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FT REPORT – FUND MANAGEMENT: The rise of the activist shareholder in the US boosts socially responsible investment

By Sam Mamudi, Financial Times
Published: Nov 05, 2007

Socially responsible investing, typically a small corner of the fund world, is starting to attract mainstream attention in the US.

As concerns about topics such as climate change and human rights grow, SRI funds are a useful option for investors who do not want their savings invested in companies whose policies they disapprove of.

This trend has seen assets in SRI mutual funds grow almost 50 per cent in less than four years, from $23.3bn (£11.2bn, €16.1bn) at the start of 2004 to $34.6bn as of September 30, according to figures from Lipper.

“There has been an explosion of interest,” says Tim Smith, director of socially responsive investment at Walden Asset Management.

The growing interest in SRI is not just among individual investors.

Institutional investors have also started to act on issues such as corporate governance and divestment (see Investors Against Genocide, right).

Denise Nappier, state treasurer and sole fiduciary of the $26bn Connecticut Retirement Plans and Trust (CPRT) Fund, is an activist shareholder whose efforts have, among other things, forced American Electric Power to report on how it is reducing its greenhouse emissions and pushed Walt Disney to split the job of chairman and chief executive.

Recently, CPRT sent a comment letter opposing the Securities and Exchange Commission’s plans to strip shareholders of access to company proxies. The $256bn California Public Employees’ Retirement System (Calpers) and the $86bn State of Wisconsin Investment Board also sent letters protesting the move.

Mr Smith believes corporate scandals, such as the Enron and WorldCom collapses in the early 2000s and the more recent problem of stock option backdating, have led to the growing interest in corporate governance and shareholder activism. “The investment community was often in the past a passive shareholder, but has today become a much more engaged shareowner,” he says.

“The corporate social responsibility agenda has never been more relevant,” says Bennett Freeman, senior vice-president for social research and policy at Calvert, the largest SRI fund firm, with $8bn in SRI assets. Mr Freeman believes attitudes began to change in the mid-1990s, when sweatshop labour exploitation by US companies made headlines. At the same time oil companies were making news for the wrong reasons, best exemplified in 1995 by the criticism Shell received after the execution of Nigerian activist Ken Saro- Wiwa, who had been protesting against environmental damage caused by the oil industry. That year Shell also faced an outcry over its plans to dump the Brent Spar oil rig into the sea. This combination of human rights and environmental worries is a feature of SRI concerns.

Mr Freeman, who was deputy assistant secretary of state for democracy, human rights and labour in the Clinton administration, believes that while attitudes at first changed to prevent the damaging publicity that these issues could bring, today companies are embracing SRI issues as part of their corporate strategy.

There are several examples of this newfound corporate focus on SRI. Unveiled in 2006, the UN sponsored Principles for Responsible Investment established voluntary guidelines for both retail and institutional investors, focused on environmental, social and corporate governance issues.

The Principles document has almost 250 signatories, including Calpers, CPRT and state pension plans from New York and Illinois.

JP Morgan Asset Management, ABN Amro Asset Management and Axa Investment Managers are among the investment managers that have signed up. Total assets of the signatories are about $10,000bn.

Meanwhile, the Carbon Disclosure Project, founded in 2000, now receives reports from 2,400 companies, data that is passed to institutional investors that have more than $41,000bn in assets.

“It’s become a business opportunity and companies are connecting sustainability and social responsibility to their corporate strategy,” Mr Freeman says. This has created an environment where SRI investors can thrive. “The challenge for SRI funds is to become as mainstream as corporate social responsibility,” he adds.

That challenge is in part to define SRI as a positive concept that can attract investors rather than simply a vehicle to avoid certain types of investments.

While the early SRI funds in the 1970s and 1980s were defined by what they would not invest in – alcohol, tobacco and gambling were three standard no-gos – today SRI funds are actively seeking companies that have policies they can embrace.

Funds now screen for companies that have made efforts in the areas of labour rights, human rights, workplace diversity, corporate governance and ethics, environmental and climate change and community efforts.

This type of screening can yield surprising names, with Walden’s Mr Smith highlighting IBM for its positive approach to diversity, while Mr Freeman names BP and Shell for their efforts in the renewable energies area.

But there is more to SRI than corporate issues. Morningstar estimates that of the 100 or so SRI mutual funds in the US, about 40 invest on a religious basis. Some of the better known, such as the Ave Maria Mutual Funds, screen based on explicitly social issues, shunning hospitals and drug companies that it connects with abortions.

Another screen Ave Maria uses excludes companies that provide benefits for the non-married partners of employees.

This leads to some investments that would not normal ly be thought of as the province of an SRI fund – Halliburton, Exxon Mobil and defence contractor General Dynamics, for example.

SRI funds also keep pace with the performance of other funds.

Lipper data shows that year-todate, SRI funds have returned 11.66 per cent compared to the fund industry average of 11.27 per cent.

Leading the way is the Amana Growth Fund, an Islamic-based religious fund. The fund is rated five-star by Morningstar.

What marks the fund out from other SRIs is that it avoids, in accordance with the Koran’s proscription on usury, financial services companies and all interest paying instruments, including bonds.

Sam Mamudi is managing editor of the Fund Action newsletter

Investors Against Genocide

The most highprofile area of the SRI world is the campaign to divest from Sudan. Activists protesting about the humanitarian crisis in Darfur have targeted money managers who invest in oil companies, among them PetroChina, that work with the Sudanese government. Eric Cohen, chairperson of Investors Against Genocide, an organisation launched in September by the founders of the Fidelity Out of Sudan campaign, says that targeted divestment is the activists’ preferred approach after the economic campaigns against apartheidera South Africa proved to be a “very blunt instrument.” That campaign led to many black South Africans losing their jobs as economic sanctions hit.

The scale of the Darfur crisis is also one that most investors can appreciate. “SRI may mean different things to different people, but there is a basic minimum principle,” says Mr Cohen. “No one wants to be connected to genocide.” Fidelity Investments was targeted because it was the largest holder on the New York Stock Exchange of PetroChina stock.

Twenty US states have decided to divest from companies linked to Sudan since June 2005, 14 of them this year. Seventeen of the states have passed divestment laws. Fiftythree colleges have also divested, including Harvard University, manager of $35bn (£17bn, €24bn).

Among investment companies the response has been less positive and even the successes have been muddied. After Berkshire Hathaway cashed out of PetroChina in midOctober, Warren Buffett denied the selloff had anything to do with Darfur, telling Fox News Business that he made $3.5bn on a $500m investment and that with hindsight he felt he sold too soon.

And while an August filing showed that Fidelity had sold 99 per cent of its American Depositary Receipts in PetroChina, Vin Loporchio, a Fidelity spokesman, says the firm did not instruct the sales. “Each portfolio manager makes decisions based on his or her assessment of a stock’s value,” he says. Mr Loporchio would not comment on whether the managers decided to sell for reasons relating to the divestment campaign.

He adds that Fidelity offers funds for SRIseeking investors.

Other investment firms identified by Mr Cohen’s group, including Franklin Templeton, Pimco parent Allianz and Vanguard have retained their PetroChina stakes.

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