By Brad Stark and Kieran Osborne
The pipeline breakage near Refugio State Beach is not only devastating to our environment and harmful to life on the Central Coast, but it also brings attention to how the oil industry is supported with investment dollars.
The public relations battle with fossil fuels has been heating up for some time, and, depending on where you live, you often will have different viewpoints on the industry.
In the Gulf of Mexico, the tourist trade is still dealing with the aftereffects of the BP oil disaster. In the heartland, fracking is seen as a blessing by some, as tremendous wealth has been created and reliance on foreign fuels has been reduced. However, significant controversy surrounds the long-term impact on ground water due to the fracking fluids. The Keystone pipeline has been a political football for years, with two sides that could not be further apart in their beliefs. And whenever there is a spill, such as the one that occurred at Refugio State Beach, public disapproval generally falls along two main paths.
Consumers have been voting with their wallets by pursuing a “greener” lifestyle, for example, through solar energy or hybrid/electric cars. Beyond that, we are also seeing a push by investors who no longer want to support certain industries – fossil fuels being near the top of the list – and who want to support others.
More investors are inquiring about Socially Responsible Investing (SRI) strategies. Conscious of how business practices can influence the planet, they want to go beyond volunteering and protesting efforts. They are now focusing on their investment allocations to communicate in the language that businesses know best: money. SRI allows investors to actively avoid companies deemed to have substandard environmental management records, for example. It is a relief to many investors that they can align their world views – their values and beliefs – with their portfolios through the use of SRI. Investors can also actively seek out companies that are setting a positive example and reward those companies by investing in their stock.
SRI encompasses three key pillars: environmental, social, and governance. Investors can screen companies on any one of these broad categories, as well as factors within them, such as pollution, energy efficiency, or water stress, to name just a few. Investors can screen out specific business involvement activities as well, from child labor to firearms and munitions sales.
In the old days, investors had less customization and less ability to carve out the industries or companies they did not want. Now, screening criteria are essentially limitless and come down to an individual investor’s preferences. No two screens are alike.
How is the screening done? Industry-standard “report cards” grade companies on each ESG category. One of these report cards (the MSCI Intangible Value Assessment (IVA) Methodology) shows that of the S&P 500 companies, nearly half score an overall environmental score of 5.0 or less on a scale of 0 to 10. Only 41 of the S&P 500 companies score 9.0 or better and just 20 companies receive a perfect grade of 10.0.
While this might not be too surprising to some, it highlights that most corporations still have a long way to go toward becoming more environmentally and socially conscious. Many investors believe that actively investing money in a more meaningful way may give companies the incentive to take these steps, and in turn, create positive societal impact.
In fact, SRI is no longer a niche corner of the investment universe. According to the US SIF Foundation’s 2014 Report on Sustainable and Responsible Investing Trends in the United States, SRI has witnessed significant growth over recent years and now represents more than one out of every six dollars under professional management in the U.S. From 2012 to 2014, SRI grew over 76%, and by the end of 2013 over $6.5 trillion was invested according to SRI strategies.
At Mission Wealth, we’ve seen increased demand for screening within clients’ portfolios. They want to rest easy about their money, knowing that they are putting their money where their mouth is.
More and more investors want to send a direct message – in monetary terms – to corporations: make positive changes. The louder their voices, the greater the likelihood of change.
• Mission Wealth has donated to the Santa Barbara Wildlife Care Network to help with the rescue effort for oiled wildlife. We encourage you to do the same! http://www.sbwcn.org/donate.html Brad Stark is co-founder & chief operating officer and Kieran Osborne is portfolio manager at Mission Wealth a financial advisory firm headquartered in Santa Barbara.