Social Investing Gathers Momentum

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A requirement that an investment yield a "market rate of return" is a feature of nearly every definition of social investing, the report said.

Socially responsible investing isn't available to private-sector defined benefit plans, whose fiduciaries are prohibited from subordinating the financial interests of plan participants and beneficiaries to other considerations by the Employee Retirement Income Security Act (ERISA).

The California State Teachers Retirement System (CalSTRS), the California State Public Employees Retirement System (CalPERS), and the New York City Employees Retirement System (NYCERS) have been offering options by which their constituents can invest in environmental and other SRI-oriented stocks for many years.

TIAA-CREF, which constructs retirement plans for 3.6 million people in the academic, medical, cultural, and research fields, has been offering ESG-screened investing options for the past 20 years. Roughly 500,000 of its members devote some of their allocation to the Social Choice Account, a retirement annuity with $8 billion in assets as of Sept. 30, 2009 and a 60/40 equity/fixed income split. Two years ago, the annuity added exposure to international stocks. Participation in the annuity tends to skew more toward younger and women investors, says Amy O'Brien, a director in TIAA-CREF's global, social, and community investing department, which is part of the asset management division.

Spreading Beyond Retirement Programs

The company also offers the Social Choice Equity Fund, a mutual fund with about $700 million in assets as of Sept. 30. The fund is available to people who don't participate in TIAA-CREF's retirement plans. Lately, O'Brien has been seeing wider use of SRI options outside of retirement platforms. Connecticut's college savings program began to offer TIAA-CREF's Social Choice fund in its 529 plans in November 2007. And endowment programs are finding new ways to leverage interest among donors and alumni. The University of Utah added the Social Choice fund as an option for high-net-worth donors about two years ago.

"Our emphasis is more on corporate action and shareholder advocacy because we're universal owners and over the long term we think these factors will contribute to the core goal, which is retirement security to investors," says O'Brien.

Private Equity Path

The real interest among institutional investors in environmental bets has been on the venture capital and private equity side, although certain states' public retirement funds, such as Vermont's, aren't allowed to invest in them, says Moscardi at Ceres.

Unlike TIAA-CREF, CalPERS doesn't manage individual retirement accounts for its 1.6 million members, so members aren't able to choose how much exposure they want to environmentally responsible companies. CalPERS has been investing in environmental assets since 2004 and most of the more than $1 billion it currently has committed to this category is in its private equity program, focused mostly on alternative energy and other clean technology startups, says Clark McKinley, a spokesman for the retirement system.

The external portfolio managers that CalPERS employs to oversee its global equity program build index funds using environmental screens and taking into account other SRI factors such as human-rights practices to pick stocks.

CalPERS' mandate is to maximize investment returns to keep the state's retirement system funded. "That's why we're in private equity in the first place. Private equity is a good portfolio diversifier," says McKinley. "We look for private equity to beat the stock market by at least three percentage points annually."

The fact that many green energy funds have higher volatility than most small-cap growth funds may make them unsuitable for conservative institutional investors, and argues for smaller allocations by retail investors, says Bill Rocco, an analyst at Morningstar Funds (MORN). Last year, in the wake of the financial crisis, most solar and wind stocks took a huge hit, and some pros say they tend to perform better during periods of economic strength, as some investors seem to be drawn to them as a hedge against rising oil prices and inflation.

The sell-off in green energy stocks in early 2009 had less to do with economic fundamentals than with the banks putting a halt to lending, which hurts small companies more than larger ones, says Moscardi. Since solar and wind projects require bigger capital outlays up front, investors sold the shares despite the U.S. government's plan to pump tens of billions of dollars into energy efficiency projects, he says. With the economy starting to recover, cleantech indexes gained more than 8% in January as the market began to focus on the opportunities again, he adds.

Some Experts Still Resist

Moscardi sees a prolonged, uphill effort to convince most institutional asset managers of the financial merits of sustainable investing. Even the New York City Employees Retirement System, considered a very progressive asset manager, has less than 1% of its assets dedicated to sustainable investing options.

Some retirement benefits experts like Alicia Munnell at the Center for Retirement Research at Boston College balk at the idea of encouraging managers of public pension funds to start picking investments based on social considerations. "It requires an investment of time, and it's very hard to tell an environmentally good company from an environmentally bad company," she says. "CalPERS' managers are extremely sophisticated," but many public pension fund managers across the U.S. aren't, and their investment decisions are subject to political posturing in back rooms.

To allow pension managers to "take their eyes off the prize of maximum returns" can only hurt future beneficiaries and taxpayers, she says.

Bogoslaw is a reporter for Bloomberg BusinessWeek's Finance channel.

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