systems, which makes fuel cells for the transportation industry—and depends on the commercialization of hydrogen technology—made the 2003 list because their products and technologies “are so important to a sustainable society.” Nevertheless the judges questioned both firms for a lack of interest in a sustainable business culture. Neither made the cut in 2004.

Progressive Investor, insists Fried, is not just about small environmental companies, but about global giants playing a key role in the new green economy including BP, Honda and Chiquita.

Rona Fried’s SustainableBusiness.com and the SB20 are your blueprint to a green corporate future.

The Tail That Wags the Dog

Back in chapter two, we investigated the trend of corporate social responsibility (CSR), the bedrock, or so I thought, of Conscious Capitalism. I asked everyone I talked to, “What is the relationship between SRI and CSR?”

“CSR is to a large extent a response to SRI,” said Co-op America’s Alisa Gravitz. One activist after another told me the same story. Socially responsible investing, they argued, drives corporate social responsibility. It is the “tail that wags the dog.” And how does the humble tail achieve such a magnificent feat? The answer lies in SRI’s “shareholder advocacy” function. Remember Shelley Alpern from chapter two, who clued ChevronTexaco (now Chevron) shareholders in on those highly toxic oil operations in Equador? Alpern is a “shareholder advocate.”

Calvert and Domini, which together manage $12 billion in assets, engage in shareholder advocacy, too. Like Alpern, they often lobby companies (this is the quiet side of advocacy) before introducing shareholder resolutions.

Calvert, for example, convinced Dell to switch from cathode ray tube monitors to liquid crystal displays, which contain less lead. Domini persuaded Avon to review the use of “parabens” chemicals in cosmetics—which may be linked to breast cancer.

The SRI industry jointly manages $150 billion in screened funds. That conveys the kind of clout dedicated activists can only dream about. The Amy Dominis of the world can—and do—dump the stock of companies that violate social and environmental standards.

Does the offending company’s stock then tank? Not now. SRI isn’t that huge a financial force. (Yet.) But when an SRI fund divests, the company in question will endure bad publicity. As we discovered in chapter five, that hurts the brand’s reputation and repels Conscious Consumers at the cash register. The wise corporation avoids both, reaps the benefits of a good name and attracts more conscious investors.

THE 2004 SUSTAINABLE BUSINESS (SB) 20

Baldor Philips Electronics N.V.
Canon STMicroelectonics
Chiquita Svenska Cellulosa A.B.
East Japan Railway Swiss Re
Electrolux Timberland
Green Mountain Coffee Trinodos Groentonds N.V.
Henkel United Natural
Herman Miller Vestas
J M Inc. Wainwright Bank
Novozymes Whole Foods

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