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A Foolish take on Socially Responsible Investing

In search for more information on SRI (socially responsible investing), I interviewed Alyce Lomax. Alyce Lomax has been in the financial news and information industry for about 25 years; she has spent nearly 15 of those years at The Motley Fool, where she is currently an analyst and writer focused on sustainable investing in all its forms.


1) What does SRI mean to you? What does ESG mean to you?
SRI involves screening out certain stocks and industries on ethical grounds. To my way of thinking, ESG integration involves including environmental, social, and governance attributes in investing theses, whether it's to uncover enhanced opportunities along those lines (for example, an excellent culture adding up to a competitive advantage, or sustainable products that result in greater sales or illustrate major innovation), or to assess risks (such as lawsuits, regulatory risks, and so forth). I feel that when I'm investing, I use a hybrid approach -- there are some industries and companies I refuse to invest in on ethical grounds -- they're just automatically screened out for me -- although I am open to changing my mind if some companies might be able to move the needle on important areas like sustainability.   

2) When it comes to investing in your values do you always have to sacrifice something (making more OR investing in your beliefs)?
I don't believe investors have to sacrifice! These days, there are more and more companies that are doing great work in making their businesses more sustainable, stakeholder-centric, and so forth. The range of choices we can make of companies to invest in while keeping our values in mind is expanding. Of course, it also helps to be a patient, long-term investor buying shares of high-quality, well-managed companies -- and often, those kinds of companies are stakeholder-centric.  

3) Do you have any examples of a company that shows a good balance of making money and is socially responsible?
There are plenty of choices these days! Starbucks and Costco are two of my favorite examples right off the top of my head, particularly in the employee treatment area, and long-time shareholders most certainly can't complain about how well those stocks have performed over the course of years.

4) Is it better to have a split portfolio that consists of SRI companies and ones that don’t follow your values, or stick to one option or the other?
I think that for many investors to be able to fully sleep at night, they'd want to stick to SRI portfolios or companies. Then again, I can see how some folks might have situations where they are actively picking stocks along SRI lines but their company doesn't offer a socially responsible 401(K) option, for example. That said, more and more funds are integrating some ESG elements into their methodologies. It's also worth it for people in that situation to check into what stocks their funds are buying, and if they have issues with some of them, contact their fund providers and ask them if they engage with some of those companies on those issues, and if they are voting their shares for SRI/sustainable shareholder resolutions. For example, 62% of ExxonMobil shareholders recently voted in favor of a climate impact report shareholder resolution -- that means a lot of the big funds used their firepower to ask the company to better address the climate change issue.

5) Is it more effective to do negative screening (elimination of values you disagree with) or positive screening (focusing only on certain areas) when finding stocks?
As I said before, I really like doing a bit of a hybrid of the two versions. Personally, I find that having some industries I'm just not going to consider frees me to focus on other companies in other industries that may be doing amazing things but might not be too obvious. There are so many different ways people can do SRI -- and that also includes shareholder activism, where one can buy shares of a company that they think needs to change for the better of some or all stakeholders and conduct shareholder activism and submit shareholder proposals for other investors to vote upon.

6) Is it alright if a company isn’t quite to where you like it, in terms of SRI, but is heading there?
I think so, but of course, it's up to each investor to decide where they will draw the line as to where "good enough" socially responsible behavior is. I really like a lot of things Pepsi has been doing in sustainability and dedicating R&D spending to formulating new, healthier products so that it offers its customers tons of choices (including choices that are better for them!). However, plenty of SRI investors would say that Pepsi still basically offers junk food and sugar water that help create public health problems, and that's not OK and should be screened out.

7) Looking at the average investor, do you think more investors lean towards SRI or investing just to make money? Why do they lean to one side or another? What benefits does the individual investor from SRI?
There is a sea change going on -- there are more and more socially responsible investors (regardless of what they call themselves, since there are so many names for it these days!). According to US SIF, last year $8.72 trillion in assets under management in the US were devoted to SRI/ESG strategies. Millennials, and your yet-unnamed generation, are leading the way! That said, there are still many, many investors who don't believe you should mix your personal values and your investing. I think that one of the biggest reasons for that is, they have bought the conventional wisdom that you can't make money that way, or that investing that way is only "political." There's a ton of data out there that shows that socially responsible investing does not guarantee one will lose money, and oftentimes investors can do just as well or better financially. Also, let's not forget the ESG integration element involves mitigating risk -- if a company that's been hurting stakeholders in the blind, irresponsible pursuit of short-term shareholder value blows up and the stock collapses, well, they've lost money. I think people don't always realize SRI/ESG is a way to try to avoid downside risk.  

8) I’m a strong believer in investing in what you know. When it comes to SRI, let’s say there is an investor who is a smoker, meaning what they know is tobacco, well then wouldn’t they want to invest in tobacco companies even though it isn’t someone else’s definition of SRI? How do you separate those individual decisions in SRI or can you?
"Buy what you know" is absolutely good advice, but I do think this is one of those situations that is definitely for the individual investor to choose. Even if they use a product, do they want to feel like they are "part owner" of a company whose products result in vast economic and social costs? Will the benefits they gain from the ownership feel OK in balance with the costs others will bear? And of course, there is still risk associated with owning shares of tobacco and alcohol companies in terms of consumers turning away from them, lawsuits, the possibility of regulation, and so forth. I think SRI is very complex and often very personal, since you're absolutely correct that it often is easier for people to make personal, individual decisions about what feels ethically right to them.  

9) Can you make a change in the world by starting SRI?
I believe people can and they are making changes in the world by investing this way! Again, young folks are making it clear they want to buy sustainable and socially responsible products, work for sustainable and socially responsible companies, and invest in sustainable and socially responsible stocks. The marketplace is evolving to reflect that demand -- in just one example, according to the Governance & Accountability Institute, 82% of S&P 500 companies published a sustainability report last year, up from just under 20% in 2011.

10) Have you ever spoken up to a company about a decision they are making that you disagree with? What is the importance of that?
As an analyst and writer for The Motley Fool for almost 15 years, I have written plenty of articles about decisions companies' managements make that I disagree with, including some that I own and like and even consider pretty socially responsible! There is no perfect company and I do think it's important to make stands on certain issues and ask the right questions, even question or own theses. I have of course also at times voted my proxy ballots for shareholder resolutions that ask for changes in areas having to do with sustainability, CEO compensation, etc. I generally don't directly contact companies or their management teams, but I think investors should always remember they can ring up their companies' investor relations departments and voice an opinion on issues. Taking a stand on important issues makes a difference in the world.  

11) Investing with good ethics is logical, why do you think people don’t do it?
Again, I think the conventional wisdom that it's a money-losing venture colors the decision, as well as the politicization of thinking about far-ranging impacts businesses have on the world, for the good or the bad. Talking about values and ethics shouldn't feel like something that's inappropriate for polite conversation. In addition, I think some folks construe concern for stakeholders and externalized costs as a weakness instead of a strength in the marketplace. That's sad, because ultimately, we are talking about what is positive and sustainable in the economic sense or not.

12) Warren Buffett has said: “You have certain things you want to achieve, but if you don’t have the love and respect of people, you are always a failure. That is the one thing you must earn, it can never be bought. No one that has the love and respect of others is ever a failure.” Do you believe if we educated people on the “popularity” good ethics would more people SRI?
I love that quote. I think that's a great point that maybe ethical behavior should be viewed as the thing the cool kids are doing, so to speak. And how people view the companies one owns is no joke: if a whole lot of people hate a company, root for it to go down, and wouldn't miss it if it went away, not only is it not one to feel particularly proud of, but it's also a heck of a lot riskier than ones that are respected, admired, and trusted.


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Thank you Alyce Lomax for answering all my questions! I hope it gives some people a different outlook on SRI. Living a socially responsible life is becoming more and more important and it will soon show in the companies we invest in.
Alyce mentions one company which I have a personal investing story- Pepsi. At the time of my purchase of Pepsi shares, I was nerding out on a new book, Omnivore's Dilemma by Michael Pollan. This book is about many things related to a healthy, balanced diet. The purpose of Pollan’s book is to make people more aware of their diets and health choices, with that he bashed a lot of food brands that I knew: Pepsi, Coca-Cola, and Nestle. Even as a 6th grader I realized this is where the world was heading and as an investor you want to stay on that same path.


But what makes an investor happy is to find a company that adapts to the time and people’s tastes. Pepsi has been expanding Quaker Oats, making more protein bars, and is in the process of cutting 20% of the calories from their sugary drinks. In 2016, Pepsi bought a probiotic health food company called Kevita, Naked Juice and Aquafina, a water company. This shows that Pepsi is trying to make a difference and appeal to consumers. They learned that people are want more natural and less chemical additives. Consumers are becoming much more socially responsible, so are the companies. As the demand of healthier alternatives is becoming a larger market, Pepsi is changing to fit the customer's needs.

SRI is a very good way to put your money where your mouth is and speak up for changes you want to be made. Being socially responsible is where the world is heading and it’s where we should put our money. SRI is a great way to jump on the train earlier and as Alyce says,  “I think that for many investors to be able to fully sleep at night.” For more information on our SRI check out my last post Impactful Snowballs.

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