You've Got the Power

February 16, 2001

By Michael Jessen

"The choice of a common stock is a single act; its ownership is a continuing process. " Although Benjamin Graham and David Dodd wrote those words in 1934, they are the touchstone of today's socially responsible investing movement. Being a stockholder is just as important as becoming one.

Where you invest your money not only says a lot about you; it ultimately says a lot about the world around you. When you have stock, you have power as a stockholder.

Just what kind of power? In response to shareholder resolutions filed by two Catholic religious orders, Wendy's International, Inc. has agreed to adopt a policy prohibiting smoking in all its U.S. company-operated restaurants during 2001.

Other groups of shareholders are trying to make an impact on a broad range of issues. For example, a coalition of thirty-eight investors from the US and Canada with over three million shares is challenging Wal-Mart to eliminate sweatshop conditions in factories that produce its products. Another coalition of environmental groups, investors, religious organizations, and indigenous peoples have filed a shareholder resolution with BP Amoco in an attempt to stop the company from drilling for oil in the Arctic National Wildlife Refuge.

Socially responsible investments in Canada today total more than $50 billion and provide the ultimate win-win: make money and do good at the same time. While socially responsible investment assets represent just 3.2 percent of the retail mutual fund market in Canada, a report issued last December indicates these assets grew at more than twice the rate of the mutual fund industry as a whole between June 1998 and June 2000.

More than $2 trillion (or $1 out of every $8 under management, is invested today in the United States in a socially responsible manner, up a strong 82 percent from 1997 levels, according to a study released in November 1999 by the nonprofit Social Investment Forum. The $2.16 trillion includes all segments of social investing - screened portfolios, shareholder advocacy, and community investing - and accounts for roughly 13 percent of the $16.3 trillion under professional management in the U.S., as reported by The 1999 Nelson's Directory of Investment Managers.

Religious groups wanting to eliminate alcohol, tobacco, and military investments from their portfolios started socially responsible investing. The movement took off in the 1980s when an alliance called the Interfaith Center for Corporate Responsibility (www.iccr.org) pressured companies to divest from the racist apartheid regime in South Africa. Since then, socially responsible investment has grown to include broad social and environmental issues and values.

For nearly thirty years the ICCR has been a leader of the corporate social responsibility movement. ICCR's membership is an association of 275 Protestant, Roman Catholic and Jewish institutional investors, including national denominations, religious communities, pension funds, endowments, hospital corporations, economic development funds and publishing companies. ICCR and its members press companies to be socially and environmentally responsible. Each year ICCR-member religious institutional investors sponsor over 100 shareholder resolutions on major social and environmental issues. The combined portfolio value of ICCR's member organizations is estimated to be $110 billion.

The Canadian credit union movement helped pioneer socially responsible investing in Canada with the introduction of the Ethical Growth Fund in 1986. Since that time, Ethical Funds has grown into a family of 12 socially responsible mutual funds. Ethical Funds recently co-filed a shareholder resolution encouraging Sears Canada to adopt international labour standards.

Ethical Funds evaluates companies on the basis of social and environmental criteria as well as financial performance. It does not invest in tobacco corporations and companies whose primary activity involves military production and nuclear energy. Ethical Funds also encourages businesses to respect basic human rights and core labour rights, implement environmentally responsible programs, practice progressive industrial and community relations, and to incorporate modern corporate governance principles. Ethical Funds has $2.3 billion in assets and approximately 180,000 unit holders.

Recently, the Vancouver, BC-based Ethical Funds Inc. announced it has become the first mutual fund company in Canada to provide public access to its proxy voting decisions. Investors and potential investors alike will be able to see for themselves how Ethical Funds has voted just by visiting the company's website at www.ethicalfunds.com.

"We suspect most mutual fund investors don't even realize that by holding common stock, mutual fund managers have an opportunity to vote on corporate policies each year at the annual general meeting," said Robert Walker, Vice President, SRI Policy and Research at Ethical Funds. "We believe that proxy voting is not just a right - it is an obligation. Through proxy voting investors can seize their rights as stockholders and take responsibility for the downstream impacts of their investment activity.

"By becoming the first mutual fund in Canada to report our proxy voting to the public, we're making ourselves more transparent and accountable to our unitholders," said Walker. "We also hope that other mutual funds and socially responsible investment institutions in Canada will follow and publicly report how they are voting the proxies they hold on behalf of their investors."

Walker says Ethical Funds was also the first in Canada to file shareholder resolutions that address the link between socially responsible business practices and company reputation. "The shareholder resolution process allows us to use our influence as an institutional shareholder, based on the collective voice and values of our unitholders," he added.

"Ethical Funds has joined with the Presbyterian Church (USA) and other socially responsible investment institutions in the U.S. to co-file a shareholder resolution at Citigroup Inc.," Walker said. "The resolution calls for Citigroup to develop policies to ensure that no employee or broker engages in predatory lending practices.

"Predatory lending is the dark side of a legitimate practice in the U.S. called sub-prime lending, where loans at higher rates of interest are extended to borrowers who don't qualify for prime rates," Walker explained. "Sub-prime lending becomes predatory lending when it involves excessive fees and interest rates, hidden costs, unnecessary insurance, and other abusive practices. Predatory lending has been blamed for stripping the equity from the homes of people in low-income communities."

Walker said Citigroup is one of North America's largest financial institutions and the fifth largest sub-prime lender in the U.S. Citigroup plans to acquire Associates First Capital, currently the second largest sub-prime lender and one where predatory lending practices have been alleged. "Any perceived reluctance to address and eliminate predatory lending practices could damage Citigroup's reputation," Walker concluded, adding that the resolution would be addressed at Citigroup's annual general meeting this spring.

Other examples of mutual funds where investors concerned about the ethical makeup of their portfolios can put their money include two new Acuity Social Values Funds (Canadian Equity and Global Equity). These funds invest in companies that have been evaluated based on social criteria including excellence in environmental management, positive labour practices, involvement in promoting human rights in other countries, and the avoidance of nuclear power, weapons, alcohol or tobacco as major sources of revenue.

Three Clean Environment Funds look for companies that fit the environmental concept of sustainable development which, as defined in a 1987 report of the World Commission on Environment and Development, is economic development that meets the needs of current generations without compromising the ability of future generations to meet theirs. These funds are also managed by Acuity (www.acuityfunds.com).

As with the Social Values Funds, the screening process is contracted out to Michael Jantzi Research Associates Inc. in Canada and Calvert Group (www.calvertgroup.com) in the U.S. They give the thumbs up, or the boot, to companies proposed by Acuity's portfolio managers.

Ian Ihnatowycz started the Toronto-based Acuity Investment Management Inc. in 1991 and has seen the company grow into the 37th largest mutual fund firm in Canada with 24 pooled and regular funds and almost $900 million in assets. Ihnatowycz is a believer in socially responsible investing and he is helping spread the word.

"There's a misconception that you have to sacrifice return with socially selective funds, which is simply not true," says Ihnatowycz. "Four out of five investors are interested in socially responsible funds, and said they'd invest in them if the returns are similar or better than traditional funds. But few know they even exist."

If you want good performance, look no further than the Investors Group Summa Fund. Started in 1987, this fund has over $3 billion in assets and has outperformed the Toronto Stock Exchange 300 Composite Index. The Summa Fund (www.investorsgroup.com) invests primarily in common shares of socially responsible, environmentally sound and ethically managed Canadian companies.

Meritas Financial, based in Waterloo, Ontario, recently announced details of its new fund family, which contains even more stringent screens, such as animal rights, gaming and pornography.

Another form of socially responsible investments is socially screened labour-sponsored venture capital funds such as BC's Working Opportunity Fund (www.wofund.com) that employs social and environmental criteria in its investment selections. There are currently about 40 socially responsible and labour-sponsored funds available in Canada, and that number is on the rise as more companies jump into what has in the past been considered a niche market.

To help your local community, don't forget to look into locally based community investment organizations such as the Osprey Community Foundation in Nelson, BC. There are now more than 180 community investment foundations in Canada.

In the United States, shareholder activism reached a new high last March. That's when Martin Stoller, a crisis management professor at Northwestern University in Evanston, Illinois and Aaron Brown, a finance professor at Yeshiva University in New York, founded the web site www.eRaider.com. Its motto: "If [management] won't take care of business, we will."

The site features a mutual fund, the Allied Owners Action Fund, that buys 5 percent stakes in small, under-performing companies. Purchases are announced on the site and message boards are used to organize a large bloc of the company's shareholders - 25 to 40 percent - through the Internet. eRaider urges investors to participate in shareholder meetings, and to fill message boards with criticisms that supporters hope will nudge management to take steps to increase shareholder value. Fund shareholders make money as a target company's stock recovers.

eRaider also takes legal action to remove management, trying to get the Securities Exchange Commission to force disclosure in areas where the company has been non-compliant, and trying to find a potential buyer for the company. A proxy fight is always an option.

American workers can also have a tremendous amount of influence over a company's ethical and social actions since they have approximately $6 trillion in retirement assets such as pensions, stock plans, and 401(k) savings plans. More vigilant shareholders are more likely to be "socially responsible," in the true meaning of that term. It's harder to get a large group of active owners to agree to improper or illegal behaviour. In addition, actively involved owners are likely to help find solutions to many corporate challenges.

The keys to creating wealth and maintaining a free society lie primarily in the same direction; both require broad-based systems of accountability be built into the governance structures of corporations. Check out the Corporate Governance web site at www.corpgov.net/ to find out what actions you can take.

The Social Investment Forum (www.socialinvest.org) is a national nonprofit membership organization promoting the concept, practice, and growth of socially responsible investing. The Social Investment Forum site offers comprehensive information, contacts, and resources on socially responsible investing. It was started by Co-op America (www.coopamerica.org/) and is also aligned with the Shareholder Action Network (www.shareholderaction.org), which is expanding the coalition of institutions, organizations, and financial professionals participating in shareholder action.

The Calvert Foundation (www.calvertfoundation.org/) has been a leader in the SRI field in the U.S. for nearly two decades. Calvert manages approximately $7.0 billion in assets in 27 screened and non-screened portfolios for over 220,000 shareholders. Calvert Foundation's various investment products help families and communities get the capital they need to work their way out of poverty. In addition, Calvert Foundation makes loans to community development organizations that focus on affordable housing, small business, microcredit and other community development. Calvert Foundation lends to community development financial institutions (CDFI), and other organizations, including community development corporations, community loan funds, community banks and credit unions, social enterprises and micro finance institutions.

It is widely recognized that money can be part of the problem or part of the solution to many world issues like global warming, pollution, and corporate responsibility. Investors now have the power to decide which camp they want to be in. You can help bring about a fairer and more sustainable society and your investment choices can make it happen more quickly than you thought possible.

GREEN STEPS - For your RRSP and IRA investing, consider putting money into socially responsible investments. You'll not only provide for your future but also help raise the bar for corporate social performance. Contact your local investment dealer, bank, or credit union for more information.

RESOURCES - Calling itself the Internet's most comprehensive personal finance site devoted to socially responsible investing, www.socialfunds.com offers complete coverage of social mutual funds, community investment, shareholder action as well as providing daily news and investment advice. Business Ethics magazine (www.business-ethics.com) has an extensive list of links to organizations involved in progressive business and investing. The UK Social Investment Forum (www.uksif.org/) promotes and encourages socially responsible investment in the UK. The Christian Science Monitor has an article entitled "How to Become a More Active Shareholder" at www.csmonitor.com/durable/2000/11/20/fp11s1-csm.shtml. Deb Abbey and Michael Jantzi are the authors of The 50 Best Ethical Stocks for Canadians, published last month by CDG books. The "Canadian Social Investment Review 2000" report can be downloaded from www.socialinvestment.ca. Corporate Social Investing: The Breakthrough Strategy for Giving and Getting Corporate Contributions, written by Curt Weeden and published by Berrett-Koehler Publishers in 1998, offers a practical 10-step plan for developing and implementing a comprehensive strategy for corporate contributions that is designed to advance a corporation's business interests while increasing the dollar value of its philanthropic activities. The Common Purpose CitizensConnection.net web site has an excellent article entitled "The Facts: The Power of Ethical Investment" at www.citizensconnection.net/PAGECZC%23%23%23%23%23%23%2300001347.vdf. Also see the article "Social Investing, Economic Evolution or Revolution?" by Amy L. Domini, available at www.lightparty.com/Economic/SocialInvesting.html. Other web sites worth visiting are the Environmental News Network's socially responsible investing page at www.enn.com/sri/, www.goodmoney.com, and www.greenmoney.com.

Michael Jessen is the owner of toenail environmental services, a Nelson, BC consulting company that helps businesses and communities profit from environmental leadership. He can be reached by telephone at 250/229-5632 or by e-mail at toenail@netidea.com. His firm's award-winning web site is at www.toenail.org/.


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