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Make Positive Change With Your Investments

Socially responsible investors each have different core values and various reasons for investing in a socially responsible portfolio


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PetroChina Company Limited is the largest oil producer in China and has one of the largest market capitalizations of any company in the world. PetroChina’s stock is traded on multiple exchanges including the New York Stock Exchange (NYSE: Symbol PTR). The massive company appears in many mutual funds. As a result, it may be part of your portfolio without your knowledge. Why should you care?

Throughout the last decade and a half, PetroChina has been the focus of many activists and has proven that the company will stop at nothing to produce a profit. 

PetroChina’s parent company, China National Petroleum Corporation (CNPC), is helping the Sudanese government explore and drill for oil. China National Petroleum Corporation owns a majority share of Petrodar Operating Company Ltd. Petrodar is an oil company that explores, develops and produces oil in Sudan. According to many advocacy groups, the oil-dependent Sudanese government uses a large percentage of its oil revenues generated through foreign direct investment to fund militias accused of killing hundreds of thousands of innocent civilians in the Darfur region of Sudan. In 2005, President George W. Bush declared the killings in the Darfur Region genocide.

The spotty environmental track record of PetroChina includes chemical spills and a controversial pipeline project. In November 2005, one of the company’s plants exploded in Jilin, China resulting in 100 tons of benzene pouring into the Songhua River injuring 60 people, killing five, while causing an environmental disaster. More recently (2014), a subsidiary of the company was responsible for ethylene and ammonia leaks which contaminated water supplies in Lanzhou. The company is also sponsoring the building of an oil pipeline across Tibet which has been criticized by many environmentalists due to the potential effect on the environment and wildlife in the region.  

This is just one example of a company many investors may hope to recognize and avoid through socially responsible investing (SRI). Socially responsible investing is a very broad term. Of course, core values are going to be vastly different for individuals and organizations. For some, green or environmental issues may be extremely important while faith-based values may be important for others.  

SOCIAL SCREENING

The history of socially responsible investing started with religions and religious groups in the 18th century. These groups did not want to invest, work or support certain activities and businesses that were thought to be against the values of these organizations. This same idea applies to the basis of most SRI funds. The start to an SRI mutual fund is founded with the idea that it will not invest in companies based on certain social criteria. This is called a negative screen. A typical SRI fund will usually not invest in companies that produce or receive a certain percentage of profits from:

  • Tobacco
  • Alcohol
  • Weapons
  • Mining
  • Forestry
  • Nuclear Power

In addition to negative social screens, most SRI funds will seek out companies based on positive social, environmental and governance track records. These funds may look for companies that are strong stewards of the environment, devoted to local communities and society in general, committed to high labor standards or dedicated to producing safe products in an ethical manner.

In most cases, a socially conscious investor may not agree entirely with all of the negative screens.

I can remember meeting with a couple employed at Colorado State University. They were interested in a socially conscious fund offered by the company I worked for at the time. I first discussed the negative screens of the fund.  I noticed right away that there was something they did not agree with.  When I asked them what their concern was, they informed me that they were avid wine drinkers and did not like the fact that alcohol was screened from the account.  This is a case where the investor did not agree with the screens due to their lifestyle.  

Social screening can be an effective way to influence an issue over time. Finance can quickly change the stance of a company or country. The divestment of investors, mutual fund companies and business in South Africa largely influenced the end to apartheid in South Africa.  In most cases, social screening is usually thought of as a long-term approach to change the attitude and position of companies over time.  For the investor, it is a way to have peace of mind knowing their core values align with their investments.

SHAREHOLDER ADVOCACY

When an individual owns stock in a company, he or she actually owns a part of the corporation. As owner of the company, they have the right to vote on the board of directors, propose shareholder resolutions and vote on shareholder resolutions.

Shareholder advocacy or activism is actively working with corporations to point out or change behavior that conflict with the core values of socially responsible investors.  Shareholder advocacy is an active way to communicate directly with companies and has the potential to produce quick results.  In a large majority of cases, resolutions do not pass.  However, shareholder resolutions provide direct communication to management. This direct communication provides management of these companies with information regarding the social, corporate and governance concerns of investors. This direct communication can often lead to change proactive change.

COMMUNITY INVESTING

Community investing involves placing investments with organizations that support underserved communities. These underserved communities may not be able to get a loan from a traditional bank. Community Development Financial Institutions (CDFIs) usually are banks or credit unions. In a typical situation, they are able to provide competitive rates for investments like CDs. When an investor puts money in a CD at a CDFI, it works the same as if they bought a CD at a traditional bank. However, the CDFI is able to turn around and provide a loan to an underserved community such as a not-for-profit institution. Studies show loans from CDFIs to these communities are more likely to be paid back than a traditional business loan.  Community investing allows investors to have a direct impact on underserved communities.

HOW YOU INVEST DOES MATTER

Many investors do not understand or haven't thought of the impact their decisions have on business organizations. SRI investors each have different core values and various reasons for investing in a socially responsible portfolio. Social screening, shareholder advocacy, and community investing each provide a way for investors to express their values. Each channel has strengths and limitations. Together, they can provide a powerful forum to interact and affect corporate decisions while providing investors peace of mind with their investing decisions.

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Kevin McNab

Kevin McNab is the founder and president of ACE Wealth Partners. Kevin has a Masters of Finance from the University of Colorado Denver and the Certified Financial Planner (CFP) certification. ACE Wealth Partners is an independent, fee-only comprehensive financial planning, asset and wealth management firm. Information contained in this article is for informational purposes only and should not be considered investment advice or recommendations. Advice may only be provided after entering into an advisory agreement with ACE. For more information, please go to www.acewealthpartners.com.

Kevin can be contacted at kevin@acewealthpartners.com or 303-301-2632.

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