Investment decisions made today will shape the world of tomorrow. SRI has emerged as a beacon of hope, guiding some investors towards financial decisions that integrate ecological and social values. But SRI investments are almost exclusively directed into the secondary markets for stocks and bonds. In the face of worsening environmental and social crises, new strategies must be implemented that mobilize capital directly into activities that will catalyze a sustainable future. This article proposes a new framework for investing in a sustainable future.
This should be a time to celebrate. Socially Responsible Investing (SRI) has grown into a $2 trillion industry in the U.S. and is spreading rapidly throughout the world. We are beating Wall Street at its own game:
I have been a huge cheerleader of SRI, writing a book (Investing with Your Values), speaking and working in the field for 14 years. For those of us who gathered at the first national conference on SRI (about 40 people at a Colorado dude ranch in 1990) this extraordinary growth would have been hard to imagine. The 2003 conference, with nearly 500 participants, is a testimony to the fact that SRI is meeting the needs of more and more investors.
But in spite of these great achievements, the situation here on Planet Earth seems to be worsening. SRI has not prevented an overwhelming array of social and environmental indicators from reaching the danger zone. I am increasingly concerned that SRI, as it is currently practiced, is not adequate to meet the needs of the 21st century. This is not a time to rest on our laurels; hitting the same nail harder may not build the ship we need now. Even if SRI continues to grow and gather more assets, it is not clear that the impact will be great enough. We need to leverage the success we've already achieved and move to the next level.
I believe we must come up with a new investment framework aimed at getting us where we want to go - towards a thriving, ecologically sound, equitable world. This will require us to take some of the spotlight off Wall Street's markets and to emphasize moving capital directly to individuals, projects, organizations and small businesses that can implement this brighter future.
Early practitioners of SRI used the image of a three-legged stool to talk about strategies.
1) The first leg was "Screening," which primarily involves eliminating investments that fail to meet certain social screens (but also is used for positive screening that rewards good behaviors or activities).
2) "Shareholder Activism" is the second leg, which harnesses the voices and votes of investors to change corporate behavior.
3) Finally, the third leg of "Community Investing" directs capital to Community Development Financial Institutions (CDFI's) that focus primarily on job creation and affordable housing for those who lack access to capital.
This same methodology is used today to measure the size of SRI. According to the newly released 2003 study by the Social Investment Forum, there is over $2 trillion invested in these strategies. But the point I wish to focus on that nearly all (99%) of the $2 trillion is invested in the secondary markets for corporate stocks or the corporate/government bond market. Community investing, (which has been growing rapidly), and direct investing, such as social venture capital, are still barely a blip on the screen.
The main reason I'm starting to feel that our trusty old stool is getting rickety is that SRI is not adequately addressing non-corporate investment opportunities. By coming up with "socially responsible" equivalents (such as mutual funds and separate accounts) to mainstream investments, we keep money in the same ballpark that Wall Street plays in. But as sustainability leader William McDonough recently said at SRI in the Rockies, it is time for us to "swing for the fences." We may only have a decade or two before major ecosystem collapse. The incremental changes that occur through corporate-based SRI may not be good enough.
I am certainly not advocating a retreat from SRI's strategy of improving corporate behavior. This is an essential piece of what must be done, and SRI is becoming more and more effective as it matures. But it would be naive to place all our eggs in the corporate basket. Sustainability is largely a local effort that must involve individuals and communities. Indeed, much of the innovation, from organic agriculture to renewable energy and green building, has taken place outside the corporate system and is now being co-opted by corporations. To be serious about halting our slide towards ecological and/or social collapse, we must find ways to direct capital to where we will get the highest environmental and social return, both within and outside of Corporate America.
If we were to unlock our thinking about investing from the way it is done on Wall Street, what sort of strategies would we come up with? As an investment advisor, I've been trained to help clients focus on their goals, then to come up with strategies that will achieve these goals. But by focusing entirely on the financial bottom line, are we forgetting that lots of retirement money will not do us much good if the planet's life-support system is shattered? Who cares if the Domini Social Index beats the S&P 500 while we witness mass extinction of species and rapid global warming?
I have grouped the challenges facing our world into three categories and propose three broad strategies designed to achieve the goal of reversing these crises and creating a healthy, thriving society.
The investment solution: Community Investing.
We all know that billions of people live on a dollar or two a day. Malnutrition and disease, illiteracy and hopelessness are harsh realities for much of the human family. An elite sliver controls the vast majority of financial resources. This gap is worsening both within the U.S. and between wealthy and developing nations.
It is not OK that billions go without food, water, education or healthcare!
Community investing gets at a major cause of poverty: lack of access to capital. Micro-enterprise loan funds in developing nations help the working poor start their own businesses and improve their lives. This same approach works in the U.S., as well. Many Americans are in need of capital to start new companies or create affordable housing. By directing our savings towards community banks, credit unions and loan funds, we can safely earn interest while making capital available to those who can best utilize it.
The investment solution: Regenerative Investing.
It's no secret that every natural system on the Earth is being destroyed. Global warming, mass extinctions, soil erosion, water depletion, pollution, etc., etc. Thousands died last summer in Europe from scorching heat. Millions have been driven from their homes due to environmental destruction. These are only the early consequences of our carbon-intensive, resource-extractive economy, and there is little prospect for improvement in the near term without radical change to the dominant industries and our own lifestyles.
Regenerative Investing acknowledges that our investment choices shape the world of the future. The fact that we have an energy system dominated by fossil fuels is the result of investment choices made by the last generation. If we are to bequeath a greener future to our children then we need to make greener investment choices. Regenerative Investing takes advantage of the opportunities that are inherent in this crisis. It harnesses human ingenuity to solve our most pressing dilemmas, and expects to receive financial rewards by making far-sighted investments in areas such as clean energy, sustainable agriculture/forestry, recycling and green real estate development. It can be done at every level, from switching to compact fluorescent light bulbs in our home to big dollar venture capital.
The investment solution: Corporate Investing.
Who makes most of the important decisions of our times? Today, corporate energy giants are wrangling over details of an energy bill that will certainly include massive handouts to the fossil fuel and nuclear industries. Halliburton and many other companies have a revolving door with politicians, assuring them of lucrative government contracts. Corporate lobbyists often write key pieces of legislation. We need to reclaim our power!
Socially Responsible Investing, or SRI, is the mature approach to using investments to achieve a "triple bottom line" - financial, social and environmental. My message to progressive activists is "don't give up on the corporations - change them!" We simply cannot abandon the corporate system; it is the one that is calling the shots. By using the tools we've written about for years - screening and shareholder activism - we have entry to the halls of power. We can us our money as a "carrot" to reward companies that are leading us in positive directions, and wield it as a "stick" to halt destructive practices.
I've focused on ways to use investment capital to address these three crises, but of course this is only a piece of the pie. Philanthropy is indispensable. Consumers play a huge role; changing our spending habits and directing capital towards locally owned businesses and "fair trade" production is essential if we want to create healthy economies. Similarly, political activism is a bedrock of society and must work towards electoral reform. But investing is the only strategy that can mobilize billions of dollars quickly.
NEW PORTFOLIOS FOR THE 21ST CENTURY
There are some barriers to implementing an investment plan that utilizes the above strategies. Primarily, the plan requires investors to think differently about the future, and to allocate assets in a different way than has been done traditionally. Most significantly, the new portfolio starts to de-emphasize the stock market. As an investment advisor, I've been trained to teach people that the stock market will always go up 10-12 percent annually over a reasonably long period of time (10-20 years). This is what it did in the 20th century, so believers in history tell us that this will continue indefinitely into the future.
I am beginning to suspect that, although the next decade or two may continue that trend, there is a possibility that sometime this century the underpinnings of our economy could unravel. In particular, the deteriorating ecological foundations of life, combined with population forecasts for another doubling, combined with unstable political situations, have all the makings of an unstable future. Can the economic growth engine keep purring? Only time will tell, but it is not too soon to start preparing appropriate investment strategies as the story unfolds.
The first strategy, Community Investing, is used today by very conservative investors. Community investments are usually extremely low-risk and tend to pay interest similar to C.D.'s or short-term bonds. I would like to see some higher risk, but higher yielding community investments so that investors would have more choice.
Currently the Social Investment Forum has a "1% or more for Community" campaign. This encourages investors to put at least one percent of their assets into community investments. This should only be viewed as a starting point. We need to raise the bar. Judy Wicks, owner of the White Dog Café in Philadelphia and a strong proponent of "local living economies" put her entire portfolio into community investments. She did this before the stock market started its three-year losing streak, so she was quite pleased to have modest but positive returns. The amount that is appropriate for every investor will vary, but I'd like to see this play a more significant role in the future.
Regenerative Investing is the least developed of the three strategies. Getting money directly into sustainable activities requires a lot of digging and personal involvement. Often the best opportunities are through private channels, not the stock market. This is why I have researched opportunities like growing sustainable hardwood trees on former cattle ranches in Costa Rica, and have launched my own green development project in Paonia, CO -- seehttp://www.creekvista.com
I'm currently investigating several other alternative investments and hope to be able to offer these in the future. This may result in the creation of new funds specifically for pro-active investments that get money on the ground, where it is needed.
Only the third strategy - Corporate Investing using SRI - is fully developed at this time. It has an unimpeachable track record for fiscal responsibility and social effectiveness. But some criticize SRI because a broad range of companies can fit within established social screens. For example, a recent issue of the GreenMoney Journal featured a debate between Paul Hawken and Amy Domini about whether McDonalds should be included in a socially-screened index (it's in the Domini Social 400). Ethical conundrums like these are endemic to social screening, but can distract us from a bigger issue: SRI is nearly entirely focused on the secondary market for publicly traded corporations. We can and should debate which ones should pass or fail, but this must not keep us from pursuing more direct strategies such as Regenerative and Community Investing that put money to work immediately.
These are some of the thoughts I've had about a new investment practices for the 21st century. I'd love to hear any feedback you might have.
Article by Hal Brill, President of Natural Investment Services, Inc., (www.naturalinvesting.com) a Registered Investment Advisor, and co-author of Investing with Your Values: Making Money and Making a Difference (Bloomberg/New Society).
He may be contacted at (970) 527-6550 or [email protected]