In celebration of our 40th anniversary as environmentally and socially responsible investment managers, COO Ethan Birchard spoke with company founder and Senior Strategic Advisor Prentiss C. Smith about the early days of socially responsible investing, and how the firm, and the field, have evolved over the years. Their conversation has been edited for clarity.
EB: Back in 1982, you started a socially responsible investment firm—something not many people were doing at the time. What made you decide on this approach?
PCS: I got into investment because I was fascinated by the amount of control that people who owned companies had over everything that happened in our society—and over much of the world. I was very politically active when I was younger; from the age of 18 I worked in the higher levels of state political campaigns, during what was a very exciting time. I studied issues and tried to determine why policies came out as they did, why society progressed as it did. I began to see that while political change could be more transient, business was a huge part of the fabric of society. Through products, employees, the environment, and more, business had a profound and persistent impact on peoples’ lives. And it didn’t change from election season to election season.
So I started researching companies on my own in the library, using Valueline. Through that research I became aware of shares and ownership, of who controls business and its impacts. And I decided: “that’s pretty cool; that’s the place I’d prefer to be.” Soon enough I was doing this research as a stockbroker, buying shares for clients when I found something positive. So I came into investing from this social responsibility perspective; we didn’t add it on later as a response to changes in the industry or client demands.
EB: What kind of social or environmental issues were you incorporating into investment decisions early on? How did that evolve over time?
PSC: The earliest issues we considered when looking at investments included apartheid, in that we excluded companies involved in South Africa, and nuclear power, where we excluded companies due to near-term risk and long-term issues. We also excluded weapons producers of all kinds, particularly those connected in any way to nuclear missiles, guidance systems, and more. And we avoided major polluters, monitoring incidents like the Love Canal tragedy to be sure we didn’t invest in companies that were so environmentally irresponsible.
Over time, we really broadened that environmental focus. From pollution we ultimately moved to looking at corporate carbon footprints, and in 2010 our investment process became fossil-fuel free after we divested from natural gas, oil and anything in the fossil fuel industry. At the same time, our early focus on apartheid grew into broader human rights screening. Incidents like the Tiananmen Square massacre in China, reports of abysmal working conditions in Indonesia in the 1990s, and multiple disasters related to the garment manufacturing industry in Bangladesh led us to implement more human rights-based investment exclusions.
EB: Have principles-based investment exclusions ever made you feel limited—or at least more challenged—in your approach?
PCS: No, I have never felt limited, or even challenged, by including principles and socially responsible criteria in investment decisions. In fact, after the 1990s I concluded it was a positive, because it oriented our research much more to tech stocks and somewhat smaller consumer products companies that made better, healthier products. That steered us away from heavy industries, chemical companies and old-line industrial companies, which have generally not done as well as tech and smaller consumer companies.
EB: The movement toward socially and environmentally responsible investment has obviously seen some victories. Have there been any disappointments?
PSC: I do find it discouraging the way larger investment firms waited for the swell of baby boomer inheritances, realizing that this group of investors would be more interested in tying their opinions on social issues to their investment strategy. The bigger firms rebranded SRI (socially responsible investing) as ESG (environmental, social, and governance) investing, and now they are trying to define what ESG means. I feel like they are reinventing the wheel, because it works for them from a business perspective. These newer ESG offerings are often just a small part of the firms’ overall business, and I think the principles can be subordinated to imperatives from the marketing department..
EB: What do you see as positives within the movement?
PSC: As I mentioned, it was very rewarding to be part of the process in the early days, to be developing social and environmental screens and really thinking about how that works. I’m encouraged that so many people worldwide have committed to SRI (or ESG), which has become very mainstream. The questions about investment returns being impacted by a socially responsible investment style have taken a back seat to concerns about climate change and other pressing issues for society. Most investors have come to realize that Investment returns depend upon the individual manager, stock selections, the rotation of money in and out of various industry groups, and the time period under review. While there will always be academic articles debating the investment returns of SRI or ESG strategies, that has not stopped trillions of dollars from flowing into funds that link social values to investment selections.