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Posted on OCT 16, 2014

Social Investments - Why are they one of the most dynamic segments of the market today?

Where do today's investors go when searching for enhanced investment results in a segment of the market where traditional financial analysis is integrated with an analysis of a company's social impact? The answer is “Social Investments.”

What are Social Investments?

A Social Investment seeks both financial and social returns as a result of making a single investment. This differs from a more traditional investment model that seeks a financial return only. The key to understanding Social Investment is that the good intention and the actual analyses and structuring of the investment are to be made targeting both types of return, the financial and non‐financial which, in this case, is social.

The ultimate focus for this type of investor is for investment capital to help build a sustainable and equitable economy worldwide. The aftermath of the financial crisis of 2007‐2011 opened the door for a reassessment of the contribution of finance to economic progress and its impact on the public.

SRI is the now commonly used acronym for Socially, or Sustainable, Responsible Investing. The thought that Socially Responsible Investing has only a limited purpose and, a limited return, is quite outdated.

SRI now a fully formed investment discipline

Originally, SRIs screened out certain investments that were contrary to the investor's beliefs by eschewing companies primarily involved in or manufacturers of military armaments, nuclear weapons, tobacco, alcohol, gambling and the like.

As the number of mutual funds increased in the 1980s, so did the choices for investors. Investors could choose to invest in a manner consistent with their core values; however, at that time, they often had to accept only average or below average returns.

In the early 2000s, SRI expanded this traditional screening approach to one that is now a fully formed investment discipline that considers environmental, social and corporate governance (ESG) criteria to generate long‐term financial returns and positive societal impact.

Data seems to demonstrate there is no need to give up ethics for earnings

One continuing misconception surrounding Social Investment is that sustainable and responsible investments have lower returns. Research studies have demonstrated that companies with strong corporate social responsibility policies, programs and practices can be sound investments.

A 2012 study by Deutsche Bank determined that incorporating environment, social and corporate governance (ESG) data in the investment analysis is “correlated with superior risk‐adjusted returns at a securities level.”

Further, a recent report by the United Nations Finance Initiative reviewed 36 academic studies and 10 industry research reports regarding SRI performance and determined that “there does not appear to be a performance penalty from taking ESG factors into account in the portfolio management process.”

Finally, the growth of sustainable and responsible investing in recent years, strongly suggests that an increasing number of investors believe that returns from SRI‐related strategies are comparable to those of more traditional investments.

Other types of SRI investing

In today's world, a sustainable and responsible investor focuses on the consideration of ESG in the investment analysis and portfolio construction across asset classes. An important segment of ESG incorporation, called community investing, seeks explicitly to finance projects or institutions that will serve poor and underserved communities in the United States and abroad.

Microfinance is another new solution which offers a financial system at the bottom of the population pyramid that broadens access to capital for individuals with low income. This concept changed the view of the poor from merely being recipients of public assistance to becoming productive entrepreneurs capable of not only building wealth, but also, taking part in the mainstream economy.

The manner in which asset managers and asset owners can actively incorporate ESG issues into the investment process can occur in a number of ways.

Corporate Social Responsibility as a factor in SRI investing

Some actually seek to include companies that have stronger corporate social responsibility (CSR) policies and practices in their portfolios or to exclude companies with poor CSR track records.

An example of this was recently highlighted in an interview in the September 8, 2014 edition of Barron's with Todd Ahlsten, portfolio manager for Parnassus Investments. He was quoted as saying, ”When you are looking at two similarly valued energy companies, and one has a good track record for worker safety and one doesn't, which do we invest in? That's a no‐brainer.” Ahlsten's Parnassus Core Equity Fund, for example, has 40 mid‐size to large company stocks with average annualized returns of 10% over the past 10 years, beating 97% of its large‐blend peers and two percentage points ahead of the S&P 500.

As Ahlsten's quote illustrates, acceptable criteria for SRI investments have expanded beyond the ESG concept to incorporate review of work‐place policies, board diversity, green‐house gas emissions and efficiency of water usage, as well as whether a company is involved in certain geographic regions such as Sudan, etc.

Another strategy employed by sustainable and responsible investors (in publicly traded companies) is to focus on shareholder resolutions and practicing other forms of shareholder involvement. Since shareholders are entitled to introduce resolutions to the company's management to be voted on at annual meetings, they do so to encourage corporate responsibility and discourage company practices that are unsustainable or unethical.

SRI investing is becoming one of the most dynamic segments of the market. At year‐end 2011, there were 333 mutual fund products, with total assets of $641 billion, in the United States that considered ESG criteria. In contrast, in the United States in 1995, there were only 55 SRI funds with $12 billion in assets. When looking at this market segment as a whole, it is also interesting to note, according to the U.S. SIF Foundation's 2012 Report on Sustainable and Responsible Investing Trends in the United States, that SRI is now a widely practiced investment discipline with more than $3 trillion in total assets under management.

Social responsibility and Johnson Bank

Social responsibility is deeply engrained within Johnson Bank itself. Sam Johnson, the fourth generation leader of S.C. Johnson and founder of Johnson Bank, an indisputably successful businessman, was also a highly regarded philanthropist and advocate for sustainable causes. Now in the fifth generation, Helen Johnson‐Leipold, Chairman of Johnson Financial Group continues the legacy of advocacy. In fact, the Johnson family is known for giving back to their communities. Embedded in our culture is a genuine sense of mission to make every community where we operate better because we're there. This philosophy is anchored in the philanthropic spirit of the Johnson family and demonstrated in the way we operate and the individual actions of our associates.

Today at Johnson Bank Wealth, that same passion is evident with our investment professionals. Our investment team actively interfaces with leading portfolio managers in the field of SRI which enables them to adeptly work on financial plans and craft portfolios centered on our clients' social values. We welcome your calls and questions.

This information is for educational and illustrative purposes only and should not be used or construed as financial advice, an offer to sell, a solicitation, an offer to buy, or a recommendation for any security.

The information and opinions in this report were prepared by Johnson Bank Wealth. Information and opinions have been obtained or derived from sources we consider reliable, but we cannot guarantee their accuracy or completeness.

Opinions expressed herein are those of the author and do not necessarily represent the views of Johnson Bank. Opinions are as of the date of this report and are for general information purposes only. Johnson Bank Wealth does not warrant the accuracy or completeness of information contained herein, such information is subject to change and is not intended to influence your investment decisions. Johnson Bank Wealth does not undertake to advise you of any change in its opinions or the information contained in this report. Johnson Bank and its affiliates may issue reports or have opinions that are inconsistent with, and reach different conclusions from, this report.

Johnson Bank Wealth does not provide legal or tax advice to clients. You should review your particular circumstances with your independent legal and tax advisors. Whether any planned tax result is realized by you depends on the specific facts of your own situation at the time your taxes are prepared.


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