What's the good of being green?  Growth of funds focused on social responsibility puts pressure on companies to join the crowd

Barbara Clements; The Tacoma News Tribune

It was a typical Starbucks annual meeting. Free coffee and jazz music inside. Protesters outside. Inside, a slide show touted the company's new medical clinics and schools built for workers who pick the coffee beans in Central and South America.

Outside, protesters said the company isn't doing enough to promote its "Fair Trade" brand which has a buying arrangement that pays growers almost double the usual price for their beans. Critics also claim the company is anti-union and that it doesn't offer enough hormone-free milk in its stores.

Inside, mulling over the show on the street, and the show inside, company Chairman Howard Schultz asked his audience of 2,000 stockholders: Can a company still be big, stay in the black and keep its soul?

Perhaps, more importantly to corporate executives like Schultz, do any investors even care?

Apparently the answer is yes, if a new crop of socially aware mutual funds and indexes - which typically include Starbucks in their portfolios - is any indication.

During the last two years or so, about a dozen so-called "social index funds" have appeared on the market, joining the granddaddy of the genre, the Domini Social Equity Fund, which began in 1991.

That New York-based fund's CEO, David Wieder, was in Seattle earlier this month to speak at the University of Washington's Net Impact Forum, which brought together business and market experts such as Wieder to answer questions like the ones Schultz posed to his stockholders two months earlier.

Wieder noted that he can answer at least one question by simply holding up a fever chart of the Domini funds.

The Domini Social Equity Fund has outperformed the S&P 500 - Domini's benchmark index - by a full percentage point during the last 12 years. During the last two years, the S&P 500 has slipped, as have stocks in general. Even so, the Domini funds and similar indexes have not slipped as badly.

The company's 2001 annual report - printed on recycled chlorine-free paper, of course - showed that Domini funds lost 17.87 percent. The Standard & Poor's 500, by comparison, dropped 14.33 percent.

Yet other funds did worse. During the same time, the Russell 2000 Growth Index declined 23.3 percent, while the Barra Large Cap Growth Index lost 29.5 percent of its value.

When the fund was created, Wieder said, there was skepticism about this "feel-good approach" to rating companies. "It certainly was not as popular as it is today."

Now, there are at least 10 index funds which contain companies that are considered "sustainable" - a term for firms that tout environmental, social and workplace philosophies.

U.S. investors - institutional or individual - had about $2 trillion socked away in socially screened portfolios in 2001, compared with $1.49 trillion in 1999, according to a new Social Investment Forum report.

The total value of managed investments in the United States is $19.9 trillion, according to the Forum. A slightly broader category of socially concerned investors - those in pension funds, mutual fund families, foundations, religious organizations and community development institutions - had $2.34 trillion under management in 2001. That means social concerns guided the placement of nearly one out of eight dollars under professional management in the United States.

To date there are 400 U.S. companies in the Domini Social Equity Fund, which includes such Northwest touchstones as Starbucks, Nordstrom and Alaska Airlines. Two years ago, the Dow Jones started a similar fund, with approximately 300 national and international firms, Starbucks and Weyerhaeuser among them.

Last year, KDL Inc., an offshoot of Domini, and Mellon Analytical Services began a social index fund using companies in the Russell 1000 index as a benchmark.

Jon Naimon, president of the Seattle-based Light Green Advisors, launched his company, which offers investment funds that buy stock of environmentally responsible companies, in 1998.

In 2001, the United Kingdom-based stock market index FTSE (called "Footsie"), Britain's counterpart to the Dow Jones, launched four indexes, including two that list only U.S. companies. Weyerhaeuser, though not on the Domini index, appeared on the FTSE4Good Index, a fact the Federal Way-based timber giant is only too happy to promote.

"If we were not a sustainable business, we'd be out of business now," said company spokesman Frank Mendizabal.

Subjective science

The fact that Weyerhaeuser is not listed on the Domini fund but is included on other social indexes shows that ratings of different companies are part economics, part art.

It's a subjective science, most fund officials will admit.

But generally, whether it's the funds by Domini, the FTSE4Good or a local socially responsible index, Seattle-based Eco Index, the indexes screen or rate the companies by environmental, social and workplace criteria.

The companies' end products matter. None of the major social indexes or funds will include tobacco companies. Whether defense contractors or nuclear power firms are folded into the mix depends on the philosophy of the company.

Boeing's involvement in the defense industry is the key reason the aerospace giant is screened out of many social indexes, experts say.

Boeing is not in Naimon's Eco*Index fund, but it wasn't automatically excluded because of its involvement in defense contracting.

"We do own Weyerhaeuser, we do own aerospace," Naimon said. "We live in the real world.

"Boeing came close, but didn't quite make it this year."

Light Green picks its stocks by melding a look at the company's financial status, management plans and environmental factors. Companies are not automatically eliminated because they cut trees or make chemicals.

"There is an older approach, for example, where many funds effectively exclude heavy industry, because to make omelettes, they had to break eggs," Naimon said. "We know they had to break eggs."

Individual investors seem to understand this.

Kirk Kirkland of Tacoma has been investing in social funds and picking individual companies on his own for the last 17 years.

"There are no perfect people, perfect politicians or perfect funds," he said with a laugh.

The results from his investments have been moderate, Kirkland said. But he expected that.

"Generally the (social funds) haven't outperformed the market, but I think you invest for other reasons," said Kirkland, who works as an environmental activist with the Tahoma Audubon Society.

Funds might not include stocks that will soar, Kirkland said. But then again, when the market turns, the holdings won't crash either.

"It's definitely a trend," said Doug Wheat, director of business development for SRI World Group, speaking about the growing number of index funds as well as the increasing desire of companies to land on these lists.

"Until the last few years, socially conscious investors haven't had a lot of options," Wheat said.

Nor had they shown much overt interest locally, according to one Seattle stockbroker.

"I haven't had that many requests," said B.J. Rasmussen, manager of the Seattle RBC Dain Rauscher office. "I have had clients say they don't want to own oil or tobacco. But I haven't had a request for a specific (social) mutual fund."

Many investors, Rasmussen surmised, may not know the funds are out there.

Even though companies are generally reviewed by a governing board before being listed on a social index fund, investors still need to do their homework, Wheat cautioned. His Vermont-based firm, SRI World Group, reviews socially responsible indexes and the listed companies.

Usually, fund managers look at the traditional bottom lines of profits and how well a company is managed. But not always.

And sometimes the company is not forthcoming about its finances. Case in point: Enron. Domini and other funds contained Enron stock as part of their portfolios, Wheat said.

Nor does the listing of a company in a fund mean its board of directors all sport halos.

Alaska Airlines is one of the companies included in the Domini Funds. A profile of the company on Domini's Web site notes the strengths, such as a relatively new fleet and a profit-sharing plan for almost all employees.

Under weaknesses was noted: "a series of aircraft safety issues."

Because of mechanical problems, an Alaska Airlines flight crashed off California two years ago, killing all 88 passengers and crew on board.

"Every large company has a combination of strengths and weaknesses," Wieder said. "What we're trying to do is find the better companies, those we can work with and who will respond to those concerns at a high level."

Wieder stressed his index and social funds are not looking for the next Microsoft or "stellar company."

Nike's rise and fall

Inclusion into these social indexes and resulting mutual funds is generally an invitation-only affair. But some companies campaign to get listed on the indexes.

"The index committee doesn't consider the lobbying," Wieder said. "But I do think it's an interesting commentary on the importance of social investing.

"Some companies are now noting their listing on indexes in their annual report."

Others come up with their own report, usually released with the more traditional annual report, on what good works the company has done in the past year.

Starbucks issued such a report last year, as did Weyerhaeuser and Oregon-based Nike Corp.

The well-known sportswear company has become a case history on how a fast-growing corporation can gain cachet and popularity, only to lose its listing on the social index funds when bad press hits.

Nike was dropped from Domini's roster in 1998 after the Beaverton, Ore.-company was repeatedly linked to sweatshops operating in Indonesia and Mexico.

For the last decade, the sportswear giant has been the target of labor and environmental groups that say the company has done little to change the conditions in its overseas factories.

Ashley Kaiser MacEachern, Nike's senior manager of corporate responsibility, said the company isn't getting enough credit for the changes it has made.

Nike has linked with the Baltimore-based Global Alliance to check out the conditions in its overseas factories. The company has set a goal to generating no waste in the production of its products by the year 2020.

"It's pretty lofty, but if we accomplish it, it will be huge," MacEachern said.

Wieder agreed that Nike has done much to improve its image and answer critics. However, he would not say whether the company would be reinstated in Domini's funds.

Nike is still listed on several other funds, including the Eco*Index and the Dow Jones Sustainability Group Index.

The bottom line

Aside from all the warm fuzzies that may come from being on the social funds, there are some very traditional bottom-line reasons that companies want to be included.

Wieder thinks companies that care about their workers, the environment and social causes - the "triple bottom line" - may have managers who are quicker to foresee opportunities or problems a company will face and to take action.

Dennis Stefanacci, vice president of corporate social responsibility for Starbucks, noted the coffee company has one of the lowest employee turnover rates in the retail industry, at 60 percent. The average for the industry is 120 percent to 200 percent a year.

Stock analysts who issue buy or sell statements on companies are turning more often to these social responsibility indexes as they consider a stock, Weyerhaeuser's Mendizabal added.

"Sustainability can provide a competitive advantage to a business," said Daniel Poston, executive director of the University of Washington's MBA program.

That the sustainability movement will continue, even through a recession, seems a given now.

And as long as there are people who care enough to brave Seattle drizzle to protest each Starbucks annual meeting, there will be a natural constituency for these indexes, even if those protesting will never buy into what the indexes are selling.

Simon Harris, who has organized the Starbucks annual meeting protests for the Minnesota-based Organic Consumers, dismissed the company's inclusion in the indexes as being a result of an aggressive PR campaign, not aggressive environmental policies.

"It's a scam," he said. "Starbucks has done a good job of 'green-washing' itself."

Despite opinions such as this, Stefanacci feels that these views, the indexes and the protests are good for the company in the long run.

"I think they've pushed (these issues) further and faster on the agenda than we would have gone on our own."

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* Staff writer Barbara Clements covers business. Reach her at 253-597-8652 or barbara.clements@mail.tribnet.com.