Socially Responsible Investment Insights

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Socially Responsible Investment Insights BE THE CHANGE YOU WANT TO SEE IN THE WORLD.

Socially responsible investing (SRI) is an investment discipline that attempts to generate competitive long-term financial returns, while at the same time achieving a positive societal impact.

practices. A growing body of research shows a strong link between strong ESG practices and financial performance.

1 Socially Responsible Investment Insights BE THE CHANGE YOU WANT TO SEE IN THE WORLD. -GHANDI HIGHLIGHTS Doing Well While Doing Good In This Edition We explore the exciting field of Socially Responsible Investing. Socially responsible investing (SRI) is an investment discipline that attempts to generate competitive long-term financial returns, while at the same time achieving a positive societal impact. Socially responsible investors aim for strong investment performance, but also believe their money should be used to contribute to advancements in environmental, social and corporate governance (ESG) practices. A growing body of research shows a strong link between strong ESG practices and financial performance. r According to the US SIF Foundation s Report on Sustainable and Responsible Investing Trends in the United States, as of year-end 2013, more than one out of every six dollars under professional management in the United States - $6.57 trillion or more was invested according to SRI strategies. Integrating deeply held personal or ethical concerns into the investment decision-making process, investors can bring about a world that values and supports human dignity and environmental sustainability. -Amy Domini- What about Performance? SRI investors, like all investors, seek a competitive return on their investments. They don t feel it is necessary to sacrifice investment performance in order to achieve social goals. Terminology- Keeping Them Honest Consistently monitoring the portfolio so it conforms to the client s desired social impact. 1

SOCIALLY RESPONSIBLE INVESTMENT INSIGHTS Issue 1 2 Terminology- Just as there is no single approach to SRI, there is no single term to describe it.

(environmental, social and corporate governance). Traditionally, SRI investors have focused on one or both of two strategies.

investment analysis and portfolio construction across a range of asset classes.

shareholder activism to encourage business practices and to allocate capital for social and environmental benefits across the economy.

2 SOCIALLY RESPONSIBLE INVESTMENT INSIGHTS Issue 1 2 Terminology- Just as there is no single approach to SRI, there is no single term to describe it. SRI has also been called, community investing, ethical investing, impact investing, sustainable investing, values-based investing and ESG (environmental, social and corporate governance). Traditionally, SRI investors have focused on one or both of two strategies. The first is ESG incorporation, the consideration of environmental, community, other societal and corporate governance (ESG) criteria in investment analysis and portfolio construction across a range of asset classes. An important segment, community investing, seeks explicitly to finance projects or institutions that will serve poor or underserved communities in the United States and overseas. The second strategy, for those with shares in publicly traded companies, is filing shareholder resolutions and practicing other forms of shareholder activism to encourage business practices and to allocate capital for social and environmental benefits across the economy. From 2012 to 2014, sustainable, responsible and impact investing enjoyed a growth rate of more than 76 percent, increasing from $3.74 trillion in More than one out of every six dollars under professional management in the United States today 18% of the $36.8 trillion in total assets under management tracked by Cerulli Associates is involved in SRI. Source: US SIF Foundation 2015

Socia lly R e sp o n si ble Inv est o r s in clude small inv est o r s, high net w o rth inv est o r s, f a mily off ic es, univ e r s it i e s, f oun dations, pe nsi on f u nds, n onpr ofit o r g a

E xa m p les in clud SOCIALLY RESPONSIBLE INVESTMENT INSIGHTS Issue 1 3 Who are Socially Responsible Investors?

3 Socia lly R e sp o n si ble Inv est o r s in clude small inv est o r s, high net w o rth inv est o r s, f a mily off ic es, univ e r s it i e s, f oun dations, pe nsi on f u nds, n onpr ofit o r g a n iza t i o n s a nd r e lig i o u s inst it u tions. P ract it i o n e r s ca n be f oun d t h r oug h out the U n ite d Stat es. E xa m p les in clud SOCIALLY RESPONSIBLE INVESTMENT INSIGHTS Issue 1 3 Who are Socially Responsible Investors? Impact Investment Goals Provide Capital Have a positive social, spiritual, environmental impact Generate Financial Returns FAST FACTS $6/36 Trillion Approximately $6 out of $36 Trillion invested with professional managers in the United States is currently done with a social conscious 18% 18% of Assets under Management nationwide are currently invested with a Socially Responsible Strategy Source: US SIF Foundation 2015 Socially Responsible Investors include small investors, high net worth investors, family offices, universities, foundations, pension funds, nonprofit organizations and religious institutions. Practitioners can be found throughout the United States. Examples include: Individuals who invest in companies that offer good labor and environmental practices Credit Unions and Community Development Banks that have a specific mission of serving low and middle-income communities Foundations that support community development loan funds and other high social impact investments consistent with their mission Hospitals and medical schools that refuse to invest in companies that offer alcohol, tobacco or firearms. Religious Institutions that file shareholder resolutions to urge companies in their portfolios to meet strong ethical and governance standards Venture capitalists that identify and develop companies that produce environmental services, or create jobs in low-income communities Real Estate developers that help develop or retrofit residential and commercial buildings to high energy efficiency standards According to the US SIF Foundation, the number of investment managers that are dedicated to SRI has grown dramatically over the last three years. The number of SRI Managers in the United States grew from 333 to 456 and their collective assets increased from 641 billion to $1.93 trillion, an increase of over 200 percent. Alternative investments, which include social venture capital, private equity, and real estate has also grown significantly. The US SIF Foundation estimates that $224 billion in capital was under the management of 336 alternative investment firms at the start of 2014, up from $37.8 billion it identified in 177 firms in 2010.

4 SOCIALLY RESPONSIBLE INVESTMENT INSIGHTS Issue 1 4 Implementation and Performance Misconceptions- When many people hear about SRI, they agree with the principles, but they raise two particular concerns: How difficult is it to implement such a strategy? and Will an SRI strategy result in significantly lower returns? First, let s discuss implementation. Implementation has become much easier with the growth of SRI. Third party firms rate companies on a variety of different socially responsible criteria, so that portfolios can be created that are consistent with client goals. The socially responsible list of companies (according to most SRI Managers) excludes weapons, nuclear power, tobacco, alcohol, pornography, animal testing, and gambling. Managers will typically exclude companies if they generate a significant portion of revenues from any of these areas. More subjective screening can also take place where companies are included or excluded based on their record in human rights or the environment. It s important to remember that it may be impractical for a socially responsible investor to get everything they want. No portfolio is a perfect reflection of the investor s wishes because investors have different values and beliefs. Meir Statman, the Glenn Klimeck Professor at the Leavey School of Business as Santa Clara University studied a variety of different screening processes and found that the process with the greatest positive impact on returns came from a best-in-class screening approach, specifically in the areas of community, environment and employee relations. An example of a manager which utilizes best-in-class screening is one based in Austin, Texas. The firm provides portfolios that are oriented towards those that are socially conscious as well as portfolios that are oriented towards investors that are more interested in sustainable (environmentally friendly) investing. Combining both of these offerings in one portfolio is a popular option for investors who are interested in both sustainable as well as socially-responsible investing. Already one of the most utilized managers among fee-only advisors, this firm became the first to integrate environmental screening into passively managed, lower-cost investment products that include U.S. and foreign stocks, large and small, growth and value. The screening process results in a rating based on a company s energy efficiency, carbon reporting transparency, pollution prevention, recycling program and more. SRI Assets Under Mgmt. (Billions $) (Source: US SIF Foundation) Growth Trad. Investments $641 $1, % Alt. Investments $132 $224 70% Community Investments $61 $64 5%

SRI investors, like all investors, seek a competitive return on their investments. They don t feel it is necessary to sacrifice investment performance in order to achieve social goals.

5 SOCIALLY RESPONSIBLE INVESTMENT INSIGHTS Issue 1 5 How do SRI investments perform? SRI investing spans a wide variety of investments and asset classes, embracing not only public equity (stocks) but also cash, fixed income and alternative investments. SRI investors, like all investors, seek a competitive return on their investments. They don t feel it is necessary to sacrifice investment performance in order to achieve social goals. Admittedly, in the early days of SRI, there were only a handful of managers that specialized in the field, and performance tended to be a bit uneven. Today, some of the largest firms in the investment industry have SRI offerings and there are a number of strong firms to choose from. There are also a number of managers who employ passive, lower-cost investment strategies that are available which can help diversify the portfolio and reduce the impact of one or two managers having a bad year. Qualities to Look for in Socially Responsible Companies Several research studies have shown that companies with strong corporate social responsibility practices are sound investments. Studies with such findings have come from TIAA-CREEF Asset Management, Envestnet PMC, Deutsche Bank Group Climate Change Advisors, GMI Ratings, Mercer, and the United National Environment Programme Finance Initiative, among others. For example, a 2012 study by Deutsche Bank Group Climate Change Advisors found that incorporating environment, social and governance (ESG) data in investment analysis is correlated with superior risk-adjusted returns at a securities level. Today, socially-responsible investing is one of the most exciting, fastest-growing, and least understood areas of the investment world. In our view, this is one trend that is here to stay.

6 SOCIALLY RESPONSIBLE INVESTMENT INSIGHTS Issue 1 6 Disclosures: Past performance is not guarantee of future results. No strategy assures success or protects against loss. The returns of socially responsible investing strategies may be lower than if the money manager or adviser made decisions based solely on investment considerations. There is no guarantee that a diversified portfolio will enhance overall return or outperform a non-diversified portfolio. Diversification does not protect against market risk. Investing involves risk including loss of principal. The information contained in this report is as of February 24, 2015 and was taken from sources believed to be reliable. It is in- tended only for personal usage. To obtain additional information, contact Cornerstone Wealth Management. The Indices mentioned in this report are unmanaged, may not be invested into directly and do not reflect expenses or fees. This report was prepared by Cornerstone Wealth Management. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Economic forecasts set forth may not develop as predicted, and trends discussed may not continue. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. Securities offered through LPL Financial, Member FINRA/SIPC. Alan F. Skrainka, CFA Chief Investment Officer Cornerstone Wealth Management Investment Insights is ed monthly to our clients and friends. Certain material in this work is proprietary to and copyrighted by Litman Gregory Analytics and is used by Cornerstone Wealth Management with permission. Reproduction or distribution of this material is prohibited and all rights are reserved.

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