Finance

Summary. There are many companies around the world today that harm the environment, exploit workers, produce harmful products, and engage in generally unethical practices. Socially Responsible Investment funds have been created for investors who don’t want to invest money in such companies. Another advantage of Socially Responsible Investments is that they generally perform better than other investments. The book, The SRI Advantage, by Peter Camejo, explains this in detail.

Resources. Below are some resources for more information about socially responsible investing.

  • CREF Social Choice – “The fund seeks a favorable long-term rate of return that tracks the investment performance of the U.S. stock market while giving special consideration to certain social criteria.” In 2006, Coke was removed as a fund because of intentionally marketing to children. More about this fund can be found below.
  • FTSE4Good. “The FTSE4Good Index Series has been designed to measure the performance of companies that meet globally recognised corporate responsibility standards, and to facilitate investment in those companies.” The easiest way to understand FTSE4Good is to read the FTSE4Good Inclusion Criteria PDF Document.
  • Kiva.org – “Kiva’s mission is to connect people through lending for the sake of alleviating poverty. Kiva is the world’s first person-to-person micro-lending website, empowering individuals to lend directly to unique entrepreneurs in the developing world. The people you see on Kiva’s site are real individuals in need of funding – not marketing material. When you browse entrepreneurs’ profiles on the site, choose someone to lend to, and then make a loan, you are helping a real person make great strides towards economic independence and improve life for themselves, their family, and their community. Throughout the course of the loan (usually 6-12 months), you can receive email journal updates and track repayments. Then, when you get your loan money back, you can relend to someone else in need.”
  • MicroPlace.com – “A billion people around the world work hard every day to lift themselves out of poverty. They don’t want your charity. They want your investment. Invest today, earn a return, provide them with a livelihood.” Help provide micro-loans to help change lives.
  • Parnassus Investments – “We were among the first firms that implemented the idea that an investment firm could generate solid investment returns by taking a disciplined approach to investing while also having a positive impact on society. We look for companies whose actions and products have a positive effect on the world. We look for companies that: respect the environment, treat their employees as partners, encourage diversity in the workplace, support the communities where they operate, and insist on ethical business dealings. While we encourage the positive factors of why to invest in a company, we also apply social screens and will not invest in companies that: manufacture alcohol or tobacco products, are involved with gambling, manufacture weapons, or generate electricity from nuclear power. Socially responsible investing does not mean sacrificing financial discipline. After applying our social criteria, we have a universe of socially responsible companies. We then select companies for our portfolio strictly based on our investment process. Just because a company has a positive benefit to society does not make it a good financial investment.”
  • Sierra Club Funds – “The Sierra Club Stock Fund invests in the top investment candidates among the most environmentally and socially progressive mid- and large-cap U.S. companies, as determined by more than 20 separate environmental and social screens. We believe companies focused on environmental and social issues make the best corporate citizens, and by minimizing their environmental liabilities will provide maximum shareholder value over time.”
  • Social Investment Forum – “The Social Investment Forum (SIF) is the only national membership association dedicated to advancing the concept, practice, and growth of socially and environmentally responsible investing (SRI). Our members integrate economic, environmental, social and governance factors into their investment decisions and SIF provides programs and resources to advance this work.”
  • Vanguard FTSE Social Index Fund (VFTSX) – “The is a socially responsible fund that is overseen by FTSE4Good. For more information, read the FTSE4Good Inclusion Criteria PDF Document.”
  • Wikipedia Socially Responsible Investing Page

College Retirement Equities Fund (CREF) Social Choice Account. For people able to invest in CREF, the Social Choice Account is a good option. The account is described in detail below [source: CREF Prospectus PDF file]:

The Social Choice Account utilizes KLD Research & Analytics, Inc. (“KLD”) to screen potential investments for the Account based on certain environmental, social and governance (“ESG”) criteria. The manner in which KLD undertakes its ESG evaluation has been updated. Therefore, the third, fourth and fifth full paragraphs on pages 28 and 29 of the Prospectus (which start with “Companies that are currently excluded…” and end with the paragraph that starts “The Corporate Governance and Social Responsibility Committee…”) should be replaced with the following language:

“Prior to being eligible for inclusion in the Account, companies are subject to a comprehensive ESG performance evaluation, consisting of numerous factors. The ESG evaluation process favors companies that are:

  • Strong stewards of the environment;
  • Devoted to serving local communities and society generally;
  • Committed to high labor standards for their own employees and those in the supply chain;
  • Dedicated to producing high-quality and safe products; and
  • Managing their companies in an exemplary and ethical manner.

Examples of environmental assessment categories are management systems, types of products and services produced, natural resource use, effect on climate change, and waste and emissions. Social evaluation categories include the treatment of employees and suppliers and dealings with the community and society at large. Governance assessment categories include governance structure, business ethics, transparency and reporting, and response to shareholder resolutions.

Companies are subsequently ranked by industry sector peer group according to the ESG performance ratings. All companies must meet or exceed minimum ESG performance standards. For each industry sector, key ESG performance factors are identified and given more weight in the process. Concerns in one area do not automatically eliminate a company from potential inclusion in KLD’s indices or the Account. When ESG concerns exist, the process gives careful consideration to how companies address the risks and opportunities they face in the context of their sector or industry and relative to their peers.

The social and environmental impact of corporate activities related to the production and sale of alcohol, tobacco, military weapons, firearms, nuclear power and gambling products and services are quantified and incorporated into a company’s overall ESG performance assessment. While not automatically excluded from KLD’s indices or the Account, most companies involved in these industries are ineligible for inclusion in the Account due to their poor overall ESG performance relative to their industry sector peers.

The Corporate Governance and Social Responsibility Committee of CREF’s Board of Trustees provides guidance in deciding whether investments meet the social criteria. The Account will do its best to make sure that its investments meet the social criteria, but TCIM cannot guarantee that every holding will always do so. Even if an investment is not excluded by the social criteria, TCIM has the option of excluding the investment if it decides the investment is inappropriate. Consistent with its responsibilities, the Corporate Governance and Social Responsibility Committee will continue to evaluate the implications of any modifications KLD makes to its ESG evaluation process.”

Original Description of the CREF Social Choice Account. The language above replaced the original fund description which follows.

The Account primarily invests in companies that are screened by KLD research & Analytics, Inc. (“KLD”)1 to favor companies that meet or exceed the environmental, social and governance criteria described below. The equity portion of the Account includes both a domestic and a foreign equities portion. The domestic equity portion attempts to track the return of the U.S. stock market as represented by the Russell 3000® Index. The foreign equity portion of the Account attempts to track the return of developed foreign markets as represented by the MSCI EAFE®+ Canada Index.

The fixed-income portion of the Account seeks to track the returns and duration of the Lehman Brothers U.S. Aggregate Index. The corporate issuers held in this portion of the Account are also subject to the screening criteria of KLD.

The benchmark for the Social Choice Account is a composite index comprised of three unmanaged benchmarks: the Russell 3000® Index, the MSCIEAFE®+ Canada Index and the Lehman Brothers U.S. Aggregate Index. See “More About Benchmarks and Other Indices” below for more information about composite and other benchmarks. Companies that are currently excluded by KLD include:

  • Companies that derive any revenues from the manufacture of alcohol or tobacco products, and retailers that derive significant revenues from the sale of alcohol or tobacco;
  • Companies that derive any revenues from gambling;
  • Companies that derive any revenue from the manufacture of firearms and/or ammunition, and retailers that derive significant revenues from the sale of firearms and/or ammunition;
  • Companies that derive significant revenues from the production of military weapons; and
  • Electric utilities that own interests in nuclear power plants.

The remaining companies are then evaluated for their records in certain qualitative areas. Concerns in one area do not automatically eliminate the company by KLD. Instead, KLD bases its screening decisions both on the company’s social performance in these areas relative to its industry peers, and the general social and environmental impact of the industries to which each company belongs. The following are some of the principal social criteria that KLD currently considers when screening companies:

  • Safe and useful products, including a company’s record with respect to product safety, marketing practices, commitment to quality, and research and development;
  • Employee relations, including a company’s record with respect to labor matters, workplace safety, employee benefit programs, and meaningful participation in company profits either through stock purchase or profit-sharing plans;
  • Human rights, including relations with indigenous peoples, non-U.S. labor relations, and operations in countries that KLD considers to have widespread and well-documented labor rights abuses;
  • Corporate citizenship, including a company’s record with respect to philanthropic activities, community relations, and impact of operations on communities;
  • Corporate governance, including executive compensation, tax disputes, and accounting practices;
  • Environmental performance, including a company’s record with respect to fines or penalties, waste disposal, toxic emissions, efforts in waste reduction and emissions reduction, recycling, and environmentally beneficial fuels, products and services; and
  • Diversity, including a company’s record with respect to promotion of women and minorities, equal employment opportunities, family friendly employee benefits, and contracts with women and minority suppliers.

The Corporate Governance and Social Responsibility Committee of CREF’s Board of Trustees provides guidance in deciding whether investments meet the social criteria. The Account will do its best to make sure that its investments meet the social criteria, but TCIM cannot guarantee that every holding will always do so. Even if an investment is not excluded by the social criteria, TCIM has the option of excluding the investment if it decides the investment is no tan appropriate investment.

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