New approach to social investing finds favor

Investing according to strict environmental, social and governance principles is fast gaining acceptance among U.S. investors. Traditionally, socially conscious investing meant shunning stocks of companies that engaged in such activities as making alcohol, weapons or cigarettes. In recent years, however, that approach has seen a fundamental shift. While many socially conscious funds still avoid certain industries, some are focusing their research on finding companies that have exceptional environmental, social or governance policies in place. "People are starting to view [ESG investing] as being a little more integral," said Michael Herbst, a mutual fund analyst for Chicago-based Morningstar Inc. "I don't see that as a trend that is likely to reverse." ESG investing, also known as sustainable investing, first gained popularity among non-U.S. investors. Recently, however, it has begun to find favor among U.S. money managers, particularly those who oversee separately managed accounts or mutual funds, said Mary Jane McQuillen, director of socially aware investments at ClearBridge Advisors LLC, a New York-based subsidiary of Legg Mason Inc. of Baltimore.

MORE ACCEPTANCE

"It's transitioning toward more of a retail and U.S acceptance," she said. "Down the road, what eventually will happen or could happen is for everyone to value ESG." It is unclear how many money managers are incorporating such principles into their overall investment strategies. However, the increasing popularity of ESG investing was cited by the Social Investment Forum in Washington last March as one factor behind an 18% jump in socially conscious investment assets between 2005 and 2006. One firm that has been on the front lines in establishing ESG products is The Calvert Group Ltd. The Bethesda, Md.-based money manager recently launched the Calvert Global Alternative Energy Fund and Calvert Global Water Fund and last September (InvestmentNews, Sept. 28) announced the launching of a new series of funds called Calvert SAGE (Sustainability Achieved through Greater Engagement). A catalyst for ESG investing in the United States is increased awareness of global warming — highlighted by former Vice President Al Gore's 2006 documentary, "An Inconvenient Truth," said Bennett Freeman, Calvert's senior vice president for social research and policy. "We've moved more into the mainstream with the ESG approach," he said. Another catalyst is growing acceptance by such institutional consultants as Mercer LLC and Rogerscasey Inc. Mercer, a wholly owned subsidiary of New York-based Marsh & McLennan Cos. Inc., published a white paper in August titled "2008-Global — The ABC of ESG" after seeing momentum in socially conscious investing from clients. Sustainable investing is also likely to get a boost from the new administration in Washington. In-deed, President Obama's $800-billion-plus stimulus proposal includes more than $500 billion in spending on roads and bridges, alternative-energy development, health care technology, unemployment assistance and aid to state and local governments. Steve Fahrer, a partner at New York-based Veris Wealth Partners, has seen an increase in the number of clients interested in ESG investing. Investors have come to the realization that socially conscious investing does not mean putting up with lower returns, he said. "I think that is an old story about getting less return [with socially conscious investing]," said Mr. Fahrer, whose company specializes in such investing and has about $500 million in assets. "Our feeling is that it is not responsible to not get a good return." The Domini 400 Social Index dropped 34.94% in 2008, versus a 37% drop for the Standard & Poor's 500 stock index. Since its inception in 1990, the Domini index is up 8.43%, versus 7.78% for the S&P 500. Even so, some advisers are skeptical of socially conscious investing. "For many reasons, I view socially responsible investing as a marketing ploy to get the most naive investors with the biggest hearts to buy certain mutual funds," said Bedda D'Angelo, president of Durham, N.C.-based Fiduciary Solutions, which has around $27 million in assets under management. "In many cases, companies pay lip service to socially responsible governance but fall short in the execution." E-mail Andrew Coen at acoen@investmentnews.com.