Conscious Investing Options for the Values Driven Investor

Transcription

1 Conscious Investing Options for the Values Driven Investor The following information is of a proprietary nature. Dissemination to other parties is prohibited without prior consent of Paul Comstock Partners. Copyright 2010 Paul Comstock Partners. All Rights Reserved.

2 Discussion Topics Values Driven Investing Often investors want to consider their personal values in addition to their wealth preservation goals when making investment decisions Socially Responsible Investing (SRI) Negative screens allow investors to withhold capital from investments that are not aligned with their values Impact Investing Investors actively seek out investments which result in social or environmental change Fiduciary issues for institutional investors to consider 2

3 What is Socially Responsible Investing? Socially Responsible Investing (SRI) is a broad-based approach to investing that recognizes that corporate responsibility and societal concerns are valid parts of investment decisions Considers an investment s impact on society Also known as: mission investing, responsible investing, double or triple bottom line investing, ethical investing, sustainable investing, or green investing Common methods investors utilize for SRI Screening Shareholder Advocacy Source: 3

4 How Do You Implement SRI? Define the values the foundation wishes to express Screens of securities can either be positive or negative Negative screens block companies engaged in certain undesirable activities Examples: Industry restrictions such as gambling or tobacco Business dealings in the Sudan Positive screens attempt to identify companies with desirable attributes Examples: high levels of community involvement good environmental practices Determine screens that may be controversial to your board and/or constituency Example Abortion/Birth Control Defense/Weapons Test restrictions if implemented on the current portfolio Names eliminated Names in compliance 4

5 Common SRI Screens Screens Tobacco Alcohol Gambling Defense /Weapons Definitions Avoid manufacturers of tobacco products Avoid firms that produce, market, or otherwise promote the consumption of alcoholic beverages Avoid casinos and suppliers of gambling equipment Avoid firms producing weapons for domestic or foreign militaries, or firearms for personal use Nuclear Power Avoid manufacturers of nuclear reactors or related equipment and companies that operate nuclear power plants Irresponsible Foreign Avoid firms with investments in government-controlled or private firms located in oppressive regimes such as Operations Burma or China, or firms which mistreat the indigenous peoples of developing countries Pornography / Adult Enertainment and violence Avoid publishers of pornographic magazines; production studios that produce offensive video and audio tapes; on television companies that are major sponsors of graphic sex Avoid providers of abortion; manufacturers of abortion drugs and birth control products; insurance companies that pay for elective abortions (where not mandated by law); companies that provide financial support to Planned Abortion /Birth Control Parenthood Labor Relations and Workplace conditions Environment Corporate Governance Business Practice Employment Diversity Human Rights Animal Testing Seek firms with strong union relationships, employee empowerment, and/or employee profit sharing. Avoid firms exploiting their workforce and sweatshops Seek firms with proactive involvement in recycling, waste reduction, and environmental cleanup Avoid firms producing toxic products, and contributing to global warming Seek companies demonstrating "best practices" related to board independence and elections, auditor independence, executive compensation, expensing of options, voting rights and/or other governance issues. Avoid firms with antitrust violations, consumer fraud, and marketing scandals. Seek companies committed to sustainability through investments in R&D, quality assurance, product safety Seek firms pursuing an active policy related to the employment of minorities, women, gays/lesbians, and/or disabled persons who ought to be represented amongst senior management Seek firms promoting human rights standards Avoid firms which are complicit in human rights violations Seek firms promoting the respectful treatment of animals Avoid firms with animal testing and firms producing hunting/trapping equipment or using animals in end products Renewable Energy Seek firms producing power derived form renewable energy sources Seek firms that support sustainable agriculture, biodiversity, local farmers, and industrial applications of Biotechnology biotechnology. Avoid firms involved in the promotion or development of genetic engineering for agricultural applications. Seek firms with proactive investments in the local community by sponsoring charitable donations, employee Community Involvement volunteerism, and/or housing and educational programs The SRI funds that attempt to influence company actions through direct dialogue with management and/or voting Shareholder activism at Annual General Meetings Non-married Avoid insurance companies that give coverage to non-married couples - Healthcare/ Pharmaceuticals Avoid healthcare industries (used by funds targeting the Christian Scientist religious group) Interest-based Financial Avoid financial institutions that derive a significant portion of their income from interest earnings (on loans or fixed Institutions income securities). (Used by funds managed according to Islamic principles) Avoid companies that derive a significant portion of their income from the manufacturing or marketing of pork Pork Producers products. (Used by funds managed according to Islamic principles) Source: Luc Renneboog, Jenke ter Horst and Chendi Zhang

6 Socially Responsible Rating Institutions

7 Corporate Watchdog Groups Several different groups rate companies based on socially responsible standards Corporate Responsibility Magazine (CRO) Annual Top 100 Corporate Citizens list ranks the world s most socially responsible companies Corporate Knights Since 2002 Annual Global 100 list ranks the world s most sustainable companies ETHISPHERE Annual World s Most Ethical Companies list identifies companies who meet their standard for ethics Subjectivity for standards of Good corporate responsibility vary such that lists of companies are wide ranging Corporations often demonized for poor corporate citizenship may show up on lists Energy Companies (RD Shell - Corporate Knight s Global 100) Multinational clothing manufactures (Nike - CR Magazine Top 100) Automobile manufactures (Toyota World s Most Ethical Companies) 7

8 CR Magazine s Top 100 Corporate Citizens Rank Name Symbol 1 Hewlett-Packard Co. HPQ 2 Intel Corp. INTC 3 General Mills, Inc. GIS 4 International Business Machines Corp. IBM 5 Kimberly-Clark Corp. KMB 6 Abbott Laboratories ABT 7 Bristol-Myers Squibb Co. BMY 8 Coca-Cola Co KO 9 Gap, Inc. GPS 10 Hess Corporation HES 11 Cummins Inc. CMI 12 Campbell Soup Co. CPB 13 Pepsico Inc. PEP 14 Microsoft Corporation MSFT 15 Procter & Gamble Co. PG 16 Newmont Mining Corp. NEM 17 Merck & Co., Inc MRK 18 Colgate-Palmolive Co. CL 19 EMC Corp. EMC 20 Baxter International Inc. BAX 21 Wal-Mart Stores, Inc. WMT 22 Johnson Controls Inc JCI 23 Nike, Inc. NKE 24 Cisco Systems, Inc. CSCO 25 PG&E Corp. PCG 26 Occidental Petroleum Corp. OWY 27 Verizon Communications VZ 28 H.J. Heinz Co. HNZ 29 Mattel, Inc. MAT 30 Xcel Energy, Inc. XEL 31 Monsanto Co. MON 32 3M Co. MMM 33 Texas Instruments Inc. TXN 34 Johnson & Johnson JNJ 35 Avon Products, Inc. AVP 36 Dominion Resources Inc D 37 Xerox Corp XRX 38 Dell Inc. DELL 39 Green Mountain Coffee Roasters, Inc. GMCR 40 Hormel Foods Corp. HRL 41 Eaton Corp. ETN 42 Brown-Forman Corp. BF.B 43 Duke Energy Corp. DUK 44 Mckesson Corporation MCK 45 Mosaic Company MOS 46 United Parcel Service, Inc. UPS 47 Wisconsin Energy Corp. WEC 48 Oracle Corp. ORCL 49 McDonald`s Corp MCD 50 J.C. Penney Inc (Holding Co.) JCP Rank Name Symbol 51 Exxon Mobil Corp. XOM 52 Starbucks Corp. SBUX 53 Applied Materials Inc. AMAT 54 ITT Corporation ITT 55 Consolidated Edison, Inc. ED 56 Chevron Corp. CVX 57 Citigroup Inc C 58 Kellogg Co K 59 Air Products & Chemicals Inc. APD 60 Staples, Inc. SPLS 61 Sempra Energy SRE 62 Yum! Brands Inc. YUM 63 McGraw-Hill Cos., Inc. MHP 64 Albemarle Corp. ALB 65 Raytheon Co. RTN 66 Symantec Corp. SYMC 67 Weyerhaeuser Co. WY 68 Sherwin-Williams Co. SHW 69 Union Pacific Corp. UNP 70 Advanced Micro Devices Inc. AMD 71 Southern Company SO 72 JPMorgan Chase & Co. JPM 73 FPL Group, Inc. FPL 74 Pepsi Bottling Group Inc PBG 75 Accenture Ltd CAN 76 Deere & Co. DE 77 Medtronic, Inc. MDT 78 Life Technologies Corp LIFE 79 Quest Diagnostics, Inc. DGX 80 Allergan Inc. AGN 81 Walt Disney Co. DIS 82 Alcoa Inc. AA 83 Freeport-McMoran Copper & Gold Inc. FCX 84 Sara Lee Corp. SLE 85 International Paper Co. IP 86 Lubrizol Corp. LZ 87 Exelon Corp. EXC 88 Ford Motor Co. F 89 CVS Caremark Corp. CVS 90 Coca-Cola Enterprises Inc. CCE 91 State Street Corp. STT 92 E.I. DuPont De Nemours & Co DD 93 Conagra Foods, Inc. CAG 94 Owens Corning OC 95 Northeast Utilities NU 96 Ball Corp. BLL 97 TJX Companies, Inc. TJX 98 Boeing Co. BA 99 Sigma-Aldrich Corp. SIAL 100 Phillips-Van Heusen Corp. PVH 8

9 Corporate Knight s Global 100 Rank Name Sales/Co2 Tonnes Leadership Diversity 1 General Electric Company $27,878 25% 2 PG & E Corp. $8,656 38% 3 Tnt Nv $14,575 20% 4 H & M Hennes & Mauritz Ab $65,236 54% 5 Nokia Corporation $320,536 20% 6 Siemens Ag $32,741 15% 7 Unilever Plc $21,596 13% 8 Vodafone Group Plc $44,047 9% 9 Smiths Group Plc $38,047 0% 10 Geberit $26,028 0% 11 Henkel Ag $20,102 31% 12 Inditex Sa $39,934 22% 13 Procter & Gamble Company $12,803 25% 14 Toyota Motor Corp. $130,187 0% 15 Westpac Banking Corp. $243,299 33% 16 Enbridge Inc $3,782 15% 17 Koninklijke Philips Electronics Na $32,234 0% 18 Diageo Plc $21,642 30% 19 Nippon Yusen Kk $1,336 5% 20 Royal Dutch Shell Plc $5,392 20% 21 ProLogis $347,050 20% 22 Insurance Australia Group $136,069 22% 23 Johnson Controls Inc $22,209 8% 24 Stockland $14,442 15% 25 Encana Corp. $2,819 20% 26 Prudential Plc $0 20% 27 Old Mutual Plc $0 0% 28 Adidas Ag $246,995 17% 29 Bg Group Plc $2,638 9% 30 Groupe Danone $41,095 0% 31 Centrica Plc $3,560 20% 32 Taylor Wimpey Plc $344,292 22% 33 Kesko Oyj $84,084 14% 34 Atlas Copco Ab $26,047 33% 35 Bt Group Plc $52,279 19% 36 Agilent Technologies Inc $42,054 11% 37 L'Oreal S.A. $123,171 21% 38 Coca Cola Company $6,179 20% 39 Intel Corp. $13,188 36% 40 Suncor Energy $2,551 18% 41 Novozymes A/s $3,078 11% 42 Vestas Windsystems A/S $212,202 18% 43 Swisscom $398,323 22% 44 Umicore Sa $21,489 10% 45 Novo Nordisk A/s $41,797 18% 46 Kingfisher Plc $43,050 11% 47 GPT Group $4,228 25% 48 Starbucks Corp. $7,768 22% 49 Sainsbury (j) Plc $53,583 30% 50 Sun Life Financial Inc $397,663 25% Rank Name Sales/Co2 Tonnes Leadership Diversity 51 Lafarge Sa $266 6% 52 Glaxosmithkline Plc $20,115 7% 53 Bluescope Steel Limited $613 13% 54 The Capita Group Plc $104,071 22% 55 Iberdrola Sa $927 13% 56 Origin Energy Limited $184 14% 57 Lonmin Plc $1,345 10% 58 Roche Holdings Limited $39,785 15% 59 Nexen Inc $1,953 8% 60 Credit Agricole Sa $2,545,994 9% 61 Boral Limited $1,177 11% 62 Pearson Plc $43,838 25% 63 SCA AB $3,874 13% 64 London Stock Exchange Group Plc $147,742 15% 65 Transcanada Corp. $630 15% 66 Electrocomponents Plc $82,921 0% 67 Statoilhydro Asa $8,129 40% 68 Toronto-Dominion Bank $244,577 25% 69 Baxter International Inc $16,732 15% 70 Duke Energy Corp. $123 18% 71 Royal Bank Of Canada $255,324 20% 72 Mtr Corporation Limited $2,066 18% 73 Sims Metal Management Ltd $28,277 0% 74 Abb Limited $22,294 0% 75 Trend Micro Inc $46,989 20% 76 Omv Ag $3,131 7% 77 Swiss Reinsurance Company $1,345,811 8% 78 Sembcorp Industries Limited $25,415 25% 79 SAP AG $76,007 6% 80 Smith (ds) Plc $4,960 0% 81 City Developments Limited $60,879 0% 82 Anglo Platinum Limited $1,117 13% 83 Pinnacle West Capital Corp. $139 17% 84 Dassault Systemes Sa $935,609 0% 85 Neste Oil Oyj $5,532 38% 86 Intesa Sanpaolo $301,959 5% 87 STMicroelectronics $7,179 0% 88 Telus Corp. $28,012 8% 89 F & C Asset Management Plc $741,837 0% 90 Tata Steel $2,932 0% 91 Samsung Electronics Company Limited $7,252 0% 92 Housing Development Finance Corp. Limite $451,906 7% 93 Posco $377 0% 94 Banco Bradesco Sa $869,454 14% 95 Ricoh Company Limited $57,194 0% 96 Petroleo Brasileiro Sa $2,053 11% 97 Dexus Property Group $3,367 14% 98 Taiwan Semiconductor Manufacturing Compa $3,189 14% 99 Natura Cosmeticos Sa $0 0% 100 Sompo Japan Insurance $268,870 0% 9

10 ETHISPHERE World s Most Ethical Companies (WME) 10

11 ETHISPHERE World s Most Ethical Companies (WME) Rank Name 1 Accenture 2 Accor 3 Aflac 4 American Express 5 AstraZeneca 6 Avaya 7 Baxter International 8 Becton Dickinson 9 Best Buy 10 BMW 11 Caterpillar 12 CH2M Hill 13 Cisco Systems 14 Cleveland Clinic 15 CRH 16 Cummins 17 Danone 18 Dell 19 Duke Energy 20 Dun & Bradstreet 21 Eaton Corporation 22 Ecolab 23 Flint Hills Resources 24 Fluor 25 FPL Group 26 Freescale Semiconductor 27 Gap 28 General Electric 29 General Mills 30 Google 31 Harris Corporation 32 Henkel 33 Hewlett-Packard 34 Holcim 35 Honeywell International 36 HSBC 37 IKEA 38 Intel 39 International Paper 40 John Deere 41 Johns Hopkins Hospital 42 Johnson Controls 43 Jones Lang LaSalle 44 Kao 45 Kellogg Company 46 Marks & Spencer 47 Marriott International 48 Mattel 49 McDonald s 50 Milliken Rank Name 51 Nike 52 Nippon Yusen Kaisha 53 Novartis 54 Novo Nordisk 55 Novozymes 56 Oracle Corporation 57 Patagonia 58 PepsiCo 59 Petro-Canada 60 Pitney Bowes 61 Premier 62 Rabobank 63 Ricoh Company 64 Rockwell Automation 65 Royal Philips 66 Safeway 67 salesforce.com 68 SC Johnson & Son 69 Sempra Energy 70 Sodexo 71 Sompo 72 Standard Chartered Bank 73 Starbucks 74 Statkraft 75 Stonyfield Farm 76 Stora Enso 77 Svenska Cellulosa (SCA) 78 Swiss Re 79 Symantec 80 Target 81 Ten Thousand Villages 82 Texas Instruments 83 The Aerospace Corporation 84 The Hartford Financial Services 85 The Principal Financial Group 86 Thomson Reuters 87 Time Warner 88 T-Mobile 89 Toyota Motor 90 Trader Joe s 91 Unilever 92 United Parcel Service 93 Vodafone 94 Waste Management 95 Westpac Banking Corporation 96 Weyerhaeuser 97 Wisconsin Energy 98 Xerox 99 Zappos.com 11

12 Sample of Socially Responsible Funds

13 World s Most Ethical Companies (WME) Performance 13

14 Does SRI Investing Compromise Returns? To illustrate how funds typically screen and to consider the impact of screens on performance, we selected a sample of SRI mutual funds for comparison All funds are considered large core holdings and easily comparable to the S&P 500 Fund Fund I Fund II Fund III Fund IV Screens Avoids firms that violate core values and favors those with strong environmental, social and governance records. No alcohol, tobacco, firearms, gambling, nuclear power, or weapons contracting. Favors firms with strong records in environmental issues, workplace diversity and employee relations. Filters out alcohol, tobacco, weapons manufacturers and polluters. No firms with ties to tobacco, gambling, alcohol, weapons or nuclear power. Favors the least offensive firms in sectors such as energy or materials. 14

15 Does SRI Investing Compromise Returns? Manager Performance Analysis February January 2010: Annualized Performance Statistics Annualized Performance YTD 1 year 2 years 3 years 4 years 5 years 6 years 7 years 8 years 9 years 10 years Return Cumulative Return Standard Deviation (Volatility) Sharpe Ratio Alpha Beta Max Drawdown Tracking Error Fund I -2.4% 32.1% -6.0% -2.9% -0.0% 0.9% 1.7% 5.5% 2.6% 1.7% 2.2% Fund II -4.4% 42.2% -6.5% -7.2% -2.6% -0.7% 0.1% 4.3% 0.5% -1.6% -2.1% Fund I 2.2% 24% 13.9% % % 4.5% Fund III -3.5% 31.4% 0.7% 2.0% 5.0% 5.7% 5.5% 7.3% 5.6% 5.9% 6.2% Fund IV -2.6% 35.1% -9.8% -6.5% -1.6% 1.3% 2.3% 6.9% 4.2% 2.8% 3.2% Fund II -2.1% -19% 17.1% % % 3.2% S&P % 33.1% -9.6% -7.2% -2.2% 0.2% 1.2% 5.4% 1.3% -0.8% -0.8% YTD Fund III 6.2% 82% 13.4% % % 6.3% Fund I -2.37% 24.52% % 11.29% 8.77% 0.92% 10.75% 24.45% % -4.26% Fund IV 3.2% 37% 16.1% % % 5.5% Fund II -4.42% 35.56% % 1.46% 12.58% 2.03% 9.26% 27.13% % % Fund III -3.50% 28.75% % 14.13% 14.70% 2.62% 9.30% 15.69% -3.69% 9.97% Return 20% 10% 0% -10% -20% -30% -40% S&P % -8% 16.1% % % 0.0% Manager Risk/Return February January % 10% 20% 30% 40% 50% Fund I Fund II Fund III Standard Deviation Fund IV Market Benchmark: S&P 500 Cash Equivalent: Citigroup 3-month T-bill Capital Market Line Upside% Fund IV -2.65% 30.61% % 7.48% 14.45% 7.58% 13.56% 34.48% % -2.57% S&P % 26.46% % 5.49% 15.79% 4.91% 10.88% 28.68% % % Upside / Downside February January Downside% Fund I Fund II Fund III Fund IV S&P

16 Does SRI Investing Compromise Returns? Manager Performance Analysis Manager vs Universe: Return through January 2010 Rolling 36-month Return Zephyr Large Core Universe (Morningstar) Zephyr Large Core Universe (Morningstar) Return 20 Return months 2 quarters 1 year 3 years 5 years 10 years Aug 2003 Mar 2004 Oct 2004 May 2005 Dec 2005 Jul 2006 Feb 2007 Sep 2007 Apr 2008 Nov 2008 Jun 2009 Jan 2010 Fund I Fund II Fund III Fund IV S&P 500 Fund I Fund II Fund III Fund IV S&P 500 Annualized Excess Return / Standard Deviation Excess Return Manager Style 10% February January 2010 Large February January 2010 Annualized Outperformance 0% -10% -20% -30% Russell 1000 Value Russell 2000 Value Russell 1000 Growth Russell 2000 Growth -40% 0% 5% 10% 15% 20% 25% 30% 35% 40% Tracking Error Small Value Growth Fund I Fund II Fund III Fund IV Zephyr Large Core Universe (Morningstar) Fund I Fund II Fund III Fund IV Zephyr Large Core Universe (Morningstar) Russell Generic Corners vs. S&P

17 Impact Investing

18 Impact Investing Definition: Actively placing capital in businesses and funds that generate social and/or environmental good and a range of returns, from principal to above market, to investor. 1 The main difference in Impact Investing and Socially Responsible Investing stems from the idea of actively seeking change through the allocation of capital Individual investors may find it difficult to meaningfully project philanthropic ideals Some investment vehicles present an opportunity for investors to gain the advantages of scale when trying to accomplish value driven goals The main goals of such funds is to intentionally make change Investments which unintentionally create social good are not included in this category Impact Investing vehicles are not charities. While the goal is to change the society for the better, some financial return is intended on the investment Returns may or may not be above market returns 1. Investing for Impact: Bridges Ventures and The Parthenon Group 18

19 Types of Investors and Vehicles Impact First Investors Investors who are primarily seeking social good and make accept below market returns or only return of capital Financial First Investors Investors who seek market rate returns which also have social impact Hybrid Structures (Layered Structures) Investment vehicles which combine capital from both types of investors in order to create economies of scale and do the greatest good Tranches are often created to satisfy the needs of both types of investors Philanthropic organizations may also take part in the investment to maximize the impact 19

20 Impact Investing Framework Although Impact Investing is a relatively new idea, recent innovations have create many different opportunities for investors to participate Opportunities exist in areas from very secure cash investments and senior debt offerings to private equity and venture capital funds Considerations for appropriate vehicles are driven by risk tolerances and investing goals The framework an investor chooses will drive potential returns As the industry has begun to mature, market returns may be reasonable considering the asset class or the tranche the investor chooses to participate 20

21 Fiduciary Issues Evidence on whether SRI adds or detracts from investment returns is inconclusive Studies of screening criteria show excess returns for companies that rate highly on corporate governance and environmental performance 1 Analysis of SRI mutual fund performance in the US and UK has shown no statistically significant difference with other actively managed funds 1 Ultimately most prohibited SRI areas represent small industries whose impact on diversification is immaterial Tobacco stocks, for example, represent approximately 1.5% of the S&P 500 Exclusion of these stocks typically translates into random tracking error on portfolios A prohibition against a larger industry such as Pharmaceutical or Banking would have a material impact on diversification SRI criteria should match the mission of the foundation Headline risk is a material consideration For example, a foundation promoting cancer research could be criticized for holding tobacco stocks in the portfolio It would be difficult to demonstrate, from a pure investment standpoint, that a portfolio had been harmed by following an established SRI criteria Demonstrating a statistically significant difference in performance could take years A three or five year performance number is not sufficient time to judge the impact of a program Note: The above comments are investment and communication opinions and should not be relied upon for compliance with fiduciary standards under the law. Before embarking on a SRI program, consult with legal counsel. 1.Source: Luc Renneboog, Jenke ter Horst and Chendi Zhang

22 Summary Opportunities exist for investors looking to align their values with their investment portfolios There are options as to how you implement values driven investing within a portfolio Socially Responsible Investing is a way to avoid participating with companies that produce products or provide services inconsistent with your personal values Impact Investing is a way to actively participate in promoting your values in emerging areas around the world while earning a return 22

23 For More Information Two Riverway, Suite 1000 Houston, TX Main (713) Fax (713)