CHAPTER 8
Public Equities: Select Values-Aligned Investments

Women have been leading and are continuing to lead the way in values-aligned investing. There's no better way I can think of to start a discussion of values-aligned public equity investments than by paying homage to some of the trailblazing women who were instrumental in building this field. Together they catalyzed financial markets to think—and act—differently. They launched firms and proved that you can use public equity to grow wealth and build a better world.

One such woman is Joan Bavaria, who has been described as a visionary, a pioneer, an inspiration, and a hero. In 1982, she founded Trillium Asset Management, one of the first socially responsible financial firms. Today Trillium manages close to $3 billion, making it one of the largest investment firms in the US, focused exclusively on values-aligned investing. Starting and building one firm was not enough for Joan. She also founded, cofounded, and inspired a number of other groundbreaking organizations in the social investing space. It's no surprise that Joan is often referred to as the “founding mother of socially responsible investing.”1

Amy Domini was a contemporary of Joan's and another trailblazer in this arena. In 1990, she launched the Domini 400 Social Index, one of the first socially responsible indexes.2 It was designed to help investors apply what are now known as ESG criteria to their investment decisions. Amy also founded Domini Impact Investments, another pioneering firm that provides values-aligned fixed income and public equity funds. She continues to serve as the chair of this firm.

In this chapter, we'll explore how you can invest your values through the stock market—an opportunity that would not have been possible without the leadership of Joan, Amy, and other women like them. You'll be introduced to online tools you can use to look inside your current investments, uncovering information about the companies they hold. You'll learn how to find values-aligned products that you can invest in today. We'll also show you how you can harness the power of shareholder advocacy, a process in which stockowners engage directly with corporate executives to drive positive change.

The Current State of Values-Alignment in Public Equities

Within public equities there are literally hundreds of values-aligned financial products. The numbers are growing each year as traditional investment firms, such as BlackRock and Vanguard, jump into the fray. Sustainable funds attracted $20.6 billion in 2019 alone—four times more than the amount in 2018—which held the previous record.3 You can invest on your own by picking individual stocks or funds, or you can work with a financial advisor to access specialized products.

When you build a portfolio of individual stocks, you decide which level of impact you want to prioritize: do no harm (level 1), benefit all shareholders (level 2), or develop solutions (level 3). You have similar, though more limited, abilities when you invest in stock funds. Although there are options at all levels, the number of level 3 funds available within public equities today is still relatively small. Most funds are designed by eliminating undesirable players or by selecting companies that adhere to ESG best practices.

Finding Values-Aligned Stocks

When you choose to invest in individual stocks, you can thoughtfully select the companies that are delivering the outcomes you want to see in the world. You can also engage in shareholder advocacy by voting your proxies or joining with other investors to demand changes in corporate behaviors and policies.

When you're considering a stock purchase, you'll most likely research the company's historic returns and growth potential. Evaluating whether the company aligns with your values is just another part of the diligence process. This step comes with a bit of uncertainty because not everyone concurs on the criteria that define a “good” company. As a result, the sources that provide ESG ratings for companies calculate and present their scores differently. Thus, until there are standards, you may have to perform some of your own research and use your best judgment to make your own investment decisions.

MSCI ESG, Arabesque S-Ray, Just Capital, and Yahoo Finance offer sustainability scoring on individual companies through their freely available websites. When you're evaluating a stock, you may want to reference a couple of these sources to see how the company fares under each form of scrutiny. Each of these sites contains detailed information on the methodology used to arrive at their scores.

Corporate Social Responsibility (CSR) reports provide another source of information. The GRI Sustainability Database4 allows you to download CSR reports from nearly 15,000 companies. The documents come directly from the firms themselves, so you might want to keep that in mind when you are reviewing them.

Using this set of tools with other web research can go a long way to giving you visibility into the sustainability and ESG strengths and weaknesses of any company you currently own or are considering as an investment.

Finding Values-Aligned Stock Funds and ETFs

The great news is there are hundreds of values-aligned stock funds and ETFs. What's more, there are some really good, freely available tools that can help you evaluate the values alignment of these financial products. You can apply these to funds you already hold in your self-managed accounts as well as to funds that are held by your employer, robo-advisor, or any other financial manager. My guess is that when you check, you'll be surprised by what you learn. I certainly was, and it spurred me to action. Once I discovered how badly my investments were performing against my values, I wanted to find better options to replace them as quickly as I could.

But how can you find the fund or funds you want to invest in among hundreds of options? Fortunately, there are ways you can quickly narrow the field. A simple web search for “best ESG funds” or “best sustainable funds,” for example, will lead you to a number of sites where others opine on the best investments and provide their analysis. This can be a great way to start. Once you identify a fund this way or get an idea from some other source, you can assess its values alignment using online tools, such as As You Sow, Natural Investments, and Morningstar.

You can also use these tools to identify new investments. That's what I did. I started my research by looking for funds that matched my investment strategy. For example, I wanted to replace the Vanguard large-cap blend index fund I was holding. I liked the diversity in the fund, the passive management, and low fees. And it fit well with the other public equities funds I was holding. But in terms of impact, it was terrible! The fund received D or F grades from As You Sow in virtually every category.

What I did was run a search for “large-cap” in the fossil-free portion of the AYS Invest Your Values site. Then I sorted the results by the funds that received the highest grades. Very quickly, I reduced the universe to a list of the highest-ranking large-cap funds. Then I used Morningstar to dig into the financials of each fund on my list. From there, I chose a new fund and shifted my money. This process worked really well for me and is explained in more detail in a video on our companion website. You could use a similar process on the Natural Investments site.

Special Categories of Stock Funds and ETFs

Within the universe of stock funds and ETFs, there are some special categories I would like to call out because they will appeal to certain types of investors.

Target-Risk and Target-Date Funds

Some of us don't want to think about our money. We want a “set it and forget it” approach where we make one decision and don't worry about it anymore. Target-risk and target-date funds are designed to address this desire. They hold a combination of cash, bonds, and stock in one fund. With target-risk, you can select a fund based on your risk tolerance—conservative, moderate, or growth-oriented—and obtain a diversified portfolio with a single investment. Target-date funds are more complicated investments that automatically reallocate assets in the fund as you age.

The simplicity of these approaches makes them favorites in retirement accounts. Since I'm not a believer in one-step investment strategies, I'm not a big fan of these funds. But if you are, you may be happy to know there are values-aligned versions available. Calvert Investments, Eventide, Green Century, Pax, Praxis, and Walden all offer socially responsible target-risk funds. So you have several options. That isn't the case with target-date funds. At the time of this writing, Nuveen was the only company that had introduced a series of values-aligned target-date funds.

Balanced Thematic Funds

Within public equities there are funds and ETFs that seek broad diversification and are designed with a specific impact theme in mind. These funds are often constructed by avoiding companies that are antithetical to the theme and/or by actively selecting companies that receive high marks related to the theme.

Consider three funds that target gender diversity. Fidelity Women's Leadership (FWOMX), Glenmede Women in Leadership US Equity (GWILX), and Impact Shares YWCA Women's Empwrmt ETF (WOMN) appear to be quite similar at the surface level. They're all large-cap funds with fewer than 175 holdings each, and they are benchmarked against the Russell 1000 on Morningstar. However, these funds are not the same, and those differences are reflected in both their social and financial returns.

Each of the funds has a different approach to delivering gender diversity. Fidelity and Glenmede invest in companies where women hold leadership roles, but they have different metrics. Glenmede looks for 25% of board seats and management positions to be filled by women while Fidelity sets their bar at 33%. Impact Shares, which is a nonprofit aligned with the YWCA, has a very different approach. The fund considers a wide range of issues that affect women in the workplace and donates its advisory fees to the YWCA to advance its work.

The funds are also varied in terms of their financial strategies. Fidelity and Impact Shares are blended funds, holding a mix of growth and value stocks, while Glenmede holds only value stocks. This difference could partially explain Glenmede's underperformance relative to the other funds during the time frame captured in Table 8.1. Impact Shares skews more strongly than the other two funds to mega-cap holdings. These companies have performed exceedingly well in the past year, which could explain this fund's relative overperformance. There are other variations between the funds that could further influence returns.

TABLE 8.1 Gender Fund Comparison

Source: Morningstar as of Sept 25, 2020.

Ticker 1 Yr. 3 Yr.
Russell 1000 Index 13.40% 11.99%
Fidelity Women's Leadership FWOMX 13.67% -
Glenmede Women in Leadership US GWILX –1.24% 4.63%
Impact Shares YWVC Women's ETF WOMN 23.28% -

The important thing to realize is that it takes a little digging to really understand what's behind a particular stock fund or ETF—on both the social and financial sides. Choosing an investment just because it meets an impact goal leaves important financial considerations on the table and vice versa. Understanding what you're investing in from both perspectives will help you make fully informed decisions.

Note: The Fidelity and Impact Shares gender funds are new. They have little more than a year of history, and both are relatively small with assets under management of just $40 million and $8.6 million, respectively. The short time frame these funds have been in market, combined with their small size, increases their risk. This is particularly true for the Impact Share product, which has less than $10 million in assets. Many professional investors like to see at least a three-year track record and $100 million in assets before they consider investing.

If you're interested in gender diversity, two other funds you could consider are PAX Ellevate Global Women's Leadership, which is available in both retail (PXWEX) and institutional (PXWIX) classes, and SSGA Gender Diversity ETF (SHE).

Sector-Focused Thematic Funds

While still relatively small in number, we're starting to see stock funds that invest in companies developing solutions to key challenges. Many focus on renewable energy, but there are also examples in real estate, water, and other natural resources.

These funds tend to be concentrated in a particular sector, which means they carry more risk than a more balanced, diversified fund. Thus, they may be best positioned as an alternative within your overall portfolio rather than as a primary public equities holding.

The iShares Global Clean Energy ETF (ICLN) tracks an index of companies in the clean energy sector and the Invesco Solar ETF (TAN) follows an index of firms that produce equipment for the solar industry. Both funds have delivered significant returns in recent years, although they didn't hold up as well over a 10-year period. It will be interesting to see how these funds (shown in Table 8.2) perform going forward. Although neither of these funds is benchmarked against the S&P 500 Index, the index is included in the table for comparison purposes only.

TABLE 8.2 Renewable Energy Fund Comparison

Source: Morningstar as of Sept 25, 2020.

Ticker 1 Yr. 3 Yr. 5 Yr. 10 Yr.
S&P 500 Index 13.40% 11.98% 13.48% 13.49%
iShares Global Clean Energy ETF ICLN 52.12% 25.54% 15.89% 2.67%
Invesco Solar ETF TAN 84.52% 40.54% 18.40% –0.63%

On the Horizon

In the last year, a few, very interesting thematic investments have started to emerge. Although not necessarily the first of their kind, they are pushing boundaries. These opportunities focus on minority empowerment, animal welfare, and social justice. However, it's far too early to tell how well they'll perform over time or if they will even last. At this point, they have track records of about a year and small investment pools. If you're a conservative or moderately conservative investor, these opportunities are probably not right for you, whereas if you're more of a risk-taker or seeking to put your social return before your financial return, you may find some of these products interesting.

Some Final Considerations

You have a lot of values-aligned choices within the public equities asset class. In the “Take Action” section, we'll help you navigate your options. Before we move on to talking about some special investments that are available through a financial advisor, there are a few last points to consider.

Active versus Passive Funds

When you're thinking about investing in a fund, you might want to know whether it's actively or passively managed. Here are a few tricks to help you figure that out.

The name of the fund is the first clue. If the name includes the word “index,” then it's passively managed. The term “ETF” often indicates a passive fund but not always since some ETFs are actively managed.

If the expense ratio is 0.50% or more, then there is a distinct possibility the fund is actively managed. You can also look at the number of companies the fund holds. Actively managed accounts tend to have fewer than 150 companies. Another clue is the number of managers involved in the fund. More than two suggests it's actively managed. And finally, the amount of turnover is often higher in actively managed accounts since fund managers are tracking the market and trying to maximize returns. If you want to be absolutely sure, call and ask or review the fund's prospectus.

A Note on Fees

In general, values-aligned funds tend to be a bit more expensive than their traditional counterparts, which is a concern for some investors. While it's possible to see differences in fee structures of 50 basis points or more, you can also find funds with fees that differ by as little as 7 basis points. This is a very small cost differential. However, it's there, and it does matter to people who prioritize fees in their investment decisions. I would suggest, however, that this is not the most important consideration. What really matters are the comparative net returns you receive over time, not the fees you pay. So I try not to get too bogged down when fees differ by less than 1.0%. They aren't the prize for me; returns are. In terms of returns, we're already seeing some values-aligned investments outperforming their traditional counterparts. Impact investors believe this trend will continue because values-aligned investing integrates long-term risks into investment considerations.

In addition, while some values-aligned investments have higher fees today, that probably won't be the case in the future. Part of the fee difference is due to the cost ESG fund providers have to pay to access ESG ratings from rating agencies. As values-aligned investing becomes more commonplace, these fees will likely drop, narrowing the fee differential. Furthermore, since large funds (i.e., those with larger asset bases) tend to have lower expense ratios, we can also expect to see the fees for values-aligned funds drop as the sizes of those funds grow.

Investments That Require a Financial Advisor

When you work with some financial advisors, it's possible to access a few specialized investments within public equities that provide a high level of customization and diversification with limited effort on your part. These separately managed accounts (SMAs) hold only your money, unlike stock funds and ETFs, which pool assets from many people. They often have minimums of $50,000 or more and carry additional fees. So they may not be attractive to, or a fit for, everyone.

Actively Managed SMAs

In an actively managed SMA, a financial advisor can make individual stock selections for you based on your values. These accounts can deliver targeted impact and relieve you from having to make investment decisions yourself. You help set the financial and values-aligned criteria and then leave the decision-making and ongoing management of the account to your financial advisor.

Since you own the underlying securities, you can also request that your advisor participate in proxy voting and other shareholder advocacy. When possible, advisors may select the same stocks for many of their clients. This results in a higher total asset allocation to a particular company, which gives the financial advisor more leverage with their advocacy. Shareholder advocacy is a core element of some advisors' business practices.

Another advantage of an SMA is the ability to proactively manage capital gains and losses. It is possible to move non-aligned stock holdings into your SMA and then sell them judiciously to mitigate tax implications. This process, known as tax harvesting, can be an effective way to gradually shift non-aligned assets that contain significant embedded gains into a more aligned portfolio.

Digital Index SMAs

Digital index SMAs are administered by tech-based asset management firms and work somewhat like a passively managed index fund. Like an index fund, these personalized accounts use big data, quantitative analysis, and risk modeling to track a specific benchmark. There is a very significant difference, however. With a digital index SMA, the rules driving investment decisions are set by you, not a fund manager. The result is a customized portfolio based on your personal values, risk tolerance, and tax situation.

Here's how it works. As an investor, you identify the criteria that will guide decisions about what's included in your account. Technology is then applied to make investment selections based on your unique rule set. In some cases, you can get quite granular with your choices. In the end, you have a portfolio that can hold hundreds, if not thousands, of individual stocks—similar to index funds. Like other SMAs, the investment process can also include tax harvesting.

Aperio, Ethic, Parametric, and Just Invest offer this solution. Aperio and Parametric have been in business for at least 20 years while Just Invest and Ethic are relative newcomers. Currently, the only way to invest is through a financial advisor that has a relationship with one of these firms. Minimums tend to be around $250,000. You'll also be paying fees of about 0.50% to the technology company, plus the fee you pay your financial advisor, which is often around 1.0% for accounts under $1 million.

Engaging in Shareholder Advocacy

When you own individual stocks or invest in a stock fund, you can bring corporate policies and practices into greater alignment with your values through shareholder advocacy. You can press for changes that you'd like to see a company make in its environmental, social, or governance practices. Shareholder advocacy has been an important tool for social change since the 1960s. Trillium and Domini, the firms started by pioneers Joan Bavaria and Amy Domini, remain deeply engaged in these practices today.

While you may believe there's nothing you can do, the exact opposite is true. The number of shareholders required to create change is smaller than you might think. As a single individual, you can have significant influence. And you can magnify your impact by teaming up with other like-minded investors. Proposals that garner as little as 6% of shareholder support are difficult for most consumer-facing companies to ignore. Resolutions with 20% or more send a clear message to corporate management that the current company policy is too risky or not supportive of shareholder interests.

At one time, I authorized As You Sow to add my proxies to a resolution they were filing with a soda manufacturer. The resolution asked the company to track its supply chain to determine whether a known cancer-causing pesticide was being inadvertently introduced into their products. Although that company did not change, the effort had ripple effects in an unrelated industry—cereal manufacturing—where a corporation did change its policies. Like me, you may also be in a position to engage in shareholder advocacy. There are a number of ways you can get involved.

First, Vote Your Proxies

The easiest way to engage is by voting your proxies. If you're an individual stockholder, you will receive proxy ballots before annual shareholder meetings. These meetings usually take place in the spring, so watch your mail for this information. Then, vote!

If you own shares in a stock fund through a self-managed account, financial advisors, or employer-based retirement plan, you can check their voting record by accessing their N-PX reports on a website maintained by the SEC. 5 Although lengthy, these reports document how a mutual fund company voted on each shareholder resolution.

You also have the right to lobby your advisors and fund managers to request they vote and engage with the companies you own. You can have a discussion with them to communicate how you want your votes handled going forward.

Second, Engage Directly

A more direct engagement approach is calling or writing an investor relations staff member at the company where you want to see change. You may find yourself engaged in a dialogue in which you can express your concerns and desires. You may even be met with open arms and an agreement for rapid change. This does happen. So a call can't hurt.

Many times, though, the staffer will thank you for your opinion and say it will be taken under consideration—then nothing happens. If the response you get does not satisfy your desire for change, you have legal standing to escalate the matter by filing a shareholder resolution. As of this writing, if you own at least $2,000 worth of stock in a publicly traded company for one year before the filing deadline, you can introduce a resolution yourself. Success requires adherence to a strict set of SEC guidelines and rules, which can be a heavy lift for an individual. And the rules may be changing. Experts counsel those interested in advocacy to not try to go it alone.

Third, Join Existing Efforts

Shareholders have strength in numbers. Fortunately, there's a network of extremely collaborative advocates that have been working on shareholder resolutions for decades. They know all the ins and outs of the process, understand the history behind many issues, and actually appreciate committed investors who want to partner with them. There may be a team of shareholders who are already coordinating an initiative at the company you are concerned about. Should you decide to file a shareholder resolution without checking in with the network, you might inadvertently undermine an engagement process that has been underway for years, possibly even decades, so please check first.

You can quickly determine whether an issue you want advanced is already being addressed by reading Proxy Preview.6 If it is, you can become a co-filer, lending your shares to the broader effort. If not, you can check with one of the advocacy organizations associated with Proxy Preview to get their advice on how best to advance your resolution.

Take Action

Hopefully after reading this chapter you're ready to consider moving some of the money you have in public equities into alignment with your values. The steps to identify new investments and make the transition are relatively straightforward.

1. Check the values-alignment of your current assets

Using the tools described in this chapter, research the sustainability scores of the assets that you already own.

What did you learn? Are your current investments supporting the things you care about, or are they working against your goals? If not, are you ready to make some changes?

2. If making changes, decide on your first step

Consider choosing one investment to transition. Perhaps it's the least values-aligned, or maybe it's an investment in a tax-deferred retirement account, or a taxable investment but one with limited capital gains—or even losses.

Think about the characteristics of the investment you want to buy to replace your current holding. Do you want the same type of asset you had before, or do you want to use this opportunity to change any of the attributes of your portfolio? Are you looking for individual stocks? Passive funds? Do you want to move a portion of your assets to a thematic fund?

3. Research your values-aligned options

Using the tools described in this chapter, research your values-aligned options and make some decisions about the investments you want to purchase.

Note: It's wise to know where you want to move your money before you sell existing holdings, because it may take longer than you think to do your research and come to a decision. I've made this mistake, and my money sat in cash while the market went up. So figure things out at your own pace, and then make your changes. You don't need to rush.

4. When you're ready, sell your old holdings and buy your new values-aligned investments

Note: Before you sell, ask your custodian if they'll save records of your old holdings. If they don't, be sure to save copies of your recent statements, cost basis, and tax information.

5. Congratulate yourself on a job well done and think about all the impact your public equity portfolio will create!

6.  If you're committed to shareholder advocacy, consider voting your proxies or having a conversation with your fund managers to request their engagement

Endnotes

  1. 1   https://www.trilliuminvest.com/about.
  2. 2   https://en.wikipedia.org/wiki/MSCI_KLD_400_Social_Index.
  3. 3   https://www.morningstar.com/articles/961765/sustainable-fund-flows-in-2019-smash-previous-records.
  4. 4   https://database.globalreporting.org/.
  5. 5   https://www.sec.gov/edgar/searchedgar/n-px.htm.
  6. 6   Proxy Review is an annual report that As You Sow, Proxy Impact, and the Sustainable Investments Institute coproduce. https://www.proxypreview.org/.
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