Looking Ahead Responsibly

February 2014

Running the Fund:Looking Ahead Responsibly

Jing Wei

Experts anticipate the increasing importance of ESG for plan investors

Ask Adam Strauss, a portfolio manager at the Chicago-based Appleseed Fund, to describe the way he evaluates and selects investments, and he will give an answer similar to that of many active managers.

“We’re stock pickers, so what we’re looking for is to invest in high-quality companies with stocks that are significantly undervalued,” Strauss says. “And we look very closely at balance sheets. If a company experiences a temporary problem in the business but the balance sheet is strong, you’ve got lots of time on your side to turn things around. If it’s weak, then that’s working against you.”

It is only after discussing pricing power and competitive advantage that he brings up the term “sustainability” or “ESG,” short for environmental, social and governance. The term has become shorthand for investment methodologies that consider sustainability factors in assessing risk and return.

ESG considerations can involve anything from an investment’s carbon footprint to its sensitivity to potential resource or energy shortages. Other elements include investment chain alignment, transparency and active asset ownership.

Strauss says the Appleseed Fund incorporates ESG not only to ensure that shareholders own environmentally and socially responsible companies but also as a means of eliminating risk and boosting potential returns.

“Our goal is to beat the market, so we’re very focused on delivering returns and doing it with less risk,” Strauss says. “We’ve beaten the markets by several percentage points per year since starting in 2006, and we’ve also delivered an extremely low beta.”

Interestingly, it is the traditional risk and return factors that will be most important for ESG funds, as they are for all funds, when it comes to penetrating the retirement planning marketplace. That is because the Department of Labor (DOL) has affirmed in a number of advisory publications—especially two issued in 2008 by its Employee Benefits Security Administration (EBSA)—that ESG factors must be considered secondarily to the economics of any investment being contemplated by a plan under the Employee Retirement Income Security Act (ERISA).

In other words, according to the DOL, noneconomic factors can serve at most as a tiebreaker when retirement plan fiduciaries are considering investment choices. That holds true even for plans at issue-dedicated nonprofits and other social organizations, where participants may be more willing to consider ethics during the investment process.

Despite the fiduciary hurdle, experts anticipate certain ESG factors—namely, climate risk, energy pricing and resource scarcity—to become significantly more material in long-term investment analysis and therefore to become more important to retirement plan investors in the years ahead.

via PLANSPONSOR.com – Looking Ahead Responsibly.

No Recession Here

The 32nd annual Natural Products Expo, the largest on record with more than 60,000 industry members and over 2,000 exhibiting companies, filled more than 1 million square feet at the Anaheim Convention Center March 8 – 11, 2012.

Happy Booth

The Yellow 108 hat booth was a popular stop

My first Expo West was 1999. Freshly licensed as financial advisor I set out to establish my value. Shared interests and habits brought me to this community, and I’ve been here since. These businesses offer a simple but monumental improvement over the traditional offering of a single bottom line for-profit. Instead of gearing revenue toward the benefit of shareholders, they make sure it benefits all stakeholders. That means shareholders, employees, and the community at large.

Organic, Natural, and Fair Trade, these widely adopted terms express the values of the community I set out to do business with. I was looking for clients who agreed that screens for social responsibility on their long term investments was what their stakeholders wanted. More than a decade ago, at Expo West, I knew I had found my tribe.

Honest Tea, Numi Tea, Sambazon, Guayaki, Organic Trade Association, Tierra Farm and Oregon Tilth are a few of the companies that I met early on and began long standing relationships. Every year I returned since 1999 I found new, like-minded clients. This year I came back again, and thrilled to see how hugely the community had grown.

For all the wrong reasons I missed the last five years of Expo West. A few visits to Expo East, the smaller version of the show, and a full travel calendar kept me away. Those days are over. Expo West 2012 was the largest Natural Products Expo to date and every person I spoke with said business was booming. Attendance was up 13% from 2011 with over 58,000 industry-related people and 3,000 exhibitors. The show is the second largest at The Anaheim Convention Center.

That larger show, held by The National Association of Music Merchants, has been around three times longer than ours, for 110 years. Unlike the Natural Products Expo, NAMM represents an industry composed of almost 100% discretionary spending. Seems to me like we’ll be #1 in no time.

Organic, Natural, and Fair-Trade products are now consumer staples. Every time people go to the store they realize that they do not want products or services rendered at the expense of others. A healthier profit can be made by taking care of every stakeholder affected by your business–employees, communities, and shareholders.

Being able to provide for this particular community at Expo West makes me smile everyday. Thanks everyone.

Rob Thomas
President & Founder
Social(k)

Social(k) Smarts: Keeping Score

Video: Social(k) Smarts: Keeping Score How are you keeping score?

Some people watch baseball and do line scoring. Others keep score with box scores. Line score is similar to single bottom line accounting. Box score is like triple bottom line accounting. How do you keep score of your financial returns?  How do you keep score of the way the game was played?

Keeping score using line score, or single line accounting, measures returns only.  $100 goes in and $125 comes out.  Financial wizards can measure financial returns with great precision.  They can even measure the amount of risk taken for the return.  But at the end of the game it is a line score.  What is harder to measure is how the game was played, how the returns were made.  If you want to really understand the dynamics of a specific game you use box scores.  This brings much more depth to the story of the game, or the investment.

We know Portfolio 21, a mutual fund, returned 2.99% annually, over the last five years as of Dec 31, 2010.  We know The Vice Fund, also a mutual fund, returned 2.43% annually, for the same time frame.  Very similar returns as seen from the line scores.

Let’s look at the box scores.  What companies do they look at to invest in?

The Vice Fund invests in companies, both domestic and foreign, engaged in the aerospace and defense industries, owners and operators, gaming facilities as well as manufacturers of gaming equipment, manufactures of tobacco products and producers of alcoholic beverages.” www.usamutuals.com/vicefund

Portfolio 21 invests in companies designing ecologically superior products, using renewable energy, and developing efficient production methods. Portfolio 21 companies seek to prosper in the 21st Century by recognizing environmental sustainability as a fundamental human challenge and a tremendous business opportunity.” www.portfolio21.com/

The box scores add a deeper understanding of the game. Triple bottom line accounting adds a deeper understanding of the investment.

How are you keeping score of your investments?  Are you measuring success by dollars only? Isn’t wealth more than cash in the bank? Returns at any cost, certainly not.  We can each use our own values and beliefs to decide what is important to measure, but we should be measuring more than the simple return.

Do You Know What Lurks in your Retirement Plan?

Do you look for financial return at almost any cost?

If your retirement plan provider knowingly supports investments that support governments engaged in crimes against humanity, e.g. Sudan, would you switch?

That’s exactly what the Unitarian Universalist Association (UUA) did to Fidelity.  UUA switched away from Fidelity when it became clear that “Fidelity’s position on investing in the Sudan hadn’t changed one iota,” according to Peter Muellar, President of UUA .

Unitarian Universalist is a liberal religion with Judeo-Christian roots. It has no creed. It affirms the worth of human beings, advocates freedom of belief and the search for advancing truth, and tries to provide a warm, open, supportive community for people who believe that ethical living is the supreme witness of religion.  The Unitarian Universalist Organizations Retirement Plan provides benefits to about 2,800 UUA staff members, ministers, church staff, and their families, with investments totaling approximately $178 million. Fidelity has managed the UUA accounts since 1999.

Sometimes, we go too far in our analysis of what we buy — should I buy organic free range non toxic carpet cleaner for my yacht?   In the case of crimes against humanity, however, its not a joke.  We can do something about these atrocities when we object to financially backing them.

One of the key characteristics of our community, is the strong desire to pay attention to what we buy and who we support.  We are torn about pulling into the BP station for a fill up; “Am I using too much petroleum?  Why am I supporting BP?  Don’t I hurt my neighbor when I boycott his station even though he has nothing to do with the spill?”

We cannot get every decision right. Moving toward a sustainable and responsible lifestyle is a process not a destination. We’re always considering options.  We’re constantly asking ourselves, “How far should I go?”

Investing is an area where many are easily confused about impact and options.  Understanding and offering appropriate investment options as an employer of a mission driven organization is a whole new row, which most don’t want to hoe.

In primitive times, it was an easy choice to choose Fidelity for a 401(k) option.  As a retirement plan record keeper and administrator, Fidelity is one of the best.  As a result, I see a lot of mission driven, sustainable, responsible and conscientious organizations with Fidelity 401(k) plans.  However, the fact remains that Fidelity’s position on certain investments are not in-line with those employee’s beliefs and moral compasses.  If you are currently using Fidelity ask them to divest from the Sudan, and see what they say. If your employer is using Fidelity ask them to consider switching, and see what they say.

Check out the links below and begin to consider not only who your provider is, but what companies the funds they offer hold.

Money Central has a great tool to look at top 25 holdings of almost any mutual fund.

http://moneycentral.msn.com/investor/partsub/funds/holdings.asp?symbol=csxax&Funds=1

Scan your fund for animal testing, GMO crops, environmental degradation, human rights violations, and genocide, and determine whether your money is growing with the right people.

These recent press releases speak to the issue of genocide.

UUA Moves Retirement Plan from Fidelity to TIAA-CREF. Announcement from the UUA, May 21, 2010. (UUA.org)
Special Board Meeting, May 20, 2010. Agenda and reports. (UUA.org)
TIAA-CREF. Will begin managing UU retirement funds beginning in the fall of 2010. (tiaa-cref.org)
End Crimes Against Humanity in Darfur, Sudan. Action of Immediate Witness passed by the UUA General Assembly, 2005. (UUA.org)
UUA pressures Fidelity over Sudanese investments Retirement plan holders urged to change funds. Jane Greer

HowStuffWorks “How 401(k) Plans Work”

If you are a little unsure about 401(k) plans, don’t be.  The issue is mostly new language and not difficult concepts.  Here is a good primer.

In 1978, Congress decided that Americans needed a bit of encouragement to save more money for retirement. They thought that if they gave people a way to save for retirement while at the same time lowering their state and federal taxes, they might just take advantage of it. The Tax Reform Act was passed. Part of it authorized the creation of a tax-deferred savings plan for employees. The plan got its name from its section number and paragraph in the Internal Revenue Code — section 401, paragraph (k).

via HowStuffWorks “How 401(k) Plans Work”.