Environmental Investment, Part 2

December 27, 2016

Today’s Blog continues where Environmental Investment, Part 1 left off.

Originally, SRI funds such as Pax World Fund were set up in opposition to destructive activities such as apartheid and the Vietnam War, and thus excluded investment in weapons manufacturers and companies doing business in South Africa. Soon after, negative screening led to the exclusion of tobacco companies in sustainable investment portfolios.

SRI portfolios may exclude a wide range of companies. The Vanguard FTSE social index fund, based on the FTSE4Good US Select Index, excludes companies involved with weapons, tobacco, gambling, alcohol, adult entertainment and nuclear power.

Today, most sustainably managed funds, such as Parnassus, now apply a positive screening strategy on various environmental, social and governance measures. And while Pax World Management and other SRI funds still exclude investment in weapons and tobacco, most now apply a positive strategy and screen companies by considering a range of financial and ESG factors for their portfolio construction.

Naturally, even the application of ESG scoring can be open to interpretation. For example, Parnassus won’t invest in General Electric because of the company’s legacy environmental issues. However, Calvert Investments includes GE because of the company's work on renewable energy.

Instead of excluding stocks in a specific category, such as fossil fuels, MSCI ‘s E.S.G. ratings rank companies according to a “Best in Class” strategy, that is, how they compare with other companies in the same industry sector.  For example, Norway’s Statoil ranks near the top of MSCI’s ESG oil and gas rankings, based partly on its record of fewer spills and lower emissions. America’s Chevron, on the other hand, ranks near the bottom with its higher-risk operations, including actions such as forced shutdowns this year in its new liquefied natural gas plant in Australia and other environmental and human rights violations.

The TIAA-CREF social choice fund doesn’t hold several popular stocks based partly on unfavorable MSCI ratings, including Exxon Mobil (for environmental impact management), Facebook (privacy and data security), Amazon (labor-management practices), and General Electric (labor-management practices, military contracting, weapons).

Life is definitely about choices and compromise. I try to make a positive environmental and social difference with my choices, but often wind up compromising. I love my iPad and iPhone. I shop locally, as much as possible, but I also order goods on Amazon. Investing also offers a lot of choices and compromise—and, it’s something too many of us haven’t considered when we try to make a positive difference.

By Athena Lee Bradley (with contributions from Robert Kropp)

For an interesting (and brief) look at socially responsible investment, check out Balancing your values with practical reality.