They're three methodologies utilized in Socially Responsible Investing. I only favor one of them. Read on to see which one and why.
- Negative Screening ("Exclusionary")
- Positive Screening ("Qualitative")
- Shareholder Activism ("Value Enhancing")
There's another lesser-known strategy called
Impact Investing that's used by foundations (i.e, Acumen, Rockefeller). In this strategy, an investor (not individual) will actively seek to place
direct capital in businesses that give social returns and $$$ returns. The key here is
direct investing. Impact Investing is similar to venture capital as the investor might take an active role leading, or mentoring the company. An example would be
microfinance. We won't spend any more time on Impact Investing as we'll be focusing on ownership of public shares.
1. Negative Screening: is one of the first strategies historically used for SRI. In this methodology, companies are excluded based on specific criteria. Most of these screens focus on the avoidance of "sin stocks." These include the usual suspects: Casinos, Weapons, Alcohol, Tobacco, and Nuclear Power. Nuclear Power, you ask ? It is easy to bulls-eye Nuclear Power given its association with nuclear warheads, and recollections of Chernobyl. Then there's the dillema of nuclear waste. However, since Nuclear Power helps reduce Global Warming, I think their benefits far outway their disadvantages, and our fears.
2. Positive Screening: This is a qualitative approach that invests in companies that serve their local communities, have ethical products, operate within a sustainable manner, and are very well aware of people/stakeholders. This not only includes their direct labor, but supply chains (i.e, in Vietnam), and at an even higher level, international human rights.
Positive Screening will be utilized in this blog, and real concrete examples will be examined.
3. Shareholder Activism: In this strategy, an investor, in this case, an Asset Manager/Pension Fund, tries to enhance value by engaging the company. Hence, the "activism" label. The asset manager will identify underperforming companies in need of better management, which may be accomplished via proxy voting. Or the Asset Manager might be protesting unjustly high executive compensation. Shareholder Activisim is a more recent trend of SRI. I disfavor this for several reasons. For one, the individual investor has no involvement. It is the machinery of a large asset manager that is making the decisions. The other strategies are more personal, whereby the individual investor seeks to align his/her personal values with specific (long-term) investments. Which segways me to my next concern - shareholder activism is more short-term oriented, and portfolios may not be very diversified as the asset manager needs to accumulate large share positions to gain voting power.
And do we really want the Carl Icahns of the world labeled Socially Responsible? There is a place for Shareholder Activism in the world of investing. I'm just not sure it's in the SRI realm.
