Capital Conversations

Socially Responsible Investing Roundtable

Steven Lydenberg, Timothy H. Smith + Colin Le Duc

STEVE LYDENBERG_ We’re here to talk about what’s happening with the baby boomers’ values now and in the years to come. And more specifically to what degree this generation is responsible for the growth in interest of Socially Responsible Investing.

My personal view is that the values the boomers inherited from their involvement in the progressive issues of the 1960s are on the verge of bringing about real change in their thinking about where and how their money is invested. They are aware of the corporate scandals of the ’80s and the later rash involving Enron, WorldCom, Parmalat and others. They are informed on global warming, the population explosion, AIDS, poverty and the health-care situation, but they are only now starting to factor these concerns into their investing. My first observation here is that the means available for them to communicate their concerns about corporate behavior have changed since the 1960s when Tim and I were starting out in this business. Back then, protests in the street were the primary way to express dissatisfaction to corporate management. Now, among other things, an elaborate and effective form of dialogue through shareholder resolutions has emerged in the United States and Canada. At the same time, the generation as a whole is still not adequately informed and active when it comes to understanding the full range of financial social investing options available and seems to lack a willingness to take full advantage of them.

TIM SMITH_ I think we are much closer now to a tipping point where baby boomers are seriously thinking about the issues of social justice, poverty and the environment and integrating them into their investment decisions. At the same time major institutional investors and pension funds like CalPERS, the state of Connecticut, as well as New York City’s pension funds have stepped up and spoken out on social and environmental issues as well as corporate governance. They focus on how these factors affect corporate financial performance as well as the importance of the issues themselves. This sends a fresh and powerful message to companies that investors care about these issues from both a social and fiduciary perspective.

COLIN LE DUC_ Looking at this from a geographical point of view; the first thing I’d say is that the situation in Europe is different from the U.S., and Asia is different from Europe. I remember in my previous firm before Generation Investment Management working on the Dow Jones Sustainability Index (DJSI) just how difficult it was to decide what the right methodology was to determine which companies to include or exclude from the indexes. In Europe the government is seen in a more central role in societal responsibility. Plus, governments are accepted as having a responsibility to regulate markets and protect investors, and this is particularly true in the UK, Netherlands, France, and Germany. In Japan, the social contract between companies and their employees has always been within a long-term view. Jobs for life and corporate responsibility extends from hiring to the grave. However, when I was in Japan I had to contend with a consortium of companies— led by Canon—that were quite vociferous in accusing the DJSI of “cultural relativism” and “corporate imperialism” in applying Western management styles on Asian companies via our research methodology. Thus, I’m sure we don’t have all the answers here in the West and must evolve our understanding of corporate responsibility in the context of regional biases.

I think business is increasingly being viewed as an appropriate way to express one’s values. The best and the brightest now demand to work for companies that are aligned with their personal values. Capitalism is maturing and becoming an enabler of a deeper generational desire to make a positive contribution to the world and enjoy a meaningful career. Mitch Kapor may be familiar to you guys over in the States. He is a technology pioneer and on the board of Mozilla/Firefox and a leading spokesman for the open source movement. Mitch is one of many who believes that once you have a deep understanding of the nature of interdependence and open-source thinking, then long-term investing just feels intuitive and common sense.

TS_ I am concerned about the business leaders who start out embracing CSR in good times but are pulled into questionable behavior when times are not so good and they believe they need to cut corners.

CLD_ Yes, Tim, there has been much talk about the first mover disadvantage when it comes to responsibility and sustainability. Just look at the oil industry and contrasting positions of BP and ExxonMobil. BP is openly addressing the need for lower carbon growth and alterative fuels, while ExxonMobil has made it plain that they do not intend to lead the innovations around addressing climate change and energy security challenges but prefer to wait for others to invest, and when an innovative process succeeds and is economically viable, they will go out and buy it! That’s why I’m particularly interested in the movement toward responsible lobbying, where your friend John Elkington is doing pioneering work.

SL_ Yes, some of the most difficult questions that responsible investors now face relate to the appropriate role of corporations in politics. Part of the reason Domini has recently filed shareholder resolutions asking corporations to report on their political contributions is so that we can at least get the basic facts out on the table. In addition, Henderson Global Investors has recently published two studies raising the important and difficult question of what constitutes a corporation’s “fair share” of taxes. The whole question of how and to what degree corporations should shoulder a share of the social and environmental burdens is complex. Two basics are needed for this debate. One is those facts and figures that the Global Reporting Initiative has so effectively promoted as a fundamental obligation of corporate reporting to the public. The second is the capacity to analyze that data effectively and to educate investors and the general public on the complexities of doing business in a globalized economy. Here I’d say that the GAP, in its most recent corporate social responsibility report, has done a great job of articulating the complexities of managing a global supply chain.

So the challenge is how do we get corporations to a position where they can tell the whole story. For example, we can see some progress here in the food industry, where regulations now require not only ingredient labels, but calorie and fat content. In addition, we know if a product is organic or has been purchased under fair trade practices.

CLD_ Good point. Consumers are pretty well educated in that regard now. Look at great companies like Whole Foods Market. And that bête noire of the CSR community Nestlé has come out with a very good new healthy food line.

Speaking more broadly, much comes down to the full integration of finance and sustainability in the context of a long term investment approach. Two years ago Duncan Austin left the World Resources Institute to become an analyst at Generation Investment Management. As an award-winning environmental economist, Duncan is now completing his skill set by doing the CFA. Investors therefore need to understand both sides of the story – they need to be conversant in technical, traditional equity research as well as understand how to interpret and integrate sustainability issues.

Another trend I’ve picked up on recently is what’s happening at the business schools. After the growth of social enterprise MBA courses over the past decade, the leading schools are saying it is crazy to have these courses as a separate track and the principle of sustainability and social enterprise should be integrated in to the core MBA curriculum. I think this may have something to do with the work that Simon Zadek did on mainstreaming CSR/SRI for the World Economic Forum in which he advocated three key impediments to mainstreaming responsible investment: incentives, information, and competence. The next generation of leaders needs the competence to understand sustainability as integral to all functions and management disciplines.

So with SRI benchmarks and standards more widely agreed and established, mainstream analysts will have no choice but to pay more attention. For example, I think it is a significant development that GE has appointed one person whose sole job is to focus on long-term investors. She is part of the investor-relations team and interacts solely with investors interested in social responsibility and sustainability issues.

SL_ One of our most important goals, I believe, is shifting the vocabulary of the investment community from the short term to the long term. But to do that, we need to be able to articulate the difference between the two. This might be a good time to ask you, Colin, how you go about defining long-term investing at Generation Investment Management?

CLD_ Well, first we devote a lot of time to the research horizon, looking at long-term trends. From this we draw up industry road maps for ten to fifteen years on a subsector level. Bear in mind that fifteen years might be a medium-term horizon for a utility but three years is a long-term horizon in software, so long-term depends on which industry you’re talking about.

Next, we look at the investment horizon. That work has produced the thirty companies in which we’re currently invested. We’ve adopted a long-term concentrated global equity strategy, and we’ve made high conviction bets on companies we’ve researched with a high degree of thoroughness. This model is conviction-driven and quite different from the pure values-driven approach other managers have employed. My sense is that there is a groundswell out there to bring what we’re all doing into the mainstream over the next five to seven years. This will likely happen sooner on the sell side, where the broker community is finding it difficult to justify their soft dollaring of fees. I think it is also a sign of the future when Bernstein, who produce some of the best long-term research, now have 80 percent of their analysts with backgrounds in strategy consulting as opposed to the normal security analyst track. Hedge funds dominate the commission pool and our competitive advantage rests in “enhanced analytics” just as you guys have been doing working with KLD—Kinder, Lydenberg and Domini—and the other SRI research providers.

SL_Thank you, Colin. We have a much better understanding of the innovation going on at Generation Investment Management and I’d only add Jed Emerson’s point that understanding systemic risk is a fiduciary responsibility. As the risks associated with climate change have shown, it is not only the quality of corporate governance that can affect shareholder value. Corporations’ actions in the social and environmental spheres have a material effect upon the world we live in and in turn on their value to society.

To sum up, many of those concerned about peace, equality, justice, and the environment since the 1960s are now in positions of responsibility in the investment and corporate communities. Cultural and philosophical changes are taking place in the mainstream. We see national pension funds such as those in France and Denmark encouraging their money managers to incorporate sustainability considerations and to avoid companies that fail to meet basic international norms. We see new efforts, such as the Enhanced Analytics Initiative, promoting the use of social and environmental factors in mainstream Wall Street stock analysis. We see pioneers in the SRI research world, such as KLD Research and Analytics and Innovest, forming alliances with some of the largest money managers to deliver new products to the marketplace. However, great transformations in the marketplace must still take place if long-term concerns are to be fully captured and dealt with in the mainstream.

Steven Lydenberg is Chief Investment Officer, Domini Social Investments LLC;
Timothy H. Smith is Director of Socially Responsible Investing, Walden Asset Management;
Colin Le Duc is Head of Research, Generation Investment Management LLP

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