In This Chapter

The idea of making the environment a part of the socially responsible investing movement has always caused concern. In the early days, hot social issues such as Apartheid, the Vietnam War, and nuclear energy shared the spotlight. The business community found environmental issues more frightening and threatening, because any movement that caught on could lead to stricter regulatory controls. Though not every business was a polluter, some polluted without knowing how much damage they were doing. But there were too many ecological disasters for industry to hide from the consequences forever. Chemical waste, asbestos, toxins in lakes and streams, oil spills, air pollutants, and contaminated work areas led to a number of landmark regulatory steps.

The most significant regulatory step was the creation of the Environmental Protection Agency, which is charged with protecting the environment. The current controversy over global warming is a direct outgrowth of generations of concern for the environment finally achieving mainstream attention.

Concern for the environment is not a new issue for socially responsible investors. It was a founding issue of modern SRI. Like other socially responsible investing issues, environmental concerns span a wide spectrum from the very radical to more moderate. Some SRI investors practice absolute exclusion (as best as can be executed). They have a zero tolerance for environmental sins and want nothing to do with any company that has a hint of pollution in its products or operations. On the other end of the spectrum are SRI investors that acknowledge steps companies are taking to improve their ecological scorecard and work with them to improve their score.

The issue that has attracted considerable interest from consumers, political leaders, scientists, and the business community is global warming. Many in the environment movement see global warming and the accompanying climatological disasters as the result of decades of environmental neglect. Others simply don’t believe it is even happening.

Former Vice President Al Gore’s book and Academy-award winning documentary An Inconvenient Truth, brought the issue of global warming into sharp focus for many people. He was honored for years of work on global warming with the 2007 Noble Peace Prize. For a number of SRI investors, it was just another reason to invest their money in companies that take a commitment to ecology seriously. These investors commitment to ecology and “green investing” began in the 1960s and gained momentum as nuclear energy was spreading as the answer to a growing economy’s need for more power. Early SRI investors who focused on the ecology excluded companies involved in nuclear energy.

The conflict over nuclear energy was heated (pardon the pun). It galvanized a core of environmental leaders in the SRI movement. Companies involved in nuclear energy were excluded from socially responsible investor’s portfolios. A number of nuclear plants were built or licensed in the 1970s, but with much protest. More than a few communities objected to reactors being built near their populations. Environmentalists objected to the reactor’s need for

large volumes of water for cooling and to run the generators. Warm water discharge into lakes often created ecological problems. The danger of an accidental discharge of radiation worried people living close to the reactors.

One major environmental problem with nuclear energy is storage of spent energy rods. These fuel rods remain highly radioactive for hundreds of years, but are not suitable for use in the reactors any longer. Storage of these spent rods presents a present and future liability. This liability is not adequately reflected on the financial statements of nuclear energy companies, SRI investors contend. Even though the federal government has capped a company’s liability in the event of a nuclear accident at $10 billion that has never been tested in court. The interest in the ecology as a socially responsible investing focus is broader than nuclear energy. It has ranged from protesting timber companies that clear-cut old-growth forest to convincing companies to use recycled materials in their packaging to supporting steps to curb pollution through new technology.

Socially responsible investing screens for ecology look for specific exclusions (nuclear energy is on most lists), while others look for companies working to improve their impact on the ecology. In Chapter 11, we’ll look at how some SRI investors prefer to work with companies to change behavior rather than exclude them from investment. This form of SRI has gained a strong following, particularly among those with an ecology agenda. Thanks for environmental laws and societal pressure, more companies are open to changes that make them environmentally friendly. SRI investors working with companies can help make those changes.

The single event that turned the tide for the environmental movement was the creation of the Environmental Protection Agency (EPA) in 1970. Prior to that, enforcing laws protecting the environment was difficult and often bogged down in court. The EPA had the power of the federal government to take action against polluters. It could even force state and local governments to act. One of its strongest weapons was requiring developers to file an environmental impact statement before permits on certain projects could be granted. The EPA was no friend of business and remains a thorn in the side of many today. It has its critics who complain the agency has become bogged down in bureaucracy and too close to those it is suppose to regulate. For SRI investors, the EPA represents an agency that can enforce protections for the environment—something that was missing.

The same year the EPA was formed (1970) Sen. Gaylord Nelson of Wisconsin organized the first Earth Day to acknowledge the importance of ecology. Patterned after “teachins ” he had observed during anti-war protests, Earth Day attracted 20 million people around the county—a number that astounded everyone involved with the ecology movement. Earth Day is now an international event celebrating the environment and is attended by hundreds of millions of people.

Clearly, many people feel strongly about ecology. Socially responsible investors who specifically wish to emphasize ecology will find a large number of opportunities. Since ecology is a core SRI issue, a number of funds with lengthy histories are available. Some use exclusion screens to avoid investing in companies that harm the environment, while others choose to work with companies to improve their environmental policies.

For many people, environmental issues are about recycling, turning off the lights when not needed, and driving a fuel-efficient car. While these are important environmental concerns, they are not the ones specific to investors. SRI investors focus on two aspects of corporations: their operations and their products. Both have environmental impacts and SRI investors may exclude a company based on practices in either area. Those SRI investors who choose to lobby for change from within the corporation may focus on one or both of these issues as areas that need improvement from an environmental perspective. Operational issues include pollution, materials, and storage of components or finished products. Product issues might include packaging, materials, safety and other concerns. SRI investors realize that the manufacturing and distribution process is complicated and potentially threatening to the environment without some forethought by the company. The payoff for investors, SRI proponents argue, is in companies that have a much lower liability for environmental lawsuits or legal action by a regulatory body.

In recent years, more companies are adopting environmental statements and promoting their concern for the environment in marketing material. This is a reflection of ecology’s importance to consumers and investors.

Operational environmental issues are the most obvious problems in many companies. The image of smoke belching out of tall smokestacks or pipes draining evil looking liquids into rivers is the iconic image of American industry for many in the early days of the environmental movement. Unfortunately, it was more than an image. Fouled air and polluted waterways are the legacy of that lack of concern for the environment. While some progress has been made in cleaning emissions, the damage remains, especially in many of the country’s rivers and lakes. Sediment contaminated with chemicals makes many of our rivers so polluted it is unsafe to eat fish caught out of them.

Thanks to the EPA and aggressive action by civil courts, many of the worst polluters have cleaned up their emissions or gone out of business. SRI investors that exclude these industrial polluters still leave many off the list of approved investments because the companies haven’t gone far enough to control the environmental damage they do in the making of their products. The companies might argue that they are within the letter of the law, but SRI investors are more concerned about the spirit of protecting our environment than whether a company has dotted every “i” and crossed every “t” on the regulatory checklist.

No company will get a perfect score on the environmental scorecard (nor would any family). All companies, even nonmanufacturing firms, directly or indirectly impact the environment. Screens exclude those whose environmental transgressions go beyond the norm. SRI investors believe, with justification, that companies scoring low on environmental issues are open to lawsuits and governmental actions that would probably impact the company financially. Management that dodges environmental issues (and perhaps law) is likely to dodge some other inconvenient rule or regulation that gets in the way of running the business. This type of attitude reveals a potential for trouble. SRI investors believe they are better off avoiding these companies.

Many environment screens exclude oil companies for a variety of concerns. When oil companies are posting record profits and their stocks are paying handsome returns, critics of socially responsible investing point out the terrific opportunities missed because of the screens. This will be an issue for anyone interested in SRI investing. Great short-term financial opportunities will be missed because excluded industries are on a hot streak. But SRI investors should look at the long-term and not measure success or failure on strictly short-term gains or losses.

Environmental issues lend themselves to long-term solutions. A company that might otherwise be a SRI investment candidate except for environmental problems could need several years to correct those problems. Long-term SRI investors that were willing to stick with the company while it corrected its environmental problems may be rewarded with a boost in the stock’s price when the market recognizes the company ’s accomplishment.

One major concern being addressed by companies is their “carbon footprint. ” As it relates to global warming, a carbon footprint is the amount of carbon dioxide given off during the consumption of fossil fuels (coal, oil, natural gas, and so on). The larger a company’s footprint, the more greenhouse gasses it pushes into the atmosphere. These gases are directly related to the warming of the planet. While many gases dissipate harmlessly into the atmosphere, others, including carbon dioxide, do not. Scientists believe the build up of the so-called greenhouse gases is causing global warming.

Carbon footprints are a way companies can measure their impact on global warming and are usually listed in tons of carbon dioxide released into the atmosphere. All companies (and families) have a carbon footprint, even service companies that don’t manufacture anything. Any consumer of energy leaves a carbon footprint because of the electricity used for lights and heating/cooling, the fuel used for vehicles, and the energy needed to create anything. The more energy a company consumes, the larger its footprint.

Numerous calculators are available for figuring carbon footprints. Each makes assumptions about energy sources, types of equipment, and other factors. The better calculators allow entry of multiple variables. For example, you may be asked to enter the number of cars in your family, the approximate gas mileage, size of house, type of heating, your zip code, and so on. The calculator uses industry averages and standards for carbon emissions to calculate your carbon footprint. The theory behind the calculators is sound, even if the actual calculations may lack precision.

Carbon footprint calculators are important instruments for consumers and investors who wish to understand the impact of energy consumption. Some companies publish their carbon footprint information. In England and Europe, moves to make reporting mandatory, such as labeling consumer goods with some type of carbon footprint code, are on the horizon. Investors, like consumers who are concerned about the environment, will have more information available to them in the near future. Conscious consumers will require this type of reporting. Companies that get out front on this issue will be rewarded in the stock market and at the corner market.

Reducing a company’s carbon footprint may not be easy—reducing power consumption through conservation measures can save some energy, but it will only take a company so far. Some companies address the issue by offsetting their carbon footprint with measures such as planting trees (trees absorb carbon dioxide from the atmosphere) or buying carbon offsets or renewable energy certificates. These market derivatives allow a company to offset part of its carbon footprint. The system of trading carbon offsets is complicated. Basically trading allows companies that can easily reduce their carbon footprint (for example, a service company) to take carbon units from a company that can’t easily reduce its output (for example, a manufacturer) .

Socially responsible investors can track companies that are working to reduce their carbon footprint. Many companies are reporting the results of their efforts. In cases of emissions trading or the purchase of energy offsets, the transactions sometimes show up on corporate financial statements. The idea of carbon footprints is still new and being refined. It may be replaced by more sophisticated measurements or the business community may settle on a general standard. Either way, SRI investors concerned about the environment and particularly global warming can look forward to having more information on companies that are working to meet their standards. In the meantime, SRI investors rely on company reports and measures from third parties to verify carbon reductions—either directly or through offsets.

The offsets and carbon trading programs are becoming more sophisticated with greater verification capabilities. SRI investors can rely on their measurements to track how well companies are reducing their carbon footprint.

Operational issues of businesses are not the only problem for the environment. Many companies produce products that may be harmful to the environment or the packaging of a product may be harmful. For example, Americans use approximately 2.5 million plastic bottles every hour, but very few are recycled. For SRI investors concerned about the environment, this issue troubles them greatly. In some cases, socially responsible investors work with companies to change the way they do business so they have a less harmful impact on the environment.

Many companies that use excessive packaging or packaging that is not environmentally friendly believe they have no responsibility for their product or packaging after the sale is made. Someone else, they argue, should solve the problem of disposing of the packaging. This is an example of how companies can push off costs on to others and make themselves more profitable. By not concerning themselves with the disposal of the packaging, the company forces taxpayers to pay for a collection and retention system for the accumulated trash the product creates (trash collectors and landfills). It is incorrect to think that companies don’t have a responsibility after the sale of their product. The use of materials in products or packaging that can’t be recycled, or that present a hazard during disposal, forces taxpayers to pay for a company ’s irresponsible action. This is, in effect, a government subsidy to the business, since the company is escaping an expense and passing that cost along to the government. To counter this, some states use deposits, notably on glass or plastic bottles, to encourage recycling.

When companies are trying to reduce their contribution to pollution and overflowing landfills, SRI investors look at scorecards that include policies on packaging, recycling, energy conservation in product distribution, and paper reduction plans. For product-oriented companies, reducing and/or changing product packaging can make a significant difference to the environment. For example, if a company changes its packaging to either a recyclable material or one that is biodegradable, it lowers the cost for future generations who will have to pay for new landfills or other means of dealing with garbage that can’t be recycled and won’t go away. Companies that adopt materials that can be recycled or are biodegradable may pay a higher price today, but SRI investors believe they will eventually financially pass rivals that ignore long-term solutions in favor of short-term gains. It is not inconceivable that the government might some day soon begin enforcing mandatory changes in packaging beyond what is already in place. Companies that make the switch to new environmentally safe materials and processes ahead of the game will likely be positioned for successful compliance.

Recycling is already the law in some locations—companies and individuals are not allowed to discard recyclable materials with other trash. But the payoff for SRI investors is in reducing the strain on the environment by using recycled materials in production, packaging, and other areas of the company. For companies to score high on recycling their effort must be more than tying a few collection bags by the gate and asking people to drop off recycled goods.

Two of the fastest growing economies in the world are China and India. Between the two countries, approximately one-third of the world’s population struggles to better themselves. Both countries have their own economic barriers, but each has managed to develop roaring economies built primarily on cheap labor. Indeed, most of the socially responsible investing complaints against the two—China in particular—are in the area of human rights abuses. But environmental concerns are also high on the list because of the relative lack of controls on industry. China, for example, produces much of its power by coal-fired generators with few pollution controls. Manufacturing facilities have almost no government restraints and may be among the worse polluters on the planet. Both India and China have push policies of exporting manufactured goods—China to a greater degree than India. This emphasis has been without controls on manufacturing or power generation. Among the biggest customers in both China and India for manufactured goods are American companies. In many ways, U.S. companies have outsourced their pollution to China and India.

China is the fastest growing large economy in the world. Although it is not a “free market” economy, it operates with the government’s encouragement to produce goods to export. Exporting manufactured goods brings hard currency from countries like the United States into the Chinese economy. China has a stock market, entrepreneurs, and many of the trappings of a free market economy. It is growing at a tremendous rate, fueled in part by government policy that makes doing business with Chinese companies very inexpensive for western companies. There have been numerous allegations of human rights violations, such as forced child labor, prison labor, and slave labor used in Chinese plants to keep costs down.

Socially responsible investors look with skepticism on U.S. companies that outsource work to China and India (or other cheap labor countries) . More about this in Chapter 5 when we look at human rights issues, labor concerns, and other societal issues.

In addition to outsourcing manufacturing to a cheap labor country, U.S. companies are outsourcing potential environmental problems to that country. If a product would have an environmental impact and require special equipment or processing to prevent pollution, a manufacturer only has to send the work overseas and labor costs drop dramatically and any potential environmental problems go away.

Socially responsible investors can’t ignore environmental problems just because a company has outsourced them to China or India. Polluting the air and water in China or India is just as bad as polluting the air and water here—in fact it is worse because citizens in those countries have fewer rights and avenues for seeking damages caused by polluters than we do. SRI investors will be cautious about investing in companies that have outsourced much of their production. Avoiding U.S. pollution laws is not a sign of good management.

Companies, especially manufacturing concerns, must buy parts from multiple vendors. China and India are big players in this business also with China in the lead. Parts and components that U.S. firms once bought domestically are now being made in China and to a lesser extent in India. For some U.S. companies, it is a matter of the lowest bidder and no questions asked. There is no concern about the vendor’s pollution controls or any other factor. The only important items are price and delivery time. This type of thinking is not characteristic of socially responsible firms. They insist on each link in the supply chain complying with a minimum environmental standard that is probably over what the vendor would do on their own.

It would be a sham to invest in a company that claimed a great environmental policy only to discover that several of its vendors were big polluters in another country. Socially responsible businesses insist that vendors comply with minimally acceptable environmental policies and verify that compliance. SRI investors find that information in company literature and from various socially responsible investing information resources (see Appendix A).