WMT blows in on the day the Northeaster hits Boston

So to say that WMT dominated the pages of SRI listservs today would be an understatement! It's been blustery Boston 'Northeaster in October' all day, might have been all that hot air. But is WMT "faking it 'til it makes it?" I'll drink to it today, but keep the 1983 Moet in the cellar for now.

After getting coverage all day, including archived audio of the WMT analyst teleconference, tonight CNBC's On the Money in its new slot 7-8pm had Dylan Ratigan interview Joan Bavaria re. WMT's new approach. Dylan played Joan off against an activist with stopwalmart.org(missed his name) who is invloved with the website www.wakeupwalmart.org which headlined today with Wal-Mart offers sham health care as publicity stunt. I could not find the transcript, but basically Joan described a "benefit of the doubt" approach, looking for back-up in performance down the line.

The host Ratigan played her off against the activist unhappy that the health plan and the worker rates are simply re-packaged benefits. It was impressive to see Trillium mentioned only later as an SRI firm looking at values, not in the initial intro. Positive news for the Global Reporting Initative was Joan identifying the GRI as an early and important step to reporting what WMT actually does, Joan mentioning about 700 firms now report on GRI.

Intriguing was the activist's attack on WMT's business model as the reason for the change, not the personal enlightenement that was claimed for CEO Scott and had been reported by CNBC earlier. The activist pointed to the upper and middle class as being the next segment WMT has to attack, defined it as being discretionary spending tied more to values than value, and that WMT had not "got religion" but was being forced to play by the rules of the segment.

Wed morning 7am on Squakbox I am looking forward to the CFO Tom Schoewe explaining. CNBC has had a high profile with WMT since they hosted in November 2004 the feature length story on The Age of Wal-Mart last year by David Faber. In some ways it is an easy bet. Anyone who has crunched the numbers can tell you: energy efficiency in a truck fleet is a no brainer when gas prices are still above $60/barrel.

Like GE's efforts on "Ecomagination", each new step creates an opportunity to encourage the corporation (which probably has internal tensions on the move they are trying to balance) while undoubtedly leaving some aspects of SRI/CSR undone.

My friend Heather who is active with the North Carolina Net Impact Professional chapter and is a consultant at Deloitte had gotten wind of a new sustainability initative at WMT in the Summer. Sustainable Value Partners are rumored to be heading up the project. I wonder if WMT CEO Scott is the "The CEO of a Fortune 100 retail company who wanted to take a proactive approach to developing and implementing an environmental sustainability strategy" referenced on the SVP client list?

So WMT has definitely won the day one PR battle - it even received airtime on CNBC re. "kinder, gentler" WMT, with the "panel" approach bunted to the 7-8pm slot.

The bottom line for the SRI industry is plain: It's happening, and "who is buying [the drinks]?!" in the words of Shelley Alpern at Trillium. While I am always happy to post a few cocktails, the more strategic questions for the SRI community is:
1. On what terms and
2. At what stage should SRI recognize small positive steps in CSR?

This the complete text of a what one SRI analyst called a "jaw-dropping speech" that Lee Scott made yesterday: http://walmartstores.com/Files/21st%20Century%20Leadership.pdf starts with Twenty First Century Leadership Presented by Lee Scott October 24, 2005 "Thank you for joining me this morning and for giving me an opportunity to share some perspective on our business and the significant opportunities we have ahead of us."

For a PR offensive, crazy how WMT's PR people somehow managed to bury it under the Environment folder, not even WMT in the news? Maybe they need to bump up the PR people from their bunker to a blue-sky orientation to match Scott's more positive orientation.

Today's NY Times article on Wal-Mart's environmental goals (copied below) is just the latest in a string of news along these lines that I've been hearing from this company. As one KLD analyst put it "Big changes for a company that has a history of not being very receptive to this stuff".

CNBC reported Scott had seen the light personally through the Katrina experience. In his speech Scott writes of the post-Katrina events:

During this time, we were asked by governments, relief agencies and communities to help. And look what happened. We were showered with gratitude, kindness, and acknowledgments. This was Wal-Mart at its best.
Katrina asked this critical question, and I want to ask it of you: What would it take for Wal-Mart to be that company, at our best, all the time? What if we used our size and resources to make this country and this earth an even better place for all of us: customers, Associates, our children, and generations unborn? What would that mean? Could we do it? Is this consistent with our business model? What if the very things that many people criticize us for – our size and reach – became a trusted friend and ally to all, just as it did in Katrina?

That ties to my new thesis about the personal enluightement of the leadership, starting with the CEO, proven positively by DOW and GE, and negatively by ExxonMobil.

Either way, adding to GE, a major world business player is now making environmental and social arguments for better business, this after coming to some corporate governance sense after firing an executive earlier in the year. WMT's massive supply chain, next to UPS, FEDEX and DHL, has the potential for a massive knock-on effect, the point made by Amory Lovins CEO of the Rocky Mountain Institute in the NYT article.

Chris McKnett spotted on. C2 of today's WSJ the headline "Wal-Mart Investors Fret Over Costs". The story ranked fourth on WSJ subscriber ranking for the day (of course below the story about Florida home property values!). Chris commented that:
"Making the numbers is the perpetual siren song of the Street, and if the Street doesn't see a connection between the initiatives laid out in the NYT and better margins, it is incredibly hard for CEO's to justify these efforts (one of the reasons GE's Ecomagination was so well received was the smart case that they made for it). For example, Wal-Mart is modifying the wheel wells of their fleet, and if the modification can increase fuel efficiency just 1 MPG about $50 million drops to the bottom line, not to mention the annual benefit = 1 MPG lower emissions X (7,000 trucks x # gallons of fuel used per truck)".

Based on WMT being FEMA for a lot of people around Hurricane Katrina, I'm willing to give them some slack. And what a sweet moment if SRI and CSR advocates can share in the champagne...


Extract from NYT: Wal-Mart to Seek Savings in Energy By MICHAEL BARBARO and FELICITY BARRINGER Published: October 25, 2005 BENTONVILLE, Ark., Oct. 24 -

Wal-Mart's chief executive is set to announce on Tuesday a set of sweeping, specific environmental goals to reduce energy use in its stores, double its trucks' fuel efficiency, minimize its use of packaging and pressure thousands of companies in its worldwide supply chain to follow its lead. Embracing energy-conscious and environmentally conscious goals will help both the company's bottom line and its customers' needs, H. Lee Scott said in an interview Monday.

Mr. Scott's announcement signals that the nation's largest retailer is joining the nation's largest manufacturer, General Electric, in pursuing policies that set specific goals for environmental performance, while advertising those goals to shareholders and customers and the public as strategic business decisions. G.E. faced criticism for its own environmental practices; Wal-Mart has faced criticism as well, but largely over its low wages, scant health insurance coverage and what its critics have called poor treatment of workers. Those critics responded to Wal-Mart's environmental initiative by saying that, while admirable, it is intended to divert attention from the chain's image problems. Mr. Scott told Wal-Mart's top officers here this morning, in an address broadcast to employees by video conference, that, "As one of the largest companies in the world, with an expanding global presence, environmental problems are our problems."

His goals, he said, are to invest $500 million in technologies that will reduce greenhouse gases from stores and distribution centers by 20 percent over the next seven years; increase the fuel efficiency of the truck fleet by 25 percent over the next three years and double it within 10 years, and design a new store within four years that is at least 25 percent more energy-efficient.

News of the upcoming announcement drew carefully parsed praise from leaders of environmental groups, including some, like Environmental Defense, which have a history of joint initiatives with large businesses, and others, like the Sierra Club, which have traditionally been more confrontational. In general, they applauded Wal-Mart's initiatives and commitments, but sought assurances that there would be a continuing public accounting - using a concrete baseline - of factors like energy use, fuel-efficiency and reduction in solid waste. "I thought G.E. was big," said Alyson Slater, a spokeswoman for the Global Reporting Initiative, a group based in Amsterdam that provides guidance to companies seeking to analyze and publicly report their environmental practices. "But Wal-Mart? Whoa. That's big."

"There are a lot of people out there who are going to be skeptical," she added. "But if they can prove it, if they can say: Here's our targets. Here's how we're meeting them," then the company could win over many skeptics, she said. Wal-Mart's community activist and organized labor critics said the environmental goals failed to address what they said were the company's most pressing problems. "It is a diversionary tactic," said Chris Kofinis, of Wake Up Wal-Mart, a group founded by the United Food and Commercial Workers Union, which is trying to organize the chain's workers. "Wal-Mart understands that they have a growing public relations disaster on their hands. American people are looking at a company with $10 billion in profit and $285 billion in sales that makes excuse after excuse about why it can't provide a living wage and health care to its workers."

A friend's kindness: Two Citigroup SRI papers from London

A friend at Smith Barney who acts as a Financial Consultant, Financial Planning Specialist, Guided Portfolio Management offered two papers for good reading on Citigroup Asset Management/Smith Barney's thinking on SRI, best enjoyed with Shiraz on rainy Sunday...!

I was introduced to him by Michael Connor, Publisher & Executive Editor of Business Ethics Magazine who thought it might be worth passing along as a contact for an article on SRI Retirement options I am writing for the Winter 2005 edition of the quarterly magazine. Michael met the advisor at a panel at the NYU School of Business. One of the audience members specializes in SRI investing for average folk. The advisor happens to have a doctorate in environmental science and his marketing material says he "has investigated the relationship of environmental performance of large corporations with their valuations in the capital markets..."

The SRI papers, "Crossing the River..." and "Sustainable Investable Themes" both dated 1 July 2005 from the London Equity office led by Mike Tyrell and Meg Brown who presented to select Citigroup clients earlier this month but were prevented from speaking with SIRAN or other analysts because of compliance issues. In an embarassing twist for Mike & Meg, my peers and I who had accepted the invite to the call were disinvited from the telecon. I deleted the emails as requested (as requested), so perhaps them finding their way to me this afternoon in Boston was a good turn returned in kind.

Sustainability Themes (112 pgs) is referenced as "industry report" providing "A guide to the environmental and social factors affecting each industry sector" offers a neat collection of available SRI info: CitiGroup company coverage, neat "forthcoming events" calendar, lists relevant Smith Barney research, references notable reports written by third parties and outline the expected sustainability reporting timetable of companies. It looks at each sector in a thin but broad way: "in a way that relates their potential financial impact, their environmental and social significance and the degree to which further analysis will be best rewarded".

I noted how they focus on "financial materiality" first, then enviromental and social factors, and finally "where [firms] will be rewarded first" - the first mover argument for SRI. My friend used this in his pitch for SRI used for the HNW market, suggesting that that SRI acts as a proxy for business risk and the old moniker "doing good by doing well" has been flipped to "doing well by doing good". It is used in a SB marketing piece "Doing Well By Doing Good: Interest in Socially Responsible Investing Increases" which references their use of KLD's SOCRATES research in their investment program.

Most interesting from a business perspective is Citi/Smith Barney's SRI research proposition and "SB stepping stones aim to help SRI analysts and financial analysts bridge the current gap between sustainable development and capital markets".

Crossing the river (60 pgs) is intended for action, interpreting SRI for financial markets "as companies begin to exploit sustainable development as a key source of competitive advantage and as institutional investors come under pressure to factor environmental and social factors into their investment processes…"

Questions to ponder: does this SRI capability

1. Replace what niche buy-side SRI analysts could do?
2. Would clients buy this (or indeed get it gratis from sell-side analysts) and still want to buy SRI research, or
3. Would Citi AM/SB (soon to be Legg Mason) buy buy-side research to use as basis for this paper?
4. Does it apply to both sides of Atlantic?

Most interesting to my mind is the strategic conception they offer in "Crossing the river..." which I quote verbatim (Tyrell/Brown, 2005, p.12/60):

Why does [SRI] exist at all?
Why SRI exists at all is perhaps the most interesting question to address. Simplifying to make the point, there are a variety of views of the role that SRI plays in society. We review each in turn and outline their prospects:

1 SRI is a mechanism for allowing those investors with specific moral or political preferences to exercise these through their investments.

2 SRI is the investment dimension of a wider self-regulation process being encouraged by European governments whereby voluntary action by companies, investors and civil society organisations reduces the need for governments to intervene.

3 SRI is a thematic investment strategy for investors who wish to make money by focussing on investing in companies in emerging and growing markets for environmental technology, education etc.

4 SRI is a broader strategy for investment outperformance based on the thesis that robust environmental and social management systems are useful indicators of broader management systems and therefore a lead indicator of share price outperformance.

5 Combining factors 3&4, some regard SRI simply as the investment community’s first steps towards financing sustainable development.

I really like what these two papers add to the SRI lexicon and hope to speak with both authors soon.

Net Impact and MBA's in Boston, who is investing in SRI?

NetImpactBoston, the professional chapter of Net Impact in Boston "New-generation leaders using business for social impact", had its first face-to-face gathering last night at Grafton St Grille in Harvard Square.

A good showing from locals [Maddy, Tammy, Mark O., Chris, Kerry, Amy, Mark R., Birud, Tom, Alex., Kristin, Reese, Chris and me] with surprise visit from Net Impact professional chapter leader in Triangle/NC, Heather. It was excellent to see and meet professionals from different fields, but all looking to build a network using business skills and sustainability as cornerstones to leading a better world. With over 12,000 members in over 100 chapters, NI is healthy and growing. I hope to measure its impact from the SRI perspective over the next 5 years. I have a strong sense that NIB is going to work.

Alex from HBS was there, and asking about roles in SRI at mainstream money managers, like SEI Investments, my old firm in Philadelphia where John Diederich is heading up the SRI at SEI Investments in the investment management unit (IMU). Alex was amusing, relating how she had spoken with a money manager over the summer who said investors "should have no emotion". The money manger's own father died of lung cancer but invests in tobacco stocks!

As always I harvested data-points from my market: I polled members, before last night, on their CSR/SRI thoughts and actions. Nothing like making it personal to see where people are and can get to! One of the best indications of the interest of professionals is the quick build of the NIB membership - now 43 members with no advertising, only using NI alumni networks and word-of-mouth.

In a survey to NetImpactBoston members with 43 respondents in October 2005 I asked four targeted questions with possible answers of 1. Always, 2. Mostly, 3. Seldom, 4. Never, 5. N/A:

Will you pay 20% premium for a good/service from a socially responsible firm?
10% (4)
71% (29)
20% (8)
0% (0)
0% (0)
Do you currently invest in a socially responsible investment fund/stock?
7% (3)
17% (7)
17% (7)
17% (7)
43% (18)
Will you stop purchasing from a company with poor CSR record or reputation?
10% (4)
74% (31)
12% (5)
0% (0)
5% (2)
When you choose/chose your career firm, how important is/was CSR record or repuatation?
37% (15)
44% (18)
7% (3)
0% (0)
12% (5)
Total Respondents
42

From an SRI point-of-view, it was instructive. The response in this demographic - all college-educated, most with graduate degrees, all of whom you assume have some money/investment literacy and CSR understanding:
1. Around a quarter of respondents "Mostly" or "Always" choose SRI
2. Fully 43% seem not to be investing - another worrying sign of the dissavings pattern in the US.

Most compelling for SRI research point-of-view, is the interest in tying consumption and career decisions to company CSR performance. All important elements in the mission of SRI, and with more pressure points, the opportunity to make the case that CSR is the business of business, perhaps. Mr Friedman just flinched?! Not likely, and the NI membership self-selected, but maybe another step toward something better.

I wonder what statistics I could get if we had a bigger sample. A reason to follow up at the Net Impact conference at Stanford 10-13 November. Looking forward to it, with Al Gore, Chairman of Generation Investment Management. Interesting note from SRIiR (the major SRI retail conference in the US) is from David Blood, co-founder of GAM and former player at Goldman Sachs, that they have only raised $80m since inception 6 November 2004. Proof of the power of consultants and the need for a track record before funds flow? My South Africa experience in money management reminds me that 18 months was average for institutional sales.

I look forward to hosting a great SRI panel on “Expecting Returns: How well can socially responsible investments perform” with Nancy Pfund of Bay Area Equity Fund, Lila Preston of Generation Investment Management [founder of the London Business School NI chapter], and Devin Zeller of Calvert. I am also hoping that Lloyd Kurtz can be there, host of SRI Notes.

What is the average person thinking re. SRI? I cannot say, perhaps we will find more pressure through the HNW channel from managers of Separate Accounts programs. At an institutional level, there were two positive comments recently, one from UBS inLondon and one from Goldman Sachs in NYC re. demand from marketplace leading them to look at SRI a little more. More on that later.

ICCR is increasing its profile with a Global Warming Shareholder Campaign

ICCR is increasing its profile with a Global Warming Shareholder Campaign After meetings Tuesday, September 20, 2005 in NYC, a series of telecons have been set. The Fuel Sustainability Investor Education Initiative: ICCR is convening a series of conference calls this fall to brief investors about energy technologies, their economic and environmental costs:

Session 1: Electric Utility Industry September 29th at 1:00 PM
Session 2: Nuclear, Coal and LNG October 6th at 1:00 PM
Session 3: Hydro, solar, Wind and Biomass n October 27th at 1:00 PM
Session 4: Transportation: Oil, Bio-fuels and Fuel Cells November 8th at 1:00 PM
After a few gremlins, the telecon rolled forward, with speakers from Anne Reynolds of Environmental Advocates of New York, Andrew Brengle from KLD and Lena Hansen from Rocky Mountain Institute.

ICCR is over thirty years has been a leader of the corporate social responsibility movement, mainly as an advocate for shareholder activism, using their network of members to lobby for change in corporate behaviour, mainly in socially and environmentally responsible.

According to its website, ICCR's membership is an association of 275 faith- based institutional investors, including national denominations, religious communities, pension funds, endowments, hospital corporations, economic development funds and publishing companies. In the just-finished 2005 proxy season, US shareholders saw something new in proxy proposals: an attempt to reform an entire industry by separating the chair and chief executive officer positions. The Interfaith Center on Corporate Responsibility led an effort in sponsoring shareholder resolutions calling for revitalized leadership in the pharmaceutical industry through separating the roles of the chair and CEO at America's largest drug companies.

ICCR efforts on shareholder actions for climate change/global warming issues are being ramped up in 2005 with the Global Warming Shareholder Campaign. Although ICCR has been pushing companies on climate change since 1991, in recent years it has succeeded in eliciting statements by coal-fired utilities such as AEP, Cinergy, and FirstEnergy acknowledging their role in global warming and pledging cuts in their greenhouse gas emissions. From silence, it is progress.

ICCR’s 2005-2006 shareholder campaign has three main themes:

· New focus on energy alternatives—renewable energy and efficiency technologies
· Broader reach to new sectors and new companies, as well as deeper into traditional target companies
· Broader and deeper institutional investor support—greater effort to attract mainstream investors (pension funds, foundations, university endowments)

In addtion to electricity generators and oil companies, ICCR shareholder actions will target auto companies, banks, home builders, REITS, big box retailers, and insurance companies. Transport companies will follow in 2006.

ICCR wants to survey public pension fund voting practices on climate resolutions, piggybacking on the mutual funds voting scorecard, similar to the one developed by CERES and IRRC's Doug Coggan.

The fesity head of ICCR for the past 4 years is Sr. Patricia Wolf, RSM. In her four years as Executive Director, Patricia has spoken at major national and international gatherings, including The Conference Board, The Triple Bottom Line Investing Conference in Brussels, a conference of socially responsible investment managers in London, The Church Benefit Association and the Social Investment Forum. She was a member of the ICCR Governing Board for eight years, and chaired the ICCR Board from 1982 to 1984. She has also been mobilized Roman Catholic investment in economic development in low-income and minority communities.

One of her best associates is Sister Patricia Daly [Business Face of faith-based investors a nun CEOs are recognizing By Geoff Dougherty, Tribune staff reporter 1,833 words 12 June 2005 Chicago TribuneChicago]. "With her unassuming looks and cream-colored knit blazer, hardly seems the type to raise hell at a Fortune 500 company's annual meeting. But dozens of times a year, she does just that. She leaves her home with a Palm Pilot and a copy of Institutional Investor magazine in her bag and arrives at meetings ready to press for social responsibility. Daly is perhaps the most visible public face of an interconnected group of faith-based investor organizations that have become increasingly influential. Their power flows from investments of more than $100 billion, their willingness to file shareholder proposals year after year, and the fact that few executives want their company to be seen fighting nuns."

Growth of SRI in Europe, Dexia adds to team

News just in from Engaged Investor magazine reports that SRI is gaining ground.

Robert Melia-Watson, News Editor, writes that "Socially responsible investment, known as SRI, has been with us for quite a while for those that think strongly that businesses should strive to run a company which actually cares about what it becomes involved in. A company should strive, at the very least, to have some basic no- go areas like child slavery, armaments and tobacco.

Of course, the whole SRI scene is a lot more complicated than that and there are great grey areas. For example, it is hard to decide whether it is more ethical to spurn a company or try to influence its ethics by investing in it, and influencing the board. Let’s hope this signals a domino effect until no self respecting fund manager will dream of having being invested in any unethical company."

Robert's comments echo some of what my discussion with Ben touched on last week > creating black and white for investors out of the SRI grey. As a real indictaor of that, Dexia Asset Management has announced it will be expanding its SRI offering [DEXIA UPS ITS COMMITMENT TO SRI ] with 12% of its funds are now in SRI.

Dexia Asset Management, which has €81.4bn under management, and a pioneer of sustainable management in Europe, has significantly strengthened its socially responsible investment (SRI) team with seven sustainability analysts working in with the financial analysts and eight managers also dedicated to SRI.

In January 2005 Dexia had sent out an RFP to boutique SRI research firms looking for input and seem to have made the buy-or-build decision with a view to creating organic growth in capability, tapping externally for pinpoint advice. CSR factos are considered for:

1. Human Resources/Social
2. Environment
3. Corporate Governance
4. Customers
5. Human Rights
6. Business Ethics
7. Suppliers
8. Society

The data and information obtained would be further interpreted and analysed by Dexia AM and would serve as input for an in-house proprietary SRI scoring framework. Primary research into sector-specific topical CSR issues including:

• Listed companies Europe, US, Pacific
• Listed and non-listed (non-governmental)
• Bond-issuers (EUR and USD denominated)
  

Dexia reported to Engaged Investor that the socially responsible investment market is flourishing: from December 2003 to March 2005 assets in SRI funds increased by 35%, against 16% for the global market for collective investment in Europe. At the same time, assets in the Dexia’s funds rose by 46%. Hugo Lasat, chairman of the executive committee of Dexia Asset Management explained, “The growth of our sustainable management funds is certainly significant, but that of tailor-made SRI management is even stronger. Long-term investors, such as pension funds and insurance companies, are beginning to commit themselves to the path of SRI. The potential for growth is therefore considerable”.
According to researchers FERI FMI’s database, more than 160 managers offer some 374 SRI funds in Europe. Sustainability analysis at Dexia Asset Management (formerly Cordius Asset Management) relies upon assessment of the relations between a company and all its “stakeholders” (shareholders, clients, employees, suppliers, the environment and society) in order, within each sector, to trigger the indicators of sustainability.For instance: the investments of a company in the training of its employees and in partnerships with its suppliers create opportunities for product innovation. A safety policy for exploitation sites minimises the risk of accidents, which can have a very negative impact on the image of the company and its goodwill.

In April 2004 EuroSIF reported Dexia's activity, including industry roadshows and their Dexia Quant range of funds managed through quantitative models developed and tested in-house by the quantitative management fed by over 40 alpha factors likely to generate an out-performance, and each with a history of more than twelve years, these models select the most attractive stocks in each of the MSCI sectors (energy, finance etc).

Dexia's activity this year included Dexia SRI project gathers momentumPortfolio21, the SRI-project set up by the insurance companies of Dexia, Dexia Asset management and Stock at Stake N.V. that focuses on Human Rights, gathers momentum. The Portfolio21-model in April 2005 reportedly applied to 6,07 billion euro under management against 4,75 billion euro September last. In December, Stock at Stake N.V. addressed 19 corporations about alleged violations of ILO core conventions. The assets under management are part of the reserves for car insurances, life insurances, pension provisions, and so on.

DJSI Europe launches in NYC; BMO Groupo captures the halo

The same week as season 4 of The Apprentice starts on NBC with Trump playing mentor in NYC, Alex Barkawi and his colleagues at SAM launched their DJSI in North America.

It is a significant development for SRI in the US. Other European-driven US ventures have started in the last 12 months: EIRIS have had a researcher on-shore since early 2005, while F&C launched a 2-person research shop in mid-2004. But the Dow Jones brand and distribution in the US, together with the global approach and solid method SAM uses, creates the potential for a significant shift in the competitive landscape.

The launch event for the Dow Jones Sustainability North America Index and Dow Jones Sustainability United States Index introduced in New York on 23 September included:

• Jane Ambachtsheer, Global Head of Socially Responsible Investing, Mercer Investment Consulting;
• Bailey Bishop, Principal, State Street Global Advisors; and
• John Prestbo, Editor, Dow Jones Indexes.

In a way that describes the mission-building nature of most ventures in the nascent SRI niche of the money management industry, Alex also invited me and SRI majors from KLD (the brains behind the Domini 400), Tom Kuh and Peter Kinder.

DJSI were launched in 1999. Based on the partnership of Dow Jones Indexes, STOXX Limited and SAM using "objective and professional benchmarks integrating economic, environment and social criteria". At August 31, over USD4 billion is managed against the DJSI by asset managers in 14 countries.

The Dow Jones Sustainability Indexes are based on a best-in-class approach and comprise the leading companies in terms of sustainability from each industry in the respective regions. The underlying evaluation by SAM covers general and industry specific sustainability criteria and accounts for long-term economic, environmental and social trends.

It is interesting that Northfield Info Systems of Boston - who have done work with KLD on their indices, was invloved too, according to Bill Baue at socialfunds.com:

"When conducting a study on socially responsible investing (SRI) indexes covering the US market, Northfield Information Services had to isolate US companies from the Dow Jones Sustainability Indexes (DJSI) World Index because DJSI did not offer a US index. That changes today, with the launch of the DJSI United States Index, comprised of 93 companies, as well as the DJSI North America, which adds 18 from Canada for a total of 111 components. "

Greenbiz also covered the story at Dow Jones Sustainability Index Launched for North America as well as posted to Canadian bank BMO Group which quickly incorporated coverage into its CR profile. How companies react to index inclusion/exclusion will make a neat academic study, and something I notcied when researching the JSE SRI Index last year for socialfunds.com.

WIlshire Associates survey of Active Socially Responsible Investing

I had a good sandwich from Pressed again yesterday. Kerry suggested I try it after reading in her favorite Daily Candy that funds from sales were being directed to Katrina victims. Sitting in International Place trying to be heard over 2 protesters with megaphones complaining about the CO from the Big Dig ventilation chimneys (I think). In the most polite fashion, the 30 or so in the chairs stepped around and looked past the curiosity and gamely stuck to eating sandwiches and speaking - loudly!

I lunched with Ben Lavine CFA ex-Wilshire Associates just in town from UCLA and joining BatteryMarch. Ben led the Manager Research Group in late 2004 team to publish the February 2005 "Active Manager Survey Socially Responsible Investing". The impetus was to check what active managers outside of those with specific SRI mandates like Catholic Funds were doing, to create a market view for Wilshire and clients if they needed to give advice or make selection recommendations. Some impetus came from the Horace Man Fund, a philanthropic investment fund Wilshire works with.

Wilshire purposely focused on active mandates given that the marketplace for passive socially-responsible investment providers is fairly well known.
Wilshire highlighted:

Active SRI is not widespread within the traditional institutional investment community. Such mandates mainly reflect a manager’s accommodation of client-specific requests on social restrictions.

Managers typically view the social aspects of these mandates as divorced from the investment process. Active managers are primarily focused on identifying investment opportunities as defined by superior financial and operating performance.

Most firms do not dedicate resources, outside of retaining data vendors, to run socially responsible mandates. Most execute the process using a separate overlay and do not employ separate proxy voting procedures unless directed by the client.

Few managers can objectively measure the performance impact from the social restrictions. None can demonstrate whether the mandates are achieving optimal ‘social objectives’ versus a baseline benchmark. In other words, how does a client know whether their portfolio is achieving an optimal level of social utility given a certain level of tracking error against the market benchmark or a socially responsible benchmark?

Finally, Wilshire did not elicit survey responses from active investment entities whose primary focus is to invest in a socially conscious manner either for reasons related to moral principals or for financial value-added (so-called ‘angel effect’). The survey just focuses on firms who provide traditional active management services to the institutional market that are approached to run socially responsible mandates.

The results from the question on sources of SRI research was enlightening:
39% came from "client-directed", and 22% from "internal research", with KLD at 22%, Innovest at 17%, ICCR at 6%, IRRC at 28% and ISS with 39%, obvioulsy reflecting the corporate govenrance business.
Common socially-restricted categories include consumer products (tobacco, alcohol), weapons manufacturing, environmental scorecards, and corporate governance. Screening for Tobacco was at 100%, Environment at 29% and Nuclear Power 41%.

Ben mentioned the survey of 70+ possible managers was narrowed to a select group of 36 money managers, with response from 32 of which 18 indicated managing at least one SRI mandate. The money managers ranged from mainstream like Bernstein to SRI shops like Dreyfus, and included big players State Street and BGI. For purposes of this survey, Wilshire defined active socially responsible mandates as client accounts which have restrictions on investments in securities with pre-specified exposures to certain societal activities.

Wilshire excluded religious-oriented mandates (e.g., Catholic Healthcare Trusts) from consideration given their more refined set of criteria that might not be applicable to broader socially responsible mandates. Requests were only made for responses for active investment mandates given that the marketplace for passive index vehicles is fairly well known (e.g. Domini, Calvert, Parnassus). Wilshire did not elicit survey responses from active investment entities whose primary focus is to invest in a socially conscious manner either for reasons related to moral principals or for financial value-added (so-called ‘angel effect’). This survey just focuses on firms who provide traditional active management services to the institutional market who are approached to run socially responsible mandates.

Ben was most impressed with BGI's approach in partnership with KLD's Social Select Index launched 31 January 2005. The first iShares® ETF for Socially Responsible Investors tracks KLD's Select Social Index, that seeks to optimize socially responsible factors while managing risk, making it much more appealing to benchmark-driven institutional investors. As opposed to screening out whole sectors - something that has punished Domini Social Index 400 in the past 18 months - the SSI uses an under-weighting approach to problem sectors, trying to be more quantitative about degrees of CSR.

Domini Social Equity's overweight to in technology stocks produced outperformance in the late 1990s, but underweight holdings of energy and utility stocks have hurt recently: ''It's kind of a double whammy that put them near the bottom of their category," David Kathman, a Morningstar analyst who follows the Domini Social Equity fund, was reported as saying in August in the Boston Globe [BOSTON CAPITAL The price of conscience By Steven Syre, Globe Columnist August 2, 2005].

The challenge to screening has always been the cuts a regular portfolio will take, especially some of the overlap for large cap value managers. Ben thinks the market has already voted on the poor corporate performance of the firm, and that includes environmental, governance and other classic SRI factors. My recent experience with a screening product for a Philadephia Separate Accounts sponsor product this Summer receiving a monthly update of tickers was that the 9 issue areas produced a 52% screen out of a R1k Large Cap manager model portfolio. That explains why many wealth managers simply chop off screening impact at 10% of portfolio to keep sub-advisors in the Separate Accounts programs happy. SRI is a "necessary evil" I was told with a smile.

Ben thinks some of the undervalued research Wilshire's survey presented was the tracking error around benchmarks. He thinks too few investors explore the impact of the SRI factors in their portfolio.

My biggest takeaway was the need for "SRI attribution" and the ability to measure one SRI fund or manager against another. I am intrigued by the opportunities that these present.

I look forward to reading Bill Baue's article in Business Ethics Meet the Faces Behind 5 Great SRI Mutual Funds which profiles five SRI money managers who invest for stellar performance and social justice and "in the top ranks of mutual fund performance, and who fuse financial discipline with attention to social justice and ecological sustainability", including Jack Robinson, Winslow Green Growth Fund; Diane Keefe, Pax World High Yield Fund; John Montgomery, Calvert Large Cap Growth Fund; John Rogers, Ariel Appreciation Fund; and Ingrid Dyott, Neuberger Berman Socially Responsive Fund.

WSJ watches COX balancing act

Alan Murray last caught my eye for lambasting the SRI/CSR agenda in his opinion piece re. Jeff Immelt's Ecomagination [see posting "Just Imagination?" 5/09/2005]. Yesterday's WSJ had him offering back some bouqets in covering the challenge of CEO pay. [The EconomyBUSINESS: New SEC Chief Tackles a Big One: CEO Pay By Alan Murray890 words 21 September 2005 The Wall Street JournalA2]

It appears while Immelt won the battle for the mantle of head of the world's best run corporation [see Cover story in Barron’s “Real Asset: Barron's survey of the most respected corporations” by Michael Santoli 12 September 2005] but lost in the cash remuneration land grab to 2 peers he beat for the job. GE remains well-respected, and while the jury is still out on ecomagination, even Bill Clinton gave Immlet kudos on Meet The Press Sunday for his role as business leader in leading the USA where the government is failing, like climate change.

Jeffrey Immelt, Robert Nardelli and James McNerney. Mr. McNerney (Boeing Co.) has a package worth some $62 million if he stays for six years, Mr. Nardelli, (Home Depot Inc.), earned $28 million in 2004. Mr. Immelt has total compensation of $8.3 million - though the company has created "performance share units" that will make him wealthy if the company does well enough in the next few years.

Chris Cox as SEC head had taken much heat in parts of the SRI community for the perception that he would not be strong enough advocate for investors [see blog 4 August]. If you had to ask the average professional who Eliot Spitzer was, they would probably tell you. Seeing Spitzer speak at the first NYSSA Corporate Governance conference [Eliot Spitzer and John Bogle Keynote Speakers atNYSSA’s Corporate Governance Conference] in late 2003 it was impressive to see his cross-sector drive to the better interest of the consumer/investor, the person on the weaker side of the business transaction power scale.

But Cox is considered more cautious, and he will prove his own mettle. WSJ's Murray writes
"CHRIS COX ISN'T STARTING out as the capitalists' tool his critics made him out to be... is smart... got good political instincts.

Mr. Cox has directed staff to explore new rules regarding CEO and executive pay. The rules would not directly limit pay - reflecitng some wisdom by from the failed attempt by Government when it imposed a million-dollar cap on tax-deductible pay back in 1993, prompting an explosion of stock options. They are drawing a lesson from the SRI/activist community: sunlight. Judge Brandeis's 1911 comment has long been used in legal circles, and obviously in situations where change is needed (see Let The Sunshine In Joel Makower April 22, 2005)

"Compensation packages for executives have changed dramatically since 1992, when the commission last addressed this topic," Mr. Cox told The Wall Street Journal in an interview published Monday. Better disclosure, he said, "clearly needs to be addressed."

Murray reports that the growth in CEO pay has been "explosive". He writes the median salary and bonus for chief executives at 350 major U.S. companies jumped 14.5% last year to almost $2.5 million, according to analysis by Mercer. My first close examination of CEO pay when I lead Villanova University's first ever team to the inter-MBA Net Impact/Leeds Business Case Compeititon in Boulder and the case was on GSK. The competition allows a week to research the company, then the students are given the case question Friday 7pm for work through the night with delivery by 8am Saturday for presentations through the morning. We guessed that garnier's pay issue would be part of the make-up. Garnier's CEO package had attracted attention in UK from NGO's like AIDS Healthcare Foundation response to news reports of AIDS pharmaceutical giant GlaxoSmithKline's decision to pay its chief executive an annual US$10 million. The good news in 2002 had been that GSK had backed down after shareholders protested the proposal at the AGM. BBC reported following the meeting, the company said in a statement: "After taking into account shareholder views, the company has decided to postpone a decision on the matter".

Murray mixes Gordon Gecko with an attack on corporate governance efforts. He advances 2 reasons: "The first is timeless: Greed. It's still a powerful motivator in human affairs. The second is a direct outgrowth of the reform movement. As the pressures on CEOs increase, their tenures decrease -- usually, because of poor performance. That leaves corporate boards scrambling to find successors, often from the outside. And outsiders tend to cost more than insiders."

The nagging question always is "Is he really worth it?". Murray writes "The day Mr. McNerney's appointment became public, Boeing stock jumped more than $4 a share -- adding more than $3 billion to the wealth of the company's shareholders. NC Times reported "Investors sent Boeing's share price up $4.29, or 7 percent, to close at a four-year high of $65.96 Thursday on the New York Stock Exchange. " What he doesn't factor in is the level to which previous CEO's, perhaps also arriving to fanfare had driven the price. Off a low base...

See
Are CEOs overpaid? Walter E. Williams (archive) March 2, 2005
CEO Skill and Excessive Pay: A Breakdown in Corporate Governance? led by Stanford's Robert Daines February 2005.

In an interesting juxtposition, while Murray's second reason was the "inflation" CEO's doing their job may create, the corporate governance regulations caused by misdeeds of their CEO peers was playing out elsewhere in NYC. WSJ reported [Tyco Figures Will Be Jailed at Least 7 Years - Judge Orders Kozlowski, Swartz To Also Pay Back $240 Million; CEO's `Kleptocratic Management' By Mark Maremont 20 September 2005 The Wall Street Journal] in New York, inmates with > six years to serve until parole eligibility are sent to one of the state's maximum-security prisons, which house 22,000 mostly violent offenders, according to Linda Foglia, New York State Department of Correctional Services spokeswoman.

Prisoners in such facilities are housed in cells, and work six hours a day at tasks like sweeping, painting, or working in the library, she said, adding that inmates generally are paid $1.05 a day. I wonder how many decimal points my .xls will need to calculate that with his original salary as numerator?

Are CEOs paid too much? Write to Alan Murray soon at business@wsj.com.

Why SRI-Extra; Blogging SRI on Socialfunds.com by Bill Baue

Bill Baue at Socialfunds.com explored SRI blogs September 07, 2005, highlighting both Lloyd's team blog and SRI-Extra. Bill identified how blogs allow "candid comments" on developments in socially responsible investment as they happen.

Why blog SRI?
SRI-Extra serves 3 functions:
1. A place to put thoughts that are often independent and not immediately applicable to current tasks.
2. To create a window for others interested in the industry. I remember being in grad. school and really wanting to see what it is like from the inside out. Here I may be able to attract new and more talented people into the SRI industry to the benefit of all.
3. Have a bit of fun and connect with others in SRI.

I hope people reading SRI-Extra see the scope we cover. SRI touches so many parts of the investment business - to call it SRI is sometimes an injustice. I was cautioned early on by a reader to stay "on-topic" with my blog. But from the descriptor on, you can see the business of investing using values and value, touches so many places. I hope readers may see how complex SRI is.

I was interested to read Lloyd's thoughts

"SRI is in a strange position--it has been around in its present form for 20 years or more, and is gaining mainstream acceptance, but at the same time needs to evolve to keep up with client demands and ensure that it remains relevant going forward," said Mr. Kurtz. "And things are happening very quickly in this profession, on several continents."

SRI-Extra aims to speak candidly, something I think more easily achieved with less embedding in the SRI movement and being more internatiuonal in perspective. I hope SRI-Extra provides for people interested in SRI move opportunities to window on the SRI mission, and especially across borders.

Internal blogs
Early on I realized that if I would be unable to commit to a stream of daily submissions. I am still getting the balance right. I believe in blogging for thought workers, and encouraged both KLD and the senior analysts to write, but nothing has happened yet. Nevervousness about liability and news articles about fired employees probably did not help [see Employee fired for blogging and Delta employee fired for blogging sues airline].

Over this past summer I project managed for the first time in the KLD Product Group a cohort of 12 mostly MBA students and had each contribute to a team blog. Some were better than others: one blog had 160 postings, another just 1. We had a remote consulting work model, and the blog was an excellent way to connect between Boston, NYC, and Asia.

While the content may sometimes by proprietary to KLD, I am encouraging the interns to adapt the content and re-publish under their own blog, as a window to future interns and those interested in getting into the industry.

Blogs also allowed the interns to have fun "unofficially", like the entry "Excerpt from the forthcoming intern guide, subtitled: Sleep? What's That?"

Conventional wisdom on SRI: more indication of boomers investing bravely?!

Interesting comments coming from the financial planning world on how SRI is growing [WHY THE CW ON SRI IS WRONG By Geoff Lewis3,004 words 1 September 2005 Registered Rep.95Volume 29; Number 9].

Although Lewis short-dates SRI to the 1960's - a broader view points to the early 20th century Quakers or even ancient Jewish laws re. dealing with one's money, the author does identifies that "(S)ocially responsible investing ... the concept has been viewed with suspicion in most parts of the investment industry."

He identifies conventional wisdom for advisors on the SRI advice business kept away from SRI clients which were
1. Were long on political and ethical commitment, but short on investing smarts.
2. Tended not to bring in big accounts.
3. By using nonfinancial criteria to pick stocks, these investors were doomed to underperform.
4. SRI remains a tiny slice of the equities business.
5. "Few he-man wirehouse brokers have snagged a trip to Bermuda for plugging SRI funds" - I liked that reality check!

But SRI is gaining momentum as a niche business with very loyal customers and, with a growing range of SRI products - including hedge funds - and a cadre of top-flight managers in the field, it's getting harder to prove that there is a performance penalty. Just this week Wednesday CitiGroup AM was shopping their SRI team from London to SIRAN and their US clients with a presentation called "Crossing the River" with a team led by Meg Brown.

I have more on this later.

The Limits to Profit stop in New Orleans?

An interesting take on the profit motive of business by Alan Murray at WSJ [BUSINESS: The Profit Motive Has a Limit: Tragedy By Alan Murray 7 September 2005 The Wall Street Journal A2]. Alan Murray covered the GE Ecomagination launch in May with heaps of skepticism (see post May 9), and follows the same vein in trying to find the thin line between when Wal-Mart must make money and put down the bar code scanners and help their employees and customer base - in Murray's view a Dickensian trade-off. I agree it is adiificult position, but I suggest it is made more difficult were one comes from the view that social, environmental or governance factors never had a place in making business work well in the first place.

"GOOD CORPORATIONS aren't made to be good charities. They are, after all, stewards of other people's money, and their mandate is to make a profit. The best of them focus on that mandate with ruthless efficiency". Murray highlights the personal epiphany of WMT's Chief Executive Lee Scott and his wife last Wednesday.

Murray describes Mr. Scott's balancing act.
"We can't send three trailer loads of merchandise to every group that asks for it," he says. He tells of being in Houston on Monday, and talking to someone who wanted Wal-Mart to donate 2,000 blankets to help refugees. Mr. Scott turned down the request. "We have to, at the end of this, have a viable business," he explains."

My two takeaways from this article are:
1. Alan Murray's stretch to understand business as anything outside of profit.
2. The bump back to WMT's philanthropy and community credentials by reading the story from inside the CE's head.

WMT received the best possible endorsement Sunday morning on Tim Russert's Meet The Press She drowned Friday night’ Sept. 4: Aaron Broussard, president of Jefferson Parish, La., breaks down while telling NBC's Tim Russert the story of the death of the mother of one of the parish’s employees. The distraught New Orleans community leader gave heartbreaking personal testimony of a colleague who promised his invalid mother help day by day, but eventually she drowned. The Feds never arrived.

Broussard's ringing endorsement was along the lines that WMT was ready to help, trucks were turned away, and why could the Fed. response not be like WMT?

Watching the impressive media coverage from WMT since the disaster, including the full-page advert supporting the American Red Cross and Salvation Army in Wednesday's WSJ, I wait with great interest to see how public opinion toward WMT improves, and how SRI ratings agenices may change their ratings.

A final WMT note: late into the night watching some stunning tennis at the US Open between legend Agassi and new-comer Blake through 1:15 a.m. I stumbled on the South Park episode where the brats (I do not know my way around the characters like I do Seinfeld) tried to destroy "Wall-Mart" but find the "heart" which is a "mirror". With sardonic humor, they make the point. WMT does represent the conflicted, schizophrenic US consumer.

WMT has been flat. In investment terms, much of their customer base is being flattened by the steep energy prices. Stores have been lost and disrupted. While their investment rating on financials may be flat-lining, perhaps the Katrina disaster may jolt them awake in SRI terms. Then again, maybe 2, 000 blankets is too many for WMT.

Investment analysts vs web

An interesting interview in Thursday, September 01, 2005 edition of IntegrityResearch ( http://integrityresearch.blogdrive.com/). I watch this blog for developments in independent research, seeing SRI research being interpreted by some as just that. HOW THE INTERNET HAS CHANGED EQUITY RESEARCH By Steven Irvine, August 30, 2005 has an interview with UBS head of Asian equity research, Nicholas Pink about the impact of the web. Funny how analysts do not want to be "supermarketed" where they are measured according to howe many "hits" they have on a report! I think it should at least be some discipline for all analysts - not necessarily popular vote, but some comment on readibility and timeliness.

From an environment angle it is a good story: at least fewer reports are printed and shipped. The web is delivering as a channel, although I know most of the researchers and analysts I know then print it off on the oither side, so maybe it is just the shipping costs that get saved, yes?! I must find some study like the Aviation study that identifies environmental costs/benefits to web distribution, and yes, failing all, do the math myself!

The greatest challenge is how quickly a report can shift through hands. The challenge is the same for all research shops. How to get paid for the hours and skills in every research report? I am exploring what security for intellectual property can be found, maybe some locking features in Adobe. Otherwise, the non-profit model is the only one for hard research - whether it is sell-side subsidized by i-banking or brokerage, or philanthropies funding the work of SRI researchers like the Rose Foundation or EIRIS or what ISS has done with IRRC. This implies only the largest retailers and distributors have power over allocating research dollars. Already reports suggest only about 3,000 of 10,000 US firms get coverage on a regular basis.

Darfur pressure rises. Hope after all?

Major investors have increased the demand for investment research identifying businesses involved in Sudan after worldwide attention on alleged genocide in the Darfur region. On Friday August 26, New York City Pension Funds began urging a shortlist of companies in their portfolio to review business ties to Sudan. Media coverage has included Time’s September 5 US edition “Who Speaks for Her? Rape is the weapon of choice in Darfur, but Sudan's government doesn't want to hear about it” and CBS television news magazine 60 Minutes on Sunday August 28 reporting on Darfur crisis in a segment titled “The Killing In Sudan”.

Dedictaed blog The Passion of the Present has logged more coverage of the issue and a number of NGO websites have sprung up specifically on the issue.

In New York, a judge on Tuesday August 30 permitted the Talisman Energy genocide case to proceed despite warnings from Canada and the US .In the lawsuit, Talisman Energy Inc. and the Sudanese government are accused of working on a plan for the security of oil fields as Talisman hired its own advisers to coordinate military strategy with the government. The oil giant is accused of participating in ethnic cleansing, confiscation of property, kidnapping and rape, according to LARRY NEUMEISTER Associated Press Writer, August 30, 2005.

In the US, pressure had been building on states to divest holdings in businesses active in the Sudan. Illinois was the first state to act, passing legislation in May of this year baring the state’s five pension systems from investing in companies that do business in the Sudan . At the time, two of the state’s five pension systems had approximately $1 billion invested in 32 companies doing business in Sudan. New Jersey, Maryland and California have also been active on the issue, with New Jersey becoming the second state after Illinois to act - and with a much faster exit strategy. The NGO Divest Sudan has identified 81 public pension portfolios with over $91 billion in assets exposed to the Sudan.

Harvard University decided to sell $4.4 million of PetroChina Co., a company engaged in oil exploration in the Sudan, in April 2005. Similar to the divestment movement targeting South Africa in the 1980’s and Burma in 1990’s, divestment from the Sudan is seen as an economic lever to bring about change in a troubled regime. Additionally, investors do not want to be seen to profit from the misery of others. Student-led divestment campaigns have begun on campuses including Stanford , University of California , Duke University and the University of Pennsylvania.

SRI firms are now scrambling to meet demand. Conflict Securities has positioned itself as a key player with its research in this niche with a product called Sudan Corporate Monitor. But questions are being asked about their ability to offer excellent information sourced only from public documents. Firms involved are not US-based because in 1997 Congress instituted economic sanctions against the Sudan due to its support of terrorism. The sanctions remain in force.

Cox gets appointed; SRI community has doubts

I am watching with interest the first “live” appointment of SEC Chair when I am on board. It is a powerful position to replace William Donaldson and so the political forces have battled. I find it a little bewildering to try and identify the right traits in these "confirmation hearings". Wonderful to see democaracy in action, and especially where investor rights will be affected. But similar to the other hearings and Supreme Court justices hearings, how does the interviewing help. I guess like anbything we judge on past performance. Ironic in an industry where by law any description of investment performance must come with its "past performance is not predictive of future performance" caveat!

The good news is the winner seems to be politically astute. After being sworn in on Wednesday, 3 Aug. Cox managed to send a signal early: he said his first meeting with SEC staff was with Linda Thomsen, director of the enforcement division. Reuters headlined with “New SEC chief backs investors, plain-English push” Reuters News 4 August 2005 10:50 WASHINGTON. "She and her entire division will have my unstinting support," Cox told hundreds of SEC employees in a packed auditorium at agency headquarters appealed to SEC staffers to put investors' interests first, saying, "If investors ain't happy, ain't nobody happy." U.S. Securities and Exchange Commission Chairman Chris Cox, in his first speech as head of the agency on Thursday, said he would put investors first, renew a push to put SEC rules and disclosures in plain English and be tough on enforcement.

Lobbyists for industries affected by these issues will weigh in on them, but Cox warned: "No one is entitled to line jump and press their issues to the forefront."
Addressing speculation since his nomination weeks ago about whether as chairman he would be "pro-business or pro-investor," Cox said the U.S. Department of Commerce serves the business community and the SEC serves investors. It isn't necessary for the interests of investors and business to be in conflict."

On Monday, July 25, a number of SRI, public interest and labor pension groups had participated in joint media to bring attention to the confirmation hearings for 3 SEC Commissioners, including Rep. Chris Cox who has been nominated for the chairmanship. A prelim list of reporters that were on the call is below. The event featured Damon Silvers of the AFL-CIO, Joan Claybrook, head of Public Citizen, and Shelley Alpern of Trillium Asset Mgmt. The speakers focused on Cox's record, the urgent work still to be done by the SEC, and why these appointments are so crucial to maintaining the health of the US markets.

According to Tracey Rembert, Coordinator of Investor and Corporate Engagement Service Employees International Union Capital Stewardship Program, both Damon and Shelley were clear to say that most union funds and the SRI community in general have not opposed the candidate, but wait to hear what he has to say at the hearing, but that we were all troubled by media reports and a glance at his voting record over the years that seemed to run counter to investors' best interests. “Senate Banking Committee and staffers were interested in the diverse group of investors signing on”, she said.

The SRI effort ended up getting 42 signatories, as Domini and Ceres joined the action today. Public Citizen also released its report looking at Cox's voting record going back to 1989 www.citizen.org/documents/PC_Cox_Rpt.pdf

On the Media call:
American Banker Amy Thompson, Bloomberg Larry Arnold, Washington Post Carrie Johnson, BusinessWeek Amy Borrus, Los Angeles Times John Peterson, U.S. News and World Report Danielle Knight, Business Ethics Magazine Marjorie Kelly, New York Times Steve Labaton, BNA Rachael McTake, Congress Daily Molly Peterson, Common Cause Suzanne Goodman, Laborer Journal Linda Pricilla, Talk Radio News Kate, The Bond Buyer Lynn Hume, Dow Jones Judy Burns, Wall Street Journal Deborah Soloman, The Hill Alana Shore, Marketwatch Rob Schroeder.

Rousseau helping CSR in 2005: McKinsey MD weighs in on CSR andshareholder value

The Product Group intern projects explored the McKinsey article this week What is the business of business? By building social issues into strategy, big companies can recast the debate about their role in society. Ian Davis, The McKinsey Quarterly, 2005 Number 3., It made the SIF discussion list by Thursday afternoon. It is worth reading, originally published in The Economist May 26, 2005.

I think it is material to SRI professionals ongoing discussions re. materiality, the role of CSR, and language to describe issues in analyzing corporate value. Read together with the recent Morgan Stanley/Oxford Analytica paper July 2005, my takeaways impacting SRI research philsophy and process are:
1. Exploring drivers for corporate behaviour and actions in a way that understands the tension of competitive companies in a dynamic market, legal and social structure.
2. Tension within a sector/industry as firms compete against each other, while being held to deliver for the common good.
3. Connection to innovation in trying to capture future opportunities.
4. Developing a lexicon that translates to a mainstream investment analysis audience.

The phrasing of the challenge to the firm and the need to address the social issues as strategic business issues is refreshing in an article written by a thought leader at a strategic consulting firm, and in the same week that Jeff Immelt is on the front page of Forbes "making money cleaning up the world" 08.15.05 Current Issue. The response by companies should be interesting.

Using some of this framework, perhaps re-stated in a way that corporates can better appreciate, may be some part of the next steps to presenting SRI-type research on CSR issues to the mainstream audience, and money managers in particular.

At the very least, it is another step in making investor relations personnel more sensitive to our analysts and their research questions. Hopefully we can develop the right products to capture some opportunities.

Day 17

Running the summer intern cohort project has been eating my time since we kicked off 1 June, with our first meeting 3 June. This morning 7:30 we meet again, our third.

It has been wonderful meeting different people interested in SRI. It has been challenging trying to balance the politics of an ongoing business and the demands of mission and business, with opening eyes and doors foir the cohort. I am feeling tirted. I hope this morning the cohort comes toward me, not goes away from me.

I wonder what the cohort thinks of this opportunity. Do the value it? Some do. Others I am not sure about. Bright spots for me will be a good meeting this morning, with the input from Liz Umlas and Steve Lydenberg.

Green Mountain Summit Plateau; Business Values

Vermont is green with rolling mountains, a cross between Switzerland and South West England, with Ben + Jerry’s celebrating its colour and quirkiness. But once again this year for the Green Mountain Summit, leaden skies. That makes it 2 for 2 for grey & rainy skies at this conference for me, not sure about the other 4 years it has been running.

While last year I was excited to make my debut in front of a US audience speaking of my Pension Fund trustee paper for Villanova University's Center for Responsible Leadership and Governance, this year was less ambitious but more corporate. I was supporting Peter Kinder and Tom Kuh. Peter opened on Monday with the keynote of his Fiduciary Responsibility paper while Tom covered index issues on Tues afternoon.

The lack of buzz around the conference was palpable. SRI itself seems to have reached a plateau, with a Presentation Tues on the “Language of SRI” leading Steve Viederman to suggest banishing the words “socially responsible investing”. The SRI “brand” has become conflicted lately as the definition of what CSR and SRI means, more players entering the industry and how they each have a slightly different take on it. For me SRI has always been a wide umbrella: what does an environmental activist, a Catholic nun or gay rights activists have in common? Now with increasing mainstream investor interest in non-financial issues, and companies pushing back by challenging the investor impacts of the SRI agenda, the industry is reaching to distinguish between the values and the value side of the debate.

I see the industry segmenting into 2 categories:
1. those that want to include the widest range of stakeholder opinions into the corporate investment assessment; and
2. those with a narrower shareholder view of the company, but see the inclusion of a limited range of extra-financial issues as a way to identify hidden value or protect against unseen risks.

I was pleasantly surprised to see the paragon of US business has moved a long way in considering Corporate Governance and CSR. Business Week's April 14 Good Governance, Good Buys? argued for CG as an investment indicator, while May 23, 2005 editorial, cautioned against what they see as “cultural wars” that may engulf US corporations When Business Bows To Activists. They reference a recent Microsoft difficulty around legislation in its home Washington state about gay rights, and directs “corporate America to make decisions for business, not for religious or emotional reasons”. In the same item, they make the argument for diversity as being to the economic advantage. On the same editorial page they reference good work being done about labour rights Stamping Out Sweatshops by the Joint Initiative on Corporate Accountability & Worker’s Rights. This matches their positive coverage in A Major Swipe At Sweatshops with the teaser line: "If a project in Turkey succeeds, long-sought global labor standards could emerge."

So even as SRI seeks to understand what they do and do not stand for, it seems corporate America is being forced to interpret “business values”. Perhaps the flat feeling at Green Mountain fairly reflects a “gestation” period for both CSR and SRI.

Green Mountain Summit: Bob Monks speaks out on SEC re XON

I had the pleasure of watching corporate governance legend Robert "Bob" Monks speak over lunch on Tues at the Summit. He is a good reason to visit Maine! Bill Baue The Ghost of a Shareholder Resolution Haunts ExxonMobil Annual Meeting does a good job of covering Bob's major issue covered, his dissatisfcation with SEC's "capricious" dispatching of his resolution, even though it was an exact replica of the one from 2004 that received votes.

Good news at XON annual general meeting ( AGM) was an unprecedented 28.4 percent vote for a first-year climate change resolution and support for seven others. The first year resolution by ICCR + Ceres asked for disclosure of plans for complying with greenhouse gas (GHG--the primary culprit behind global warming) reductions targets in countries participating in the Kyoto Protocol.

In conversation with Bob afterwards we explored the role of pensions consultants and their complicity in enhancing the status quo without really adding value. The coverage of SRI issues and global climate change risks have been weak, with exceptions by Jane Ambachtsheer of Mercer. I pointed to the recent SEC investigation media reports covering SEC finds bias in pension consultants: An SEC survey of 24 pension consulting firms finds significant conflicts of interest on May 14. The SEC found that a majority of the pension consultants have affiliations with money managers, the major issue SEI Investments identified in their business model, and what I faced in the employee benefits industry in South Africa through 2002.

The SEC concluded that some of the relationships may exist as a way for money managers to "curry favor with the pension consultant" and thus get business from the pension plans that the consultants are advising. The pension plans were frequently unaware of such relationships. ANother situation where Brandeis's "daylight as best antiseptic" would be useful.

The SEC study surveyed 24 of the nation's 1,700 pension fund consultants and found:
• More than half of the consultants surveyed provided services to pension funds and money management firms, raising the potential for conflicts of interest. For example, 10 sold software to money management companies to analyze clients' portfolios. The software cost as much as $70,000 a year.
More than half of the consultants offered investment conferences free for clients, but charged money managers a fee. Money managers weren't required to go but might have felt pressured to do so.
• Many consultants required money managers to direct a portion of their stock and bond trades to a broker affiliated with the consultant. By doing so, the consultant's fees were buried in the cost of brokerage. Also, the fund might pay more for trades than they would elsewhere, which means lower returns for investors.
• Many consultants provided services, such as investment management, to pension plans through affiliates. That's not wrong, but the consultant has to disclose potential conflicts.
• Many pension consultants don't consider themselves to be fiduciaries. Fiduciaries have a legal obligation to act in their clients' best interests.

This makes me angry: selling fear andgreed. It also reminds me of a role I could play as an unconflicted professional trustee. Matthew Hutcheson had approached me to the advisory board of erisa-fiduciary.com, an indpendent institutional investor serivce, now building out to a Fiduciary Guild. I am also surprised Eliot Spitzer did not hone in on this one as he has in othe rindustry with known but never confessed poor practices.

Green Mountain Summit: here come the lawyers...

Day 1 of the Green Mountain Summit at the Stoweflake Inn and it seems an age since I arrived here last year filled with apprehension and hope ahead of my presentation as an MBA student on Pension Fund Trustee attitudes to SRI issues. The weather is the same however: overcast, and rained most of the way up from Woodstock VT.

It was goods to see a number of friendly faces, and interesting to see who was holding out their shingles. Booth technology does not seem to have penetrated the SRI community, and while some have the space-frame boards system, there was no particular wow factor.

Maybe Peter Kinder leading off with his Fiduciary paper Pensions and the Companies They Own should have given me forewarning, but browsing through the booths I was struck by how many more lawyers were here. Last year Glass & Eisenhofer sponsored the Land's End backbacks, making a substantila effort. This year a number of other law firms have emerged, including one from the old suburbs, Schiffrin & Barroway LLP, from Radnor PA around the corner from the Templeton Foundation. I am intrigued that the business card is for "European Investor relations". Has someone spotted a bridging opportunity that I missed? The legal market is less the class action type suit that G&E are offering, and seem to be more like shareholder activism and corporate governance research.

While they play an important role, it really does make the summit seem more issue focused than investment focused.

An interesting conversation with the rep. from Sierra Club Mutual Funds, managed by Forward Management. Garvin, indicated that just half of the 800,000 members of Sierra Club invest in the mutual fund offering, and no mention of what percentage of assets. In talking about the fund, he did jump first to speak of performance, especially the run-up in oil in Q1 which hurt all SRI funds light on the sector and such dark-siders as ExxonMobil.

Hank Boerner from Rowan & Blewitt, an Interpublic Company based in NYC approached me with his web tool from ICCR whihc is used to track the resolutions sponsored by the network's disparate membership. It should go live in September, and he is looking for feedback on his Beta, and even wants advice on his pricing. Interesting if it may fit with any existing vendor products, like onereport or Socrates.

Wind site developer Western Wind Energy is back, and feeling bullish now that the Renewable Portfolio Standard (RPS) for NY State is set at 25%, higher even than leader California's 20%. With this capital looking for investment, the opportunity window for wind is huge. They have developments in Arizona and New Brunswick, Canada, where they are listed. It was good to see the market-aware behaviour from a listed company: checking the stock price only to find Toronto closed for a bank holiday, Victoria Day. A statistic I appreciated was GE's ecomagination has ramped turbine revenue from 300m two years ago to $2bn in FY2005. But still, they have no answer to the age-old question: are windmills considered beautiful by beautiful people?!

Investing in SR Companies is a Must for Public Pension Funds

There is no better alternative, according to Prof. S. Prakash Sethi of Baruch College in NYC, who just had his paper published in the Journal of Business Ethics (56:99-129, 2005). I originally saw Sethi (a kindly man in the manner of C.K. Pralahad who wrote The Fortune at the Bottom of the Pyramid: Eradicating Poverty Through Profits) give a verison of this at the AEI seminar in June 2004, hosted by longtime anti-SRI researcher Jon Entine (US Pension funds, Social Investing and Fiduciary Irresponsibility, January 2004 and
The Myth of Social Investing: A Critique of Its Practice and Consequences for Corporate Social Performance Research).

As I was new to the intricacies of US politics and the history of AEI, I realised only over lunch when a horribly researched paper whose name I forget flailed at SRI with all the subtlety of a Rottweiler consuming a hotdog after 2 nights on guard duty. It was a kind of "into the lion's den" for the likes of Tim Smith and Peter Kinder (who gave a fine perfroamnce, provoking some tightly wound Professor to froth at the mouth!). I left D.C> feeling a lot more clear about the political landscape and how that informs SRI. Sethi covers some of this where he discusses the "failed" experiment of economically targeted investments ETI's in the early Clinton years 1993/4.

With US$1.0 trillion in AUM, Sethi points out the powerful place as investors that public pension funds get to play. It is something I have identified as both strength and a weakness for SRI.

The strength comes assets Public Pension funds bring to the argument. The New York State Common Fund ($115.7bn), New York State teachers ($72.4bn), Texas teachers ($76.60bn), CALPERS ($168 bn), CalSTRS ($100.53bn), TIAA-CREF ($307bn) and the funds from North Carolina have all been representative in increasing the heat on corporate governance and SRI issues. In fact it was a coterie of public investment figures that helped push Grasso off his comfortable perch at the NYSE.

The weakness is that the public scrutiny can reverse the positive attitude of trustees to SRI because the funds are so political by their very nature, and a subsequent election can remove a trustee who appears outspoken, with the simple hammer of poor investment performance over the immediate past period. As the funds become more successful as activist investors, so business hypes up any arguments they can, including looking for anti-business (in their eyes anything union e.g. AFL-CIO). They allege Calpers Chairman Sean Harrigan put the screws to Safeway, he was serving as the executive director of the very food workers' union striking against the grocer. Eleven of the 13 Calpers board members had union ties, including Democratic State Treasurer Phil Angelides. Harrigan was fired.

I appreciate that Sethi uses both formal and practitioner definitions as he defines SRI. SRI is dogged by an elastic brand – it is more umbrella than pigeonhole, many sub-definitions can run in and outside of the definition, depending on the positive or negative view of the observer.

Sethi outlines the debate with the 2 oft-cited arguments against SRI:
1. Fiduciary responsibility
2. Financial returns on SR investments
And adds two of his own, namely:
3. Types of SRI included in public pension plans
4. Increased size of public pension plans and the ability to change investment portfolio

Sethi makes the argument first floated by Robert Monks, that large pension funds – especially where they are invested in passive portfolios (which most of them are to reduce expenses and maximize diversification, most definitely need to consider SRI because of the long-term risks and returns; “concerned with long-term survival and growth of the corporation”. Monks wrote in November 1996 about “the need for shareholder activism value added and legitimacy”. He cited a Wilshire Associates study where Wilshire, for many years a consultant to the Public Employees’ Retirement System of the State of California (“CalPERS”), concluded that its principal’s highly publicized activism was value adding.

He demonstrates that the current measurement of future risk assessment “invariably understates, and quite often completely overlooks, these long-term risks because of the inherent bias toward short-run on the part of financial intermediaries whose own compensation depends greatly on short term results”.

This focus on the role of intermediaries is something I tried to identify in last year’s study at Villanova University into pension fund trustee attitudes to social, environmental and corporate governance factors. As a former pension consultant for 6 years in South Africa’s sophisticated $100bn retirement fund industry as the market raced in the 1990’s, I have seen first-hand the pressures to identify performance. Both trustees and consultants are to blame where their agenda is separated from the “greater good”.

The blame goes both ways: the consultant fearing for his appointment and the competition from the next consultant offering “better returns”, feels the pressure to take out the least powerful player at the table – the investment managers actually doing the job. The pressure comes from trustees always driving for returns, and they in turn may feel pressure from their members and the roles of authority to demonstrate actions to protect their position. I have returned to wonder if the wizened old trustee asking point-blank questions of bright young twenty-something market “experts” is not the best model, quite like Warren Buffet’s assertion that he never invests in businesses he doesn’t understand, so insulating him from the market’s biggest bubble of this century.

The most important element that Sethi can help to bring to this debate, aside from the virtues of using qualitative assessment and investor discretion to factor in all risks – including extra-financial risk – is to expose industry practice. While maybe not fraudulent or criminal, it may certainly not be in the best interests of all retirement fund members. Boston lawyer Louis Brandeis wrote in his ‘Other People’s Money” (1914) that “daylight is the best antiseptic” as he argued for securities and banking regulation, which his future position as Supreme Court Justice allowed him to observe as Roosevelt enacted in the early 1930’s.

In this I could not agree more. I hope the debate is joined, for the benefit of all investors.

Just Imagination?

I stopped in my tracks when I saw the TV advert for GE's "ecomagination" campaign last Thursday, turned to my wife and asked aloud: was that really GE? The GE Wind advert with water skiing norsemen using wind in their sails to breeze by their competitors (pardon the pun) I noticed during my slow MBA days.

So today's effort in the WSJ was impressive: third news short bullet on cover page "What's News?", p. 2 "General Electric Plans Broad Push on Green Issues" with advertising full page colour on eight (8) pages pushing locomotives to "clean coal". Based on the media work we did at the John Templeton Foundation in Jan/Feb this year, a full page colour advert in the WSJ costs
$275,089.98, making the 8 page spread across all editions - including the online edition - a $2.5m bet.

Meanwhile, reading from the p.2 article, we find (as wtih cover page bullet) GE restating its earnings for 2001-2004 and Q1 2005 'amid increased scrutiny over derivatives deals". The classic SRI analyst's dilemna: looking better on some policies related to extra-financial factors, while fumbling on the financial side. Think Royal Dutch Shell, even Enron's philanthropy record.

It really is conflicting. Amity Shlaes in the FT described it plainly: a bet. "On Monday afternoon in Washington DC, Jeffrey Immelt, GE's chairman and chief executive, will make a historic bet: that "what the world needs" today, as much as it once needed the light bulb, is green technology".

My first reaction is: should we believe it? If we believe it, is GE's initative too early or too late? GE since buying Enron Wind assets has always been interesting. I respect their strategic foresight, as you would expect from a leader in many businesses. But telling for me that the WSJ article was on the same page as GE restating earnings. I don't want GE to greenwash me, so I'm checking this slowly. While they tout their GE Scores Perfect 10.0 Rating from GovernanceMetrics International on the investor relations site, they're on the cover page re-stating earnings.

But it is positive. Now how do we capture it and hold the firms to the new model? The market reacted equally ambivalently: moving from $35.80's to $36.20's. You look, listen, and decide (to quote one of Stimela's best tracks) - check out the analyst call. The play on the "imagination" of the campaign does also scarily remind me of the catchy but thin track from the early 1980's by a high-pitched 2 boy band; "Imagination". Let's hope the GE campaign lasts longer...

Amy Domini's 15 minutes: It Matters to SRI in the USA

Amazing how Amy Domini's placing in the Time 100 Influential People has presented an opportunity to raise the level of discussion of SRI. You can hear Amy Domini and Ethical Investing Story aired: Tuesday, April 26, 2005 on Here & Now on NPR.

Of all the American things I love, from Ben & Jerry's to The Simpsons to Puget Sound, both NPR, and its TV cousin PBS, are true modern day treasures for Americans. Sad though that PBS has to pitch annually to its federal overseers for 15% of its budget, and to raise the remainder from its listeners. Can it be far from a subscriber model on Sirius or XM radio, available around the world?

As a South African I would differ with Ms Domini re the power of SRI to change events in South Africa. growing up there as a privileged middle class White African, I was aware how businesses thrived. Like with the recent experience in Serbia and Iraq - the only thing that sanctions achieve is to create a very powerful balc market, because at the end of the day, at the individual level, each of us is dominated by the demands of the market and the money that drives it.

Most of the abnormal society I discovered was not through the lack of certain goods, but in understanding the political and cultural history, the lack of international sport and cultural entertainment brands. It was more important to young SA that the Springboks could not tour, and U2 played in Mbabane and Harare not Durban or Cape Town (check their Rock 'n Roll Hall of Fame induction). Economic sanctions did play a role. But political and cultural sanctions deserve a major share of the limelight.

Good to see Tim Smith finds a mention again (see An Activist Returns to South Africa Published, Fall 2001) ! Still no acknowledgement of the role of KLD, even though Amy founded it with Steve Lydenburg and Peter kinder in the garage of the latter's married home in 1988! Things must really be bad for KLD-Domini relationship. It seems to me that more effort should be made to present the stories of Peter Kinder and to hear from Steven Lydenburg about the future of SRI. In comparison, the website gives ample attribution to KLD:

Creation of the Domini 400 Social IndexSMThe index was created by the social research firm of KLD Research & Analytics, Inc.(KLD). KLD began work on the Domini 400 Social IndexSMin late 1989. It started officially tracking the Index on May 1, 1990 and has monitored the Index's performance since then. The Index was created to fill four primary needs:
· To answer the question of whether social screening carries an inherent financial "cost";
· To provide a socially screened equity benchmark;
· To communicate the standards of mainstream social investors to corporations and the general public in a viable format;
· To provide the basis for a screened, indexed investment vehicle for investors.
· In creating the Index, KLD employed a combination of exclusionary and qualitative social screens.

2 points from Amy's discussion:

1. The simplification of the SRI question into the questions like those by Rev Sullivan in the early 1980's (the Sullivan principles) - for example, how many employees in senior positions in SA are not white - points to the classic simplification that all investors enjoy intuitively. This ties into the point from my blog 19 Apr: is the future of SRI in the "Dummies Guide" approach, simplifying so it can be understood quickly by hurrying and avaricious traders?

2. No mention of how companies choose to reflect the Domini stamp of approval. I have tracked two companies lately that reference the listing on the Dow Jones Sustainability Index and FTSE4Good, but not Domini 400. I wonder what better marketing of the brand could have achieved more? While clearly famous in the Boston area where Here & Now is presented, the plain distribution power of the media- and financial-information based indices is ultimately more persuasive in the marketplace, and frankly may have bigger brand power.