Trust Planning

Trust Planning

Estate Planning and Wealth Management

Ethical Investing and the Big Banks

If you want socially responsible investments (SRI) in your trust portfolio you must put it in the trust formation document and then select both a trustee and an investment manager who really knows socially responsible investing. Although the tide is changing, still very few big banks will manage a trust fund with social responsibility in mind.

Most bank wealth management departments, as well as individual money managers cut corners; few really deeply understood socially responsible investing. You need someone really smart, really experienced and really progressive, someone who wants a better world at least as much as they want to make money. Ethical investing is not easy. 

The Magic of Ethical Investing?

Ethical Investing. Socially Responsible Investing (SRI). Environmental, Social Justice, Corporate Governance (ESG). Shareholder activism. These are not magic bullets. This is what you need to know:

  • "Green washing" (faking environmental concern) is the norm
  • You will find a lot of compromises (in funds and with money managers)
  • The performance of generic socially responsible investing mutual funds rarely matches the market
  • There are very few fully ethical socially responsible investing funds
  • When you look at the individual stocks in a typical socially responsible investing mutual fund, you find unusual stock choices (nondairy creamers), and a too heavy allocation to some sectors (bank stocks)
  • While shareholder activism has some impact and should not be abandoned, study after study shows it is largely ineffective.

A Private Equity Example of Shortcuts.

Taking an example of a small private equity firm (that shall remain anonymous and that except in this one example seems to be an excellent company) that specializes in investments in "frontier markets". Frontier markets include countries that are even newer to large-scale capitalism than emerging markets; these countries may have only just started their own stock markets, many of them are emerging from decades-long civil wars. This private equity firm went so far as to hire a Harvard graduate with a masters in public health to ensure the social responsibility of the firm's investments. Their stated policy was that, among other ethical no-no's, this fund did not invest in alcohol. A private equity group has a limited number of ventures that it invests in at any one time. However one of these ventures was a beer brewery. The private equity firm justified the investment by adding the caveat to their prospectus that their investment policy was no alcohol, except beer and wine. I can't see how someone with a masters in public health could have ethically justified funding a brewery in a Muslim-Hindu country that had just finished a violent civil war.

Is Traditional Investing Damaging?

Traditional investing is very damaging to people and to the world. Read and listen to this collection of socially responsible investing books, documentaries, and online resources, and then make up your own mind.

Who Cares about Ethical Investing?

Ethical investing is becoming more popular, but the truth is, research shows, most people--the majority of investors--do not care enough about ethical investing to significantly change their portfolios. There is a lot of window dressing of essentially the same portfolios. One analysis found that the people most interested in socially responsible investing are young, single, college educated women who don't have much money. (Joan C. Junkus, Thomas C. Berry, "The demographic profile of socially responsible investors", Managerial Finance, Vol. 36 Iss: 6, pp.474 - 481).

There are, however, a number of economics researchers who are championing the need for socially responsible and socially responsive economic systems. John Nash is the 1994 Nobel laureate in Economics (and subject of the movie "A Beautiful Mind"). Nash's recent work focuses on how to make the international money system more fair. (See the paper, "Ideal Money," in Southern Economics Journal, 2002.) Joseph Stiglitz is the 2001 economics Nobel laureate, and author of the recent bestselling book, The Price of Inequality.

Do Any Big Funds Use Ethical Guidelines?

Yes, Norway's pension fund is a world leader in ethical investing. Norway's pension fund is very large, over half a trillion dollars, due to a combination of a responsible government and significant oil revenues. It has clear exclusion criteria for ethical investing, and also identifies specific companies that violate human rights, damage the environment, promote corruption, harm world health, and weaponize the world. These decisions are made by a group of dedicated professionals (not political activists or special interest groups). It would be a great idea for every mutual fund, bank trust department, portfolio investment manager, and individual investor to replace any mutual fund that includes the companies listed in the above links. University endowment (i.e. Yale) should take note.

Do ETFs Have a Downside in Terms of Socially Responsible Investing?

If you buy DIV, SPDR, EFA--any of the big Exchange Traded Funds (ETF)--you are including a lot of companies that should not be kept in business. Ethical investors would not put them in their portfolios. But hiding behind acronyms, like EAFE, we buy both good and bad companies, keep them all in business and help finance their expansion.

Most mutual funds are as blindly unethical as ETFs. Morningstar has a service that lets you see the stocks that comprise each fund. A surprising number of popular mutual funds still include tobacco stock. Some mutual funds had quite high percentages (6%). But remember what was said above: few people really care about socially responsible investing. Ethical investing takes work, and in most people's minds, ethical investing takes a back seat to profits.

Look at the exchange traded fund EFA, an index fund of "international stocks" sold by iShares. EFA seeks to follow the performance of stocks in Europe, Australasia, and the Far East (the MSCI EAFE Index). One assumes that iShares has significant latitude in choosing stocks, as long as the fund mimics the performance of this overall market.

As of August 17, 2012, here are EFA's tobacco holdings:

1.03% British American Tobacco
0.39% Imperial Tobacco Group
0.27% Japan Tobacco
1.69% Total in Tobacco

EFA also has 0.64% invested in liquor (Anheuser Busch).

This has real world consequences. Yale University's endowment, in the second quarter of 2012, had about $9 million invested in EFA (and many investors, institutional and otherwise, follow Yale). So, Yale is spending over $150,000 to increase smoking rates, a lot of that invested in initiatives to increase tobacco use in developing countries. How can the Yale School of Medicine sanction that? That is not paying attention to global health. The total capitalization of EFA is $34.4 billion, so that is $581 million dollars invested in harming people's health. If you care about health, boycott EFA until it changes its composition. Write letters to Yale and their investment officer, David Swensen, until they change their priorities.

Are Institutional Investors Hurting Farmers?

Yes, without a doubt. Institutions, including big bank trust departments, are using commodity ETFs that include agricultural options. Derivatives are replacing actual assets in the "real assets" allocation in portfolios. It is this type of slight of hand (replacing the real with a financial fiction that can packaged and re-sold) that caused the 2008 collapse.

Read this report on Excessive Speculation in Agricultural Commodities. Also this UK website explains how big banks (they cite Barclays) profit from food speculation, diving up the price of food and causing the poor to go hungry. Big banks routinely put these commodities ETFs into their clients' trusts (at least JPMorgan does). There are alternatives, but you have to really push to get the banks to use them. Banks will not do ethical investing unless you insist and are persistent.

For more background on the systemic issues with the commodification, corporatisation and international flow of agricultural output, watch Bill Moyers interview with Vandana Shiva. Ms Shiva is a scientist, Indian activist and author of the book, Making Peace with the Earth. Watch the documentaries on farming in our resources for socially responsible investing.

Governments and Socially Responsible Investing

The U.S. government has mandated that 40% of the U.S. corn crop be used for biofuels. Sounds good, except that the UN considers developed nation's use of food to power cars, when people in developing nations are starving and malnourished, an actual crime against humanity.

In 2001, the Hawaii State Legislature commissioned a public policy study of common SRI practices (in all states) and what trust law allows in terms of making ethical investing a priority for state pension funds: Socially Responsible Investing Report by the Legislative Reference Bureau, Honolulu, Hawaii.

Learn more about the Current State of Corporate Social Responsibility and Socially Responsible Investing