Socially responsible investing is all well and good, you say. But how can a single, small- time investor I – or even a million small-time investors – hope to influence the behavior of huge multinational corporations largely funded by equally huge institutional investors?
Goliath, meet David. You’ll find he looks a lot like you and me.
It turns out that a majority of the "huge institutional investors" in America are the pension funds that manage the retirement savings for people like us. Approximately 58 percent of all stock and bond investments are controlled by employer- sponsored pension plans. Another 12 percent are in IRA accounts. That’s about 70 percent of the total investment economy, or a cool $3 trillion.
At present, the largest holdings in most pension plans include Philip Morris Inc., Exxon, General Dynamics, General Electric and Union Carbide – companies you may or may not want to support with your retirement savings.
But suppose those funds could be directed to companies that practiced "socially responsible business," declining to externalize their costs to workers, the environment or future generations. Suppose those funds could somehow express the moral values and long-term interests of their owners rather than the short-term, profit-only interests of their paid money managers.
Historically, that’s been very difficult to do. First, it has been difficult to find good information about the social performance of companies, and second, government regulations have made it difficult, if not impossible, for fund managers to screen funds for anything other than maximum financial returns.
Thanks to the growth of IRA, 401(k) and SEP plans, all that could change. As individuals gain more responsibility for managing their own retirement dollars, the opportunity for directing those dollars to socially responsible investments could be dramatically increased.
For the last 10 years, by far the fastest growing segment of the pension market is in 401(k) plans and their little sibling, the SEP plan. Both of these plans have the following features: contributions are tax-deductible and all earnings accrue on a tax-deferred basis; both employer and optional employee contributions are allowed; they provide companies and employees flexibility on what they contribute each year; most plans feature employee controlled investment options; and the plans are relatively inexpensive to administer and maintain.
They are also increasingly attractive to companies that are seeking to get away from the traditional pension plans that guaranteed workers a regular monthly check after retirement.
The upshot of all this is that you, as an individual investor, should have a lot more to say about how your retirement funds are invested than you had in the past. Previously, the biggest obstacles to socially responsible pension fund investing were statutory. The Securities Exchange Commission (SEC) and the US Department of Labor have structured rules that prevent the owners of pension trusts from investing in "social pursuits." Those who manage such funds are considered to have a fiduciary responsibility to all employees to get the best possible return while limiting risk to what they consider a "prudent person" would adhere to. The threat of litigation hangs heavily over the heads of those who would violate the SEC guidelines and include "social" criteria in their investment policies.
When you consider the government’s viewpoint, the policy is probably a wise precaution. Who is to say that my "socially responsible" goal is the same as yours? Can you count on everyone enrolled in your company pension plan to be for or against investing in companies that do animal testing, use nuclear power, or are military contractors? The fiduciary director or manager of a pension fund may have a very different set of social priorities than his or her workers, and through control of pension funds, could exercise social mandates that are contrary to your concerns or those of other workers.
The 401(k) and SEP plans offer an elegant solution to this dilemma. By offering each individual employee the opportunity to direct the investment of his or her own funds, these plans could shift most of the investment responsibility and liability from the pension trustee to the individual participant.
The trustee of a pension plan needs to follow the standard legal guidelines around set-up, enrollment, performance monitoring and disclosure. There needs to be a broad selection of investment options in different classes; i.e. stocks, bonds, and fixed rate instruments. But so long as the plan follows these guidelines, a number of the investment options can be in the "socially responsible" category.
Will your investment returns be negatively affected by "socially responsible" investing? There is no historical record that shows this. In fact, the performance record of the 400 "socially responsible" corporations represented by the Domini 400 index (DSI 400) has outperformed the broad market (S&P 500) since the comparison started in May of 1990 (see below).
While there are no guarantees, of course, the early research indicates that you shouldn’t have to take a hit on performance to act on your conscience. As you might expect, personal responsibility is the only course that will lead to corporate responsibility. And by making sure your employer offers socially responsible investment options in its 401(k) plan, you can have a broader impact on your fellow employees and your world.
John S. Adams, CFP, is an investment advisor specializing in socially responsible investments. John lives and works on Bainbridge Island, WA.