There’s no such thing as a free lunch, but is there a “free good”?

By Blaine Townsend CIMA© CIMC©
November 29th, 2011

If I made a list of the Top Ten Questions about socially responsible investing (SRI) that I’ve faced over the past two decades, Number One would be: “Will I lose money ?” followed closely by “Is there a cost?”, “Will it underperform?”, “Is it more risky?” You get the picture.

Nelson CapitalMy answer to those questions is based on actual experience building portfolios that balanced financial objectives with social and environmental concerns: The use of social screens has a very neutral effect on performance.

In this month’s The Journal of Investing, Nelson Capital’s versatile chief investment officer Lloyd Kurtz teamed with Northfield Information Services’ Dan DiBartolomeo to prove I was right. (Admittedly, they may have had other reasons for writing the piece as well, but we can’t be sure.) “The Long-Term Performance of a Social Investment Universe” takes a deep dive into the performance of the MSCI KLD 400—which used to be known as the Domini Social Index. The KLD 400 is a socially screened “large cap” universe designed to behave like the S&P 500 while reflecting the values of the mainstream SRI investor.

Kurtz and Dibartolomeo reveal that “factors” (eg. investment issues like size of a company, industry weightings, etc.) account for virtually all the relative performance difference between this SRI universe and the broad market over the past two decades. According to their study, social responsibility remains a “free good.”

On the other hand, bad corporate behavior is not a "free good"—even if the companies don’t always pay the costs directly. Historically, the costs of bad corporate behavior are passed on to society at large, as in the clean-up of a spill, public health and safety costs, or the need for government intervention because of market manipulation or governance failures. These costs are called “externalities.”

As pressure mounts around the globe to stop the degradation of natural systems and deal with the burgeoning health and social needs of a growing population, the costs of these externalities may begin to shift to shareholders. One glance at sovereign balance sheets around the world will tell you that the chances of society continuing to pay for these externalities are slim. Something has to give.

If social responsibility is a “free good” to investors, it certainly is one to society as well. This is one of the major tenets of sustainable investing: The markets will eventually punish the companies that create liabilities for society at large by stiffer regulations, higher input costs, and possibly a change in consumer patterns.

It begs the question: Will the environmental, social and governance-focused investment strategies being honed today outperform conventional counterparts? I am sure Kurtz and Dibartolomeo will have an answer to that question 20 years from now.

In the meantime, keep up on the latest sustainable investing trends with our Nelson Capital Management’s ESG notes, compiled each week by Adam Berkowitz. For more information or to make suggestions about our ESG notes please contact Adam or visit our website.

Change at the flick of a switch

High in the central mountains of Mexico, in the small town of Adjuntitas Dos, the lights have come on for the first time as part of the Luz cerca de todos (“Light close to everyone”) project. The Luz cerca de todos project set out to supply remote regions with sustainable solar powered energy. Siemens Energy supported the project with the donation and installation of 182 solar power systems for homes and ten systems for public buildings in nine towns that do not have a public power utility. The small-scale systems generate enough electricity to operate lamps, a radio, or a television for several hours. In these remote highland farming villages approximately 30,000 people still live without running water and do not have access to the public power grid. Most families spend up to 40 percent of their income on candles and batteries alone. Siemens spent 230,000 Euros in material expenses and oversaw the installation of the solar systems.

Doubling down on renewable energy

Bloomberg New Energy Finance released a report this week which forecasted renewable energy project spending to reach $395 billion by 2020 doubling the 2010 figure of $195 billion. Due to the rapidly expanding growth in solar and offshore wind projects spending levels are estimated to grow to $460 billion by 2030. Currently, total worldwide energy consumption from renewable sources including hydro, is approximately 12.6 percent. The report projects renewable energy consumption over the next 20 years to reach 15.7 percent. Growth in Europe will slow over the next three years as they deal with sovereign debt problems, while the U.S. and Canada are projected to reach a combined $50 billion in annual spending by 2020. The developing economies of India, the Middle East, Africa and Latin America will have the most rapid growth, with projected rates of 10 percent to 18 percent per year over the next decade.

Another deep water oil spill

The Associated Press reported this week that there is a potentially uncontained oil leak at an offshore well operated by Chevron Corp. located 3,800 feet underwater, 230 miles off the northeastern coast of Rio de Janeiro state. The drilling contractor for the well is Transocean—the owner of the Deepwater Horizon rig that BP was leasing at the time of last year’s Gulf of Mexico oil spill, the largest in U.S. history. The company said yesterday in a statement that “cementing operations are taking place as part of … well plugging activities.”

Chevron has claimed the oil spill was between 400 and 650 barrels of oil and that they’ve contained the leak, though conflicting reports have come in from SkyTruth, a nonprofit group that uses satellite imagery to detect environmental problems. SkyTruth reports on its website that the oil spill extended 918 square miles, and that the spill rate as of Tuesday was up to at least 3,738 barrels per day. Ana Carolina Oliveira, a spokeswoman for Brazil’s oil regulator, the National Petroleum Agency, said an estimated 1,000 barrels had leaked to the surface and that it was still unclear if the leak was contained. In the past few years, Brazil’s state-run oil company Petrobras and others made massive offshore oil discoveries thought to hold at least 50 billion barrels of oil, making them the biggest finds in the Western hemisphere in 30 years.

Nelson Capital Management disclaimer

Nelson Capital Management is a registered investment adviser and a non-bank affiliate of Wells Fargo & Company. The information in this report was prepared by Nelson Capital Management and expresses the opinions of its investment team unless otherwise noted.

This material is for general information only, is not suitable for all investors, and is not soliciting any action from any particular investor.

Information and opinions presented have been obtained or derived from sources we believe reliable, but we cannot guarantee their accuracy or completeness. Opinions represent NCM’s judgment as of the date of the report and are subject to change without notice.

Affiliates of Nelson Capital may issue reports or have opinions, which are inconsistent with, and reach different conclusions from, this report.

Asset allocation does not assure or guarantee better performance and cannot eliminate the risk of investment losses.

Nelson Capital Management and/or its affiliates do not provide tax or legal advice. Please consult appropriate tax or legal advisors to determine how this information may apply to your own situation.

Additional information is available upon request.

This presentation is not an offer to buy or sell, or a solicitation of an offer to buy or sell the securities mentioned. The investments discussed or recommended in this presentation may be unsuitable for some investors depending on their specific investment objectives and financial position.

Blaine Townsend CIMA© CIMC©

Blaine Townsend CIMA© CIMC©

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