Leading Social Investment Indicators Report 2001

Transcription

1 Leading Social Investment Indicators Report 2001

2 The Leading Social Investment Indicators Report 2001 Researched, written, and reviewed by: Project director: Bara MacNeill Mark Thomsen Doug Wheat Jay Falk Mark Thomsen This official publication is licensed for the use of the purchaser and not for use by any other person or organization. No portion of the publication may be reproduced in any format or by any means including electronically, mechanically, by photocopying, recording, or by an information retrieval system or by any other form whatsoever, without prior written consent of the copyright holders. In addition, no derivative products may be created using the information in this document. Prior written approval is required before the document may be transferred to another person or entity. This document contains information gathered from numerous primary and secondary sources. SRI World Group makes every effort to validate its data but may not be held responsible for information reported inaccurately. This report is not a recommendation to purchase or sell the securities of the companies or mutual funds named. Securities of the corporations or mutual funds named in this publication may be held by the employees of SRI World Group. SRI World Group does not provide investment or legal advice. Accordingly, SRI World Group does not make recommendations with respect to the advisability of investing in, purchasing, or selling securities, and SRI World Group does not render any advice on the basis of the specific investment situation of any particular client. Copyright 2002 SRI World Group, Inc. 74 Cotton Mill Hill, Brattleboro,VT All rights reserved.

3 Contents Executive Summary Acknowledgements Introduction A Note about Enron v xi xiii xv C HAPTER 1: CORPORATE G OVERNANCE 1 Domestic 2 International 7 C HAPTER 2: MUTUAL F UNDS AND I NDEXES 27 Mutual Funds 28 Indexes 36 C HAPTER 3: CORPORATE S OCIAL R ESEARCH 43 Standardization of Corporate Disclosure 43 Global Corporate Social Research 44 New Products and Other Developments 46 C HAPTER 4: SHAREOWNER ACTION 49 Proxy Vote Results 50 Resolution Sponsors 52 Success Stories 54 Corporate Governance 57 Shareowner Action Abroad 58 Mutual Fund Proxy Vote Disclosure 59 Other Developments 60 C HAPTER 5: COMMUNITY I NVESTING 63 CDFIs and Community Investing Intermediaries 64 Government Incentives for Investors 69 Community Investing and Mutual Funds 71 Economically Targeted Investments (ETIs) 72 Innovative Models for Investment-Grade Securities 73 iii

4 C HAPTER 6: SOCIAL R ETURN ON I NVESTMENT 77 C HAPTER 7: GOVERNMENT R EGULATION AND L EGISLATION 81 Securities and Exchange Commission 82 Congressional Activity and the Department of Labor 87 C HAPTER 8: ACADEMIC R ESEARCH AND B OOKS 91 Studies 91 Surveys 96 Other Studies and Surveys 98 Book Reviews 99 Other Books of Interest 101 iv Contents

5 Executive Summary The Leading Social Investment Indicators Report is designed to make it easier for investment professionals, consultants, and institutional investors to stay on top of the changing social investment market. This report highlights the developments, trends, and products that are shaping the future of sustainable and responsible investing. As most readers would expect, the report covers corporate governance, mutual funds, community investing, and shareowner action. It covers related fields as well, including government regulation and legislation and pertinent academic research and books. The 2001 report will be followed by quarterly reports in Chapter 1 Corporate Governance details some of the groundbreaking corporate governance changes occurring around the world. Corporate governance is the system through which shareowners can hold company management accountable. How companies are governed has been important to institutional investors for years, long before Enron made corporate governance front-page news. Several studies in 2001 supported the argument for improving corporate governance by documenting the positive correlation between best practices and shareowner value. There are also reports describing how CEO pay corresponds to company performance. Chapter 4 Shareowner Action provides information about investor efforts to make specific corporate governance changes at companies. In 2001, the Securities and Exchange Commission (SEC) acted on the following rules relating to corporate governance: Role of Independent Directors of Investment Companies International Disclosure Standards Mandated Edgar Filing for Foreign Issuers Disclosure of Equity Compensation Plan Information Revision of the Commission s Auditor Independence Requirements Internationally, the creation of corporate governance rating systems in developing countries is particularly inspiring, showing that the larger Executive Summary v

6 public is coming to understand the importance of transparency and disclosure. Countries as diverse as Thailand, Russia, Malaysia, and Romania are taking steps toward higher standards for disclosure. China, Germany, Malaysia, Russia, and the United Kingdom are highlighted in this chapter, as they are the countries exhibiting the most significant corporate governance changes in terms of both quality and quantity. Brief information regarding corporate governance activity is provided for more than fifteen other countries. Chapter 2 Mutual Funds and Indexes provides a financial performance review of sustainable and responsible mutual funds and an overview of the new benchmarks introduced to investors in SRI World Group s analysis indicates that social investing continues to provide financial returns competitive with the returns achieved using traditional investment strategies. According to data from Wiesenberger, a financial information company, the performance of 55 percent of social mutual funds was equal to or better than their peers performance. This is true despite the downturn in the technology sector where many social mutual funds were heavily invested. Highlights from 2001 include: Fixed income funds led the way in performance among sustainable and responsible mutual funds. The Parnassus Fixed Income Fund (PRFIX) had the best performance with a percent return. In the domestic equity category, small-cap and value funds posted the best results. Two funds from Ariel Capital Management, the Ariel Fund (ARGFX) and the Ariel Appreciation Fund (CAAPX), were the top performers, with returns of 14.2 percent and percent, respectively. In the balanced fund category, all sustainable and responsible mutual funds finished in negative territory in The Walden Social Balanced Fund (WSBFX) performed the best, with a return of percent for the year. All international funds had a particularly difficult year in Two international social funds decisively outperformed the benchmark of their international fund category. Portfolio 21 (PORTX) and the Enterprise Global Socially Responsive (EGSAX), both of which invest in large-cap companies, soundly beat the Morgan Stanley Capital International (MCSI) World Equity Index performance of percent. The year 2001 brought a modest number of new sustainable and responsible mutual funds into the U.S. marketplace, reflecting the year s pervasive bear market. vi Leading Social Investment Indicators Report 2001

7 In total, two new U.S. indexes and eight European or international indexes were introduced. KLD Research & Analytics, Inc., the creator of the Domini 400 Social Index (DSI), partnered with Russell/Mellon to launch both of the new U.S. indexes. One is the KLD Large Cap Social Index, which is based on the Russell 1000, and the other is the KLD Broad Market Social Index, which is based on the Russell Chapter 3 Corporate Social Research highlights some of the more important international developments in this arena. Notable events include: The Global Reporting Initiative (GRI) has continued to revise and refine a framework for reporting corporate economic, environmental, and social performance. The Sustainable Investment Research International (SiRi) Group has created and begun to use a template for profiling the sustainability of companies around the world. Sweden s Foundation for Strategic Environmental Research, better known as MISTRA, commissioned a report that identified UK-based Henderson/NPI, Norway-based Storebrand Asset Management, and U.S.-based Trillium Asset Management as the three best-practice SRI managers. KLD Research & Analytics, Inc. developed an offshoot of its SOCRATES rating system called PASS, an acronym for Portfolio Advisers Screening Service. PASS provides a snapshot of a company s social and environmental performance, which brokers can use to build portfolios according to client interests. Chapter 4 Shareowner Action examines the impact of shareowner efforts to change corporate behavior. Shareowners voted on more social and environmental resolutions in 2001 than during any other year since 1992, when the issue of Apartheid was foremost in the minds of investors. Improving labor conditions was the issue that spurred the most resolutions and, of all the issues that went to vote, increasing board diversity generated the highest average support from shareowners. The three most popular issues were adopting International Labor Organization (ILO) standards; linking executive pay to social and/or environmental criteria; and phasing out, labeling, or reporting to shareowners on genetically engineered food products. The following items are also covered in this chapter: The pioneer of social and environmental shareowner action, the Interfaith Center on Corporate Responsibility (ICCR), continued to Executive Summary vii

8 advocate change on a wide range of issues, with its members filing over 130 resolutions in the 2001 proxy season. Several mutual fund and money management firms, including Calvert, Domini, Trillium, Harrington, and Walden, increased their involvement in holding dialogue with corporate management and filing shareowner resolutions. Public employee pension funds, including Connecticut Retirement Plans and Trust Funds and New York City Funds, as well as labor unions, filed a variety of resolutions important to their members. Corporate governance resolutions in 2001 sought, among other things, (1) the right to approve stock option plans, (2) greater board diversity, and (3) recourse against excessive executive compensation. In the overall 2001 proxy season, over 70 resolutions were filed and later withdrawn, in most cases because the filers and company management were able to reach agreement through dialogue. Chapter 5 Community Investing discusses how investors are increasingly viewing underserved, distressed rural and urban communities as opportunities rather than as risks to be avoided. By the end of 2001, two well-known community development financial institutions, Shorebank and Self-Help Credit Union, had each passed the $1 billion mark in providing financing to individuals and organizations. The growth in community investing can be attributed to at least two factors: its lengthening track record and the social investment industry s successful campaign to allocate 1 percent of assets to community investing. One of the most important developments in the community investing arena in 2001 was the announcement of a planned federal tax credit for qualified community investments. The New Markets Tax Credit (NMTC) will provide a federal tax credit to individuals who make qualified investments in pre-designated community development financial institutions. Investors should be able to take advantage of the NMTC in late 2002 or early Other items covered in this chapter include: Community investing intermediaries, such as the Calvert Social Investment Foundation, are increasing the range of services they offer to both investors and community development financial institutions. In 2001, the Calvert Foundation loaned over $30 million to domestic and international community development financial institutions, up from $25.5 million in viii Leading Social Investment Indicators Report 2001

9 Congress created the New Markets Venture Capital (NMVC) program in late 2000 and allocated funding for it in The program is being overseen by the Small Business Administration, which conditionally designated seven new NMVC funds in July. It is expected that the New Markets Tax Credit will be available for qualified investments in NMVC companies. There are now at least two mutual funds, the CRA Qualified Investment Fund and the Community Investment Fund, that focus exclusively on community development investments. And, as of the end of 2001, seven other sustainable and responsible mutual funds had allocated at least 1 percent of assets to community investments. Innovative financing structures are being created to open investing in distressed communities to a wider range of institutional investors. One model involves creating investment-grade securities from mortgages, in unique situations, with the support of Fannie Mae. Another model would establish a secondary market for revolving loan funds. Revolving loan fund assets are estimated to be as high as $12 billion in the United States. Chapter 6 Social Return on Investment explains how The Roberts Enterprise Development Fund (REDF) has developed a means of calculating, in monetary terms, the social return on investments made in certain nonprofit organizations. The concept of Social Return on Investment (SROI) is gaining recognition, and the technique REDF has designed, with some adjustments, may eventually be useful for evaluating the social return on for-profit investments as well. Two prominent business schools have attributed enough importance to SROI to include it as one of three criteria for winning a venture capital contest. Chapter 7 Government Regulation and Legislation describes the actions taken in 2001 by the Securities and Exchange Commission (SEC), the Department of Labor (DOL), and Congress that are of interest to social investors. There were several changes related to how investment professionals are allowed to dispense investment advice. The SEC actions in 2001 included: A rule requiring that an investment fund s name reflect the investments in the fund Mandated EDGAR filing for foreign firms seeking U.S. investments Providing public Internet access to Form ADVs, which investment advisers file A report by former acting SEC Chairwoman Laura S. Unger, which continues the assessment of Regulation FD (Fair Disclosure), a rule Executive Summary ix

10 that requires public disclosure of information that may influence stock price The DOL released an Advisory Opinion that clarifies that a plan sponsor may hire an intermediary to offer investment advice, and Congress reviewed the Proposed Retirement Security Advice Act, which would allow an adviser to recommend an investment that would financially benefit him or her. Chapter 8 Academic Research and Books provides details of several different studies that indicate a positive relationship between financial return and environmental, social, and human resources best practices. A number of surveys also showed that corporations, investors, and consumers are increasingly embracing sustainable and responsible business, investing, and purchasing practices. A number of books relating to various aspects of sustainable and responsible investing are also briefly reviewed in Chapter 8. Among the books reviewed are: The Rise of Fiduciary Capitalism: How Institutional Investors Can Make Corporate America More Democratic, by James P. Hawley and Andrew T. Williams The New Global Investors: How Shareowners Can Unlock Sustainable Prosperity Worldwide, by Robert A. G. Monks Socially Responsible Investing: Making a Difference and Making Money, by Amy Domini Sustainable and Responsible Investment Strategies: A Guide for Fiduciaries and Institutional Investors, by SRI World Group, Inc. x Leading Social Investment Indicators Report 2001

11 Acknowledgements The compilation of this report would not have been possible without the many individuals and organizations that supplied us with their data, time, and relevant information. We are grateful for their cooperation and express our thanks. The names of these individuals and organizations appear throughout the text and in the endnotes. Every attempt has been made to cite sources correctly. SRI World Group, Inc. March 2002 Acknowledgements xi

12

13 Introduction In the United States and around the world, investors are increasingly choosing to use socially responsible investment strategies. In the past, social investing was the province of investors who were concerned with the ethical use of their assets. Today, however, there are social investors, including individuals and institutions, that engage in social investing as part of a strategy to achieve competitive returns. Indeed, there is empirical evidence that, along with realizing social benefits, social investors are achieving competitive financial returns from their investments. Socially responsible investing is a methodology that embraces the financial market s ability to identify leading companies. It also provides shareowners with tools to change the behavior of companies that are not meeting expectations. But it is becoming clearer to many investors that attention to corporate governance policies is a precursor to successful social investing. Corporate governance systems establish the framework by which management can be held accountable to shareowners and ultimately to other stakeholders. As Enron painfully showed, a company may provide positive financial statements and perform well in the social and environmental arenas and still not be a socially responsible investment. Attention to good corporate governance practices is essential if a company wants to maintain investor confidence. In addition to corporate governance, socially responsible investors consider a wide range of criteria, including how the company performs financially and how it interacts with its employees, the environment, the communities in which it operates, and society at large. Social investors often avail themselves of the latest corporate social research when selecting investments, and investors use tools such as proxy voting, dialogue with management, and shareowner resolutions to prod management to act in shareowners interests. There is no single social investing approach that is appropriate for all investors. Individuals and institutions choose the specific strategies that best fit their situations and that help them meet their financial goals. SRI World Group compiled the Leading Social Investment Indicators Report 2001 in order to provide investors and advisers with accurate information about the many changes that occurred in the social investing field last year. This report covers all subjects that one might expect in a report Introduction xiii

14 on social investing: mutual funds, shareowner action, and community investing. It also includes an extensive review of corporate governance, related government decisions and initiatives, corporate social research, and the latest academic papers and books. The report also reviews some of the most significant developments in international markets. Defining the scope of the research for any report can be challenging. In compiling the Leading Social Investment Indicators Report 2001, SRI World Group chose to focus on elements that would be of most interest to readers. Some subjects that are not covered include annuities, social venture capital, hedge funds, and real estate. This report also does not discuss money managers involved in the field, nor does it provide market analysis. SRI World Group has made no attempt to determine the size of the social investment market or the social mutual fund market. This report does analyze developments, trends, new products, and relevant statistics related to corporate governance and sustainable and responsible investing. By presenting this information within meaningful contexts, the Leading Social Investment Indicators Report 2001 can help investment professionals and institutions better serve their clients and participants. A note about terminology: SRI World Group uses the terms socially responsible investing and sustainable and responsible investing throughout the Leading Social Investment Indicators Report While they are used nearly synonymously in this report, we believe the terms have slightly different meanings. The term socially responsible investing is generally understood as making investments using ethical and moral criteria. The term sustainable and responsible investment strategies implies the use of environmental, social, and economic criteria in the investing process but not necessarily for ethical or moral reasons. Socially responsible investing is used in this report because it is a term familiar to most audiences. However, SRI World Group believes that the market is leaning toward sustainable and responsible investing, and readers can expect to see this term more in the future. SRI World Group is not a financial advisor and does not sell financial products. As an independent provider of information and consulting services related to sustainable and responsible investing, SRI World Group offers investors unbiased research and analysis. To learn more about how SRI World Group can help you incorporate the sustainable and responsible investing strategies that are appropriate for your organization, please contact Doug Wheat at or dwheat@sriworld.com. xiv Leading Social Investment Indicators Report 2001