Socially Responsible Investing and Corporate Sustainability

From Carl M. Birkelbach,

Chairman and Chief Executive Officer,
Birkelbach Management Corp., Chicago

Socially Responsible Investing (SRI) Definition

The Social Investment Organization defines socially responsible investing (SRI) as “the integration of social responsibility and environmental sustainability with investment. It includes all the financial decision-making processes that are a part of a prudent investment management approach, but it also includes the selection and management of investments based on issues of sustainability or social responsibility.”

SRI Evolution and Application by Birkelbach Management Corp.

With roots stretching back hundreds of years to Jewish, Christian and Islamic traditions, SRI evolved in the 20th century and into the 21st by developing a variety of “social screens” of companies.

Birkelbach Management Corp. (BMC), which specializes in SRI strategies for individual and institutional investors, uses three of the most widely accepted social screens: (1) avoidance screening; (2) positive screening and (3) sustainability screening:

• Avoidance screening: In the 1970s and 1980s, the first social investors tailored portfolios to a particular set of values by avoiding investments in companies that violated those values. For example, funds were set up to avoid investments in weapons contractors, appealing to investors opposed to militarism and the Vietnam war. To oppose apartheid, investors divested from companies doing business in South Africa.

As the advisor in managing socially responsible investment accounts, BMC tries to avoid companies that manufacture alcohol and tobacco products or are involved in gambling or weapons production and thereby avoid any crisis that may develop from having ownership in a company that imposes harmful effects on society.

• Positive screening: More recently social investors began to identify companies as good corporate citizens, meeting or exceeding certain standards of corporate social or environmental conduct and standing out as “best in class” in an industry. Positive screens are set up for continued monitoring of companies selected for the portfolios.

Likewise, BMC seeks to invest in the majority of companies that reap positive rewards for investors by enhancing human conditions and inspiring the values of initiative, equal opportunity and economic growth. BMC believes that government regulation is only a part of the response to the crisis of scandalous behavior of top corporate management. The advisor maintains that all of us bear responsibility to influence the corporate culture and leave a legacy to society by putting our investment dollars in corporations that reflect our values.

• Sustainability screening: Corporate leaders and academics are realizing that adopting sustainability principles can offer substantial long-term investor value. These principles – innovative technology, corporate governance, shareholder relations, industrial leadership and social well being – were those for which the Dow Jones Sustainability Indexes (DJSI) were set up to address in 1999.

DJSI tracks the performance of companies worldwide that value social and environmental issues as well as the financial bottom line. It defines corporate sustainability as “a business approach that creates long-term shareholder value by embracing opportunities and managing risks deriving from economic, environmental and social developments.”

Similarly, BMC believes that corporate sustainability is a catalyst for enlightened and disciplined management and is crucial in the success of any company and of its stock performance.

SRI Growth

SRI growth is outstripping that of the wider investment universe:

• Socially screened portfolios counted by the Social Investment Forum’s 2003 Report on Socially Responsible Investing Trends in the U.S. grew 7 percent during the bear market of 2001 and 2002 to $2.14 trillion in total managed assets, while the broader universe of professionally managed portfolios fell 4 percent. From 1995 to 2003 assets involved in social investing grew 40 percent faster than all professionally managed investment assets in the U.S. In 1995, assets involved in SRI stood at $639 billion.

• More than one out of every nine dollars under professional management in the U.S. is involved in socially responsible investing, the Social Investment Forum Report added. Managers of socially screened accounts include giant retirement service providers, such as California Public Employees' Retirement System. CalPERS was reported in April 2004 to be increasing pressure for improved corporate governance by withholding support for re-election of some corporate officers and investing $1.5 billion in environmentally-sound funds and clean technologies.

SRI Financial Performance

Investors looking for excellent financial performance – and who isn’t -- can seek to obtain it using a socially responsible strategy. Socially responsible investors who want to put their money where their values are don’t necessarily have to pay for the privilege by sacrificing financial performance:

• The DJSI World (in US dollars) and DJSI STOXX (in euros) indexes outperformed their mainstream counterparts from 2002 to 2003. DJSI-based assets increased by over 40 percent.

• “Numerous studies show that companies with better environmental and management practices show better returns,” Thomas Van Dyck, a consultant with US Bancorp Piper Jaffray's Philanthropic and Social Investment Consulting group, told MSNBC in April 2004. “The trend of greener investing is growing fairly quickly and as people see more and more performance with purpose they’ll decide to invest along with their values because they don’t need to give up performance.”

• Academic studies cited by the Social Investment Forum Report find that socially screened portfolios perform as well as their unscreened counterparts.

• Tests of the BMC socially responsible investment strategies show superior performance. The BMC strategies use financial as well as social criteria to generate results better those of the Standard & Poor’s 500.

One of the BMC strategies, the Index Tracker’s Plus Portfolio Strategy, selects S&P 500 stocks that (1) should attain excellent returns when the market rises and (2) outperform the market when it falls. The other BMC strategy, the Active Portfolio Strategy, features use of BMC’s proprietary technical analysis indicators to seek stocks in (and some outside) the S&P 500 that could likely significantly outperform the S&P 500 while still being socially responsible.

Model Portfolios using each BMC strategy outperformed the S&P 500 in tests for the first quarter of 2004 and in back tests to January 1998. (The test results are hypothetical, may not reflect actual results and do not guarantee profit). For further information read the Disclosure Agreement and Form Adv Part II on the Birkelbach Management Corp. Web Site, www.InvestmentValues.biz

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Carl M. Birkelbach is founder, chairman and chief executive officer of Birkelbach Management Corp., a Chicago-based money manager since 1974 and a registered investment advisor, and Birkelbach Investment Securities, Inc. (BIS). BIS is a securities broker-dealer since 1978 registered with the U.S. Securities and Exchange Commission and a member of the National Association of Securities Dealers Inc. (NASD). BIS provides safekeeping and execution services through its relationship with Pershing LLC, the world's leader in correspondent brokerage services.

He became known to the investment community as the “Lone Bull” by being one of the few stock market commentators who, in the sideways-moving market of the 1970’s and early 1980’s, foresaw the bull market of the rest of the 1980’s and 1990’s.
Mr. Birkelbach has applied his nearly 40 years of investment experience as author of "Stock Market Forecasting Through Charting” and editor of more than 500 BIS Investment Strategy Letters. He also has appeared frequently as a market commentator on television and radio news programs and as a quoted source in business/financial journals and periodicals.
For more information please refer to our Disclosure Document

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