Thursday, December 12, 2013

Put Negative Screening at the Top of Your To Do List



If your new year’s resolution this year is, do no evil, one very important place to start is with your portfolio.  It can be extremely hard to determine where you should invest if you care about the environment and are against the egregious exploitation of workers and corporations running rough-shod over communities and people, either here or internationally. Practitioners screening for environmental, social and corporate governance factors (ESG)—including mutual fund and index researchers and managers, financial advisors and union researchers alike—use a tremendous number of tools and spend considerable amount time evaluating the performance of companies on a wide variety of ESG metrics and criteria, usually paying for proprietary data and subscription services handsomely. I’ll have another post about ways to make your portfolio more sustainable by using financial advisors specialized in socially responsible investment (SRI) and investing in sustainable mutual funds, soon. But, all on your own, making sure the companies you’re investing in are good is quite hard.  On the other hand, it is relatively easy to decide to cash out stocks in companies that are clearly not participating in making the world a better place, today or tomorrow, which is to say, it’s pretty easy to make your portfolio do no evil, today.  


Divest the Sectors the World Could Do Without


First, eliminate any company in industries that are problematic to you, wholesale. For some this is defense, tobacco and prisons.[1] For others it will be all fossil fuel (oil, gas and petroleum), coal and nuclear companies.[2]  Advocates for environmental justice might seek to eliminate companies producing GMOs in the agriculture chemicals sector, or metal mining given its intensive water use and cyanide pollution of water systems.[3] If your general sense from these sectors is, they should have no future, you should consider getting rid of them from your portfolio.  


Maligned Sectors and Companies that May or May Not be so Bad


You might have strong feelings about labor and community issues and have immediate bad associations with the corporate images of, say, Starbucks or Pfizer. You might also have an aversion to pharmaceutical companies because of their practices; patenting life-saving drugs and wielding monopoly profits, while making essential medicines inaccessible to many in need.  Or you might have an aversion to all big power brokers in oligopolistic sectors like the largest bank holding companies or all financial service companies. There are even some advocacy groups seeking a government-funded, Medicare-for-all type health system who are calling for the divestment of all healthcare and health insurance companies. However, there might be nuance to be found here and even in these much maligned sectors there are some good developments and companies that are ahead of their class in terms of social and environmental practices that you might want to consider holding on to.  For this reason, I wouldn’t suggest divesting all pharmaceutical companies and automobile companies and reconsidering ditching brands that you associate with scandals in the past, like Nike. Sometimes these companies have made the most changes in their practices because of these early lessons. For the most part, unless you have trouble sleeping with these in your portfolio, I would flag the company that you’re concerned about and discuss rebalancing this part of your portfolio with a professional.   

Do Divest These Companies


One of the best investment screens that you could possibly use to make sure your portfolio is doing no evil is screening for companies that are members of the American Legislative Exchange Council (ALEC).[4] Why? ALEC is a legislative advocacy organization that has advanced and helped pass legislation repealing labor protections including unionization and minimum wage standards and legalizing the violation of pension contracts. It fought for and achieved the repeal of renewable energy mandates in several states and is advancing legislation that would support the Keystone XL pipeline project. It advances the deregulation and growth of the weapons and prison industries and the erosion of democratic civil rights via Voter ID laws.  Indisputably, a corporation signing on to and financially backing this political platform should be differentiated from companies with incidental poor performance on some ESG measures. ALEC membership signifies the direct sponsorship of the erosion of ESG standards though legislation and these companies squarely fall into the actively and consciously doing evil category. If the company is a member, you can either sell the stock today or consider joining various campaigns petitioning them to leave ALEC or sending their management letters of concern, directly, as an investor. If they remain ALEC members after 6 months to a year, I suggest selling these stocks.  If the company wises up and eventually chooses not to fund ALEC in the future, great, you can look at their corporate fundamentals and price/risk profile then and add the company back into your portfolio if that makes sense at that point. But if you want to have a guaranteed conscience-free portfolio, you need to consider dropping these companies. Dump them soon if not now.   


Don’t Follow the Herd


This is advice you may not hear from a number of socially responsible investment practitioners and even from investment and finance blogs on the topic. You might be tempted to just go with companies included on sustainable indexes like Dow’s, but there are some serious red flags here.[5] For example the Dow Jones Sustainability North America Index contains a surprising number of ALEC member companies. Of the top ten component companies that comprise Dow’s Global (Broad Market Indices) BMI, five companies are ALEC members. Of those, AT&T stands out for its very visible and large political contributions, and although Exxon Mobile has made major changes it’s still primarily in the business of fossil fuel extraction. Chevron is similar in this regard and Bank of America still has predatory and problematic mortgage lending and retail banking practices even after involvement in major investigations and settlements. Microsoft is the remaining ALEC member here. Similarly, four out of ten of the top components of the Dow Jones Sustainability North America 40 Index and the Dow Jones Sustainability North America Diversified Index are ALEC members. Likewise, Corporate Responsibility Magazine (the new name of CRO Magazine) 100 Best Corporate Citizens List has some problematic corporate actors here too. Coca-Cola Co is ranked 8th, Newmont Mining Corp 16th, Walmart 21st, Occidental Petroleum Corp. 26th, Monsanto Co. 31st, and McDonald’s Corp 49th, just to choose some from the top 50 that stand out on community, human rights, environmental, monopoly and anti-competitive practices and contentious and problematic labor relations. Like I said, making sure your portfolio is making the world a better place is much harder than making sure it’s not doing blatant evil. Don’t be misled by “best of” lists.  


What Now?


If you follow this advice and find yourself with a large portfolio rebalancing on your hands (if you no longer have at least seven industries represented and an imbalance of too many of one kind of size of company or too many growth stocks, for example), you may want to seek out a professional to help you figure out where to reinvest. But give them a list of those industries and companies that you do not want and be very clear about it.  


Now You’re Better than Google!


This new year’s resolution may seem like chore but it really requires maybe a couple of hours of inspection, rearranging investments and maybe chatting with a professional. In total, it’s a lot easier than quitting bad words, hitting the gym every other day or quitting refined carbs for the rest of your life. Seriously. And more than being torn that one time you buy a value-pack of toilet paper from Walmart, you can certainly be sure you aren’t bankrolling Walmart with your lifesavings. And that should make you feel like a better person.

[1] Sector: Industrial Goods, Industry: Aerospace/Defense, Companies: all.  Sector: Consumer Goods, Industry: Consumer Non-Durables, Companies: all Tobacco.  Sector: Services, Industry: Security & Protection Services, Companies: Prison systems targeted for divestment include CCA, GEO Group, and MTC. 
[2] Sector: Basic Materials, Industry: Energy, Companies: all fossil-based. Companies involved in nuclear energy can range from those in mining, processing, enrichment, plant operation and waste management. Larger US companies in this category include Dominion Resources, Duke Energy, GE Hitachi Nuclear Energy, NRG Energy, South Carolina Electric and Gas Company, Southern Company, UniStar Nuclear Energy, Westinghouse Electric Company.

[3] Sector: Basic Materials, Industry: Metal Mining, Companies: all gold mining companies.  Sector: Basic Materials, Industry: Chemicals, Companies: Monsanto, DuPont, Dow Chemical Company, Syngenta AG. 


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