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June 29, 2012

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Mary Jane McQuillen & Bill Paul Transcript 6/29/12 #901

June 29, 2012

WEALTHTRACK Transcript
#901- 6/29/12

CONSUELO MACK:  This week on WEALTHTRACK, how can you make a difference with your investments? Two practitioners of what’s being called “impact investing” share their strategies for making money while doing good. ClearBridge Advisors Mary Jane McQuillen and Earthpreserver.com’s Bill Paul on investing with impact are next on Consuelo Mack WEALTHTRACK.

Hello and welcome to this edition of WEALTHTRACK. I’m Consuelo Mack. How can you make a difference with your investments? Was Gordon Gekko inadvertently correct when he said greed is good? Can you actually make money while doing good?

For a number of reasons that question has taken on new meaning and significance. Interest in aligning one’s values with one’s investments is becoming a global phenomenon among increasing numbers of institutional and individual investors. Major companies all over the world are being judged on their so called “sustainability.” What does that mean?

One of the earliest and broadest definitions comes from a 1987 United Nations commission report. It means “meeting present needs without compromising the ability of future generations to meet their needs.” More specifically, sustainability practices include the environmental, social and governance policies, or ESG, of companies. A who’s who of large multinational companies from numerous industries now issue annual corporate sustainability reports in addition to their annual reports. They range from Coca Cola to International Paper, to Oracle, to Shell Oil and Wal-Mart among many others. Increasing numbers of investors are jumping on the bandwagon too. According to one study, “nearly one in eight dollars under professional management in the U.S., or about $3.07 trillion, follows investment strategies that consider corporate responsibility and societal concerns.”

Wall Street is taking note. Some major firms offer socially responsible and ESG screens for institutional and high net worth clients. Morgan Stanley Smith Barney recently introduced an “Investing with Impact Platform” for its individual clients, offering them the opportunity to pick and choose among multiple strategies involving stocks, sectors, mutual funds, and private investments to quote “align their financial goals and their personal values.” And therein lies the rub. Is socially responsible investing as profitable as traditional investing? According to numerous research reports, it can be; like any other investment approach, there are winners and losers.

This week’s WEALTHTRACK guests are well versed in the risks and rewards of impact investing. Bill Paul is a familiar WEALTHTRACK guest. He is a Financial Thought Leader in the environmental and energy field, founder and editor of Earthpreservers.com, a now twenty year old environmental publication for children. He is also an energy consultant and analyst and former energy reporter for The Wall Street Journal. Mary Jane McQuillen is portfolio manager and Head of the Environmental, Social and Governance Investment Program at ClearBridge Advisors where she integrates ESG research into the stock selection process. She is on the board or involved in numerous ESG organizations and was named a “rising star of corporate governance” by the Millstein Center at the Yale School of Management. I began the interview by asking them why impact investing is gaining momentum.

BILL PAUL:  Impacting investing is taking off because Wall Street can see that its investor demographics are starting to change. The kids from 20 years ago who started with recycling programs in first grade are now coming up through college, through graduate school into the workforce and they’ve got money to invest. Every step of the way over the last 20 years kids have had green as their default mode. They were in clubs in high school. They went to college in part based upon what campus is the greenest. They chose a graduate school in part because, if you’re an architect you want to be a green architect, if you are a lawyer you might want to practice environmental law. All of these programs have really taken off and now Wall Street is going to bear the fruit.

CONSUELO MACK:  So it’s gone mainstream. Now from an institutional point of view as well, institutional investors, Mary Jane, and you’ve been involved in this field for 16 years, they are also really pushing this as well, certain institutional investors. So tell us about that. Where is that interest coming from?

MARY JANE MCQUILLEN:  Sure. Historically, when you think of individual investors they are very values based, many of them are very values based, as well as the faith based community and certain institutional investors who had a mission-related.  Increasingly though in the past 10 to 15 years you’ve seen institutional investors who may be agnostic about “values,” but are very concerned about risk and about opportunities that they need to identify for solutions to longer term issues. So where they’re looking at in terms of impacting investing is more about risk now for many of the institutional investors. How is climate change going to affect the sectors that I’m investing in? What sort of costs will there be by not being efficient and environmentally aware and what sort of reputational impact will it have? So the institutional investors are becoming much more sophisticated about how to integrate these issues around the environment, around social and governance issue or also known as impact investing.

CONSUELO MACK:  So that’s really interesting. So risk is part of the equation. And so therefore, if you’re not socially responsible or if you’re not considering what your impact might be on the environment or the community then, in fact, that means that you as a company are at a higher risk of having problems? Is that where the connection is?

MARY JANE MCQUILLEN:  Also, from the investor base, to go back to the investors, they are many times in a position as a fiduciary and so as a fiduciary they need to consider all factors in their investment approach, in terms of their due diligence. So if you look outside the United States- in many cases particularly for the pension funds- they are required to disclose how they integrated the E, the S, and the G in their investment process. In the U.S., it’s a little bit slower on the uptick, but it is coming along. And you’ve got major pensions from the East Coast to the West Coast and in-between who are asking, where is the risk in these investments that we’re making whether it’s the insurance sector, whether it’s financials or materials, energy, consumer.  It goes across all the sectors and they’re asking their investment managers to look at each area more closely.

CONSUELO MACK:  It’s interesting, in the old days it used to be called socially responsible investing and it was a very narrow investing segment. Basically, there were clients and investors who would say, “I will not invest in the sin stocks. I won’t invest in tobacco; I won’t invest in alcohol and fire arms.” Then it was in South Africa during the days of Apartheid. But it just seems that it is so much broader now. So Bill, how broad is it? What are we talking about when we’re talking about impact investing?

BILL PAUL:  Well, it’s everything. Take a look at ethical fashion, as an example. It’s human rights, it’s environment, it is worker rights, labor, unfair labor practices in China. It is everything. The word is sustainability and responsibility.

CONSUELO MACK:  So what does sustainability mean now?

BILL PAUL:  It means that you can produce what you are producing in a way where you will not use up the stuff that it takes to make it, whether that stuff is a natural resource, a clothing material, the energy that it takes, the water that it takes, the transportation it takes to deliver it to a store. Locally grown food is nothing more really than cutting back on transportation costs. So it is literally everything. It’s fascinating; it’s basically taking a new approach to innovation. That’s what is really kind of different about this. In the old days, it was take your medicine time. “I’m probably not going to earn as much money, but I can feel better at the end of the day.” It has totally flipped over. It is now seen as a way to cut costs and to innovate so that you are able to come up with new products that the public wants in a way that is, as you started to say, sustainable. “I can keep doing this.”

CONSUELO MACK:  One of the perceptions about socially responsible investing, sustainable investing or what not is that by doing good you’re somehow going to give up profits, that you’re not going to get a competitive financial performance if you invest in the socially responsible sector- investing with impact. So why don’t we address that right now. So what about that perception? It’s a tough one to overcome.

MARY JANE MCQUILLEN:  It is a tough one to overcome, but sustainability in our view and many of our clients’ view is that it’s not just about the sustainability of the planet or the people, but it’s also about the sustainability or the longevity of the business enterprise. So if you have sustainable companies that are operating well and that are well-managed, there is a higher likelihood that they’re going to continue to hire those employees, pay those employees, reduce their impact, put the investment in technology. And from a return standpoint, they’re thinking much longer term which is something that we like when we’re looking at our investments because we tend to hold them for a long time as we watch them grow.

BILL PAUL:  I would suggest that sustainability is the way to judge the quality of a company’s management. It is a way to judge just how quick they are in a multitude of areas: controlling costs, dealing with consumers, innovating new products. It’s not the whole picture, but for any investor who is limited in time, which we all are, if you feel good about a company’s green credentials you probably can feel good about the quality of the management as a whole.

CONSUELO MACK:  So give me a for instance. Microsoft, for instance, I mean, Intel – there were some companies that you mentioned to me before. Facebook is doing some stuff as well now. So give me a couple of for instances.

BILL PAUL:  The whole Silicon Valley crowd is definitely into this. Yes, they want to save the world up to a point, but the fact of the matter is that when you have a smart electrical grid which is a grid that behaves more like a wireless telephone system, you now have opened up a new way of marketing to the consumer. You can sell them all kinds of things. You can interact with the consumer. For any of those folks- whether it’s Google, Intel, Cisco- they all have either the hardware or the software that when you put it together it becomes a vast new way to reach out into the consumer market.

CONSUELO MACK:  And when you’re talking about that, Bill, what kind of policies are you talking about that they’re following?

BILL PAUL:  The basics are that you want to be as much renewable energy as possible. Two, you want to have as little waste, as little thrown away as possible. Three, you want to make absolutely sure that your employees feel that they are, essentially, trying to save the world up to a point. That all the products have a redeeming social value, with the exception, I guess, of the oil and gas industry. Sorry, but they’re not part of that play, in my mind.

For example, if you are a paper products company and let’s say you make bathroom tissue, you darn well better not be making that tissue from forests that have not been certified as sustainable. You will be called to task by the Rainforest Action Network, the Natural Resources Defense Council, what have you. It is almost becoming a de facto part of business that you have to keep your green cred in order or you will be attacked. As much as it is an opportunity to invest in a company, it is a risk.

CONSUELO MACK:  So this is the risk that you were talking about, Mary Jane.

BILL PAUL:  This is a huge risk.

MARY JANE MCQUILLEN:  One of the companies that we own at ClearBridge is Intel. Intel is one, in terms of renewable energy; they are the largest buyer of renewable energy in the United States as a company and working with the EPA. Eighty-eight percent of their power comes from green energy which includes biomass, hydro, solar, wind, and so on. In terms of their employees, they are one of the few companies I’ve ever heard of who every employee, as part of their incentive, has environmental performance as part of their score. So whether you’re the administrative assistant or part time worker or the top engineer or the CEO, environmental performance is part of your compensation across the board whether you think you’re affected or not.

CONSUELO MACK:  So tell us how it works at ClearBridge, Mary Jane? How do you approach the investment process differently than a regular portfolio manager would who is just concerned with performance?

MARY JANE MCQUILLEN:  Right. I think for this to really work at the firm is that you have to have the buy in at the culture of the company. So at our firm, ClearBridge, our President, our CIO, our Head of Research, and all of our fundamental analysts and co-portfolio managers all believe this makes sense as an investment approach- otherwise they wouldn’t be able to do it And so the way we work is that we believe if these issues are important and can be material and relevant to the sector that they’re covering and the companies that they’re recommending- these are the analysts- that they should be integrated at the fundamental level, not something as an add-on later on after we’ve picked the best ideas names completely without the ESG integration and take it out. That wouldn’t make sense. We should do it at the beginning before it even gets into the portfolio.

BILL PAUL:  We have to introduce one more buzz word into this and that’s “greenwash.”

CONSUELO MACK:  That’s new to me. What is greenwash?

BILL PAUL:  Greenwash companies are companies that pretend to be green.

CONSUELO MACK:  Ah, so I was going to say how do you tell? Everyone says they’re a value investor, they’re not. Everyone says they’re sustainable, they’re not.

BILL PAUL:  That’s where ClearBridge comes in.

CONSUELO MACK:  So greenwash- it’s they’re pretending green, but they’re not.

BILL PAUL:  Oh, they have very fancy public relations type statements that say, “We are greener than Kermit the Frog.” But you look closely and you discover they’re not, not in any way. They waste energy. They do not have energy efficiency programs. They do not meet any of the criteria that she is introducing into her reviews.

CONSUELO MACK:  Right.  So are there a lot of those?

BILL PAUL:  Lots and lots.

MARY JANE MCQUILLEN:  There are a lot, yes.

CONSUELO MACK:  So what are the major themes that we should look for if we’re looking for companies that are sustainable investments? What are some of the major categories, some of the major screens, Bill? You mentioned energy efficiency being one.

BILL PAUL:  A, I’m going to start with energy efficiency. That is the lowest hanging fruit. Does a company’s management understand that once you put in that system which reduces energy and produces green energy- solar and wind- especially a company that produces green energy onsite. Once that capital outlay is taken care of, it’s free energy for the rest of your life.

CONSUELO MACK:  So are you just talking about big companies or can smaller companies, small and midcap companies, for instance, can be energy efficient?

BILL PAUL:  Every company can be and should be. Now, it’s easier if you’re a manufacturer like Ford and you can have a closed loop watering system and what have you. But every company in terms of its sourcing- where is it buying its raw material, how far is it transporting to reach markets? What kind of cars do the employees drive, for example? Is there any kind of an incentive to go hybrid? I find it interesting that companies, when they greenwash, they say, “Oh, we’re all in favor of green power,” and then they don’t buy any green power.

A good place to start is every company, just like it has an annual report full of financial gobbledygook, basically, has a Corporate Sustainability and Responsibility Report, a CSR. Ask for that CSR and then read it. Everybody watching this show will know greenwash when they see it. Okay? It’s pretty transparent because you can relate to stuff that was obviously written by some public relations person. It’s energy efficiency, but it’s also resource reduction, it is waste reduction, a transportation efficiency. I think it’s UPS that only makes right turns now because it has a GPS system that keeps it from having to sit at lights and waste gasoline. Little things like that are actually huge things and those things will come through in a good CSR.

CONSUELO MACK:  So what are some of the major themes that you look for in the social category?

MARY JANE MCQUILLEN:  Whether it’s the person at the plant level or the person who is in the R&D lab, the way those companies are treating, hiring, and training their employees makes a really big difference. We had a discussion recently with our consumer analyst and said, “Is all the attention paid on the higher end white collar employees and should less attention be paid on the plant worker, so to speak?” And what many of the studies have shown is where you could have a lot of loss and a lot of damage could happen as well is if you don’t pay attention to the plant worker. You may think, oh, they’re replaceable, oh, they’re low wage, oh, they don’t require a lot of training, but if you don’t have them well managed and you don’t have them trained and happy, so to speak, then you could have a lot of implications that ripple up to the senior management. So it can go both ways. So the labor issues and how they manage labor is extremely important.

CONSUELO MACK:  Governance. What are some of the major things in governance?

MARY JANE MCQUILLEN:  Governance is an interesting area as well because governance covers everything from executive compensation. We look at how a CEO is performing relative to the one, three, five years of the stock performance and how much he or she is getting paid through the compensation committee. And then we look at the independence of the board. You know, are these all the friends of the CEO or relatives or are they actually independent members who actually can contribute from a board standpoint to shareholder value and make the right decisions?

It’s not necessarily a black and white decision. There are some CEOs who still get paid a significant amount of money, however, within their peers they’re paid perhaps lower, but it may seem significant outside of that sector. So we try to keep it within a relative basis in what’s considered reasonable and tie it back to performance. So governance is one that’s getting g a lot of attention and it’s one that should get a lot of attention because we want to know who is managing these investments from the inside and that’s where we’re trying to get as much information as possible.

CONSUELO MACK:  So from an investor point of view, kind of, where do I start? I mean, you know, Bill, what would your recommendations be as far as if I decide, alright, I want to invest in a socially responsible way at least in some of my investments?

BILL PAUL:  I’d go to Silicon Valley. I would go to Intel or another company which has the technology to make a huge difference overnight especially in energy. But the ramifications spread out into how people live their lives in general. So I would look at a Google which is bankrolling a lot of wind. I believe it’s one of the bankrollers of this offshore East Coast wind power grid that’s going to be serving Maryland, Virginia, and other states within a few years. I would look at Intel. I would look at Cisco. Cisco makes the widgets that are going to go into all this kind of stuff. I would also look at- and this is going to seem kind of strange- but I would look at Warren Buffett. He has a lot of companies. This is almost a proxy for some of the companies he owns like Sherwin Williams. House paint that doubles as a solar collection system. Things like that.

CONSUELO MACK:  Mary Jane, how would you have an individual investor approach this whole area of investing with impact?

MARY JANE MCQUILLEN:  I would definitely ask the investor to do the same level of due diligence for this type of investing as to any other type of investing whether it’s public equities, bonds, cash management, whether it’s mutual funds or separate accounts. Whatever level of due diligence they would do for any other investment, they should apply that same level of rigor to a responsible or sustainable investing option. They should look at the performance track record, they should look at the quality of the management team, the fees, how long they’ve been managing these types of investments. And that’s a perfectly reasonable question to ask for an interview with the manager, to say to the team or someone from the team, “Can you describe your process to us?” Because quite frankly, not every process is the same. And it’s not to confuse matters, but there are boutique shops and mainstream firms who say, “I do large cap value.” And they pride themselves on their version of large cap value versus someone else’s definition of large cap value. Well, we have our version of ESG and other firms may have their version of socially responsible or someone else might have impact investing. So it’s reasonable to ask, “Can you explain your process and be transparent?”

CONSUELO MACK:  So One Investment for a long term diversified portfolio? Mary Jane, what would you have us own?

MARY JANE MCQUILLEN:  One company we like is Cree. (CREE) And Cree is LED lighting, light emoting diode. Many of your viewers may be familiar with light emoting, LED lighting which, as the absorption or the adoption process has been improving, the prices have been stabilizing and the quality or the attractiveness around LED lighting has increased. Right now it’s still, I believe, only four to five percent absorption within the United States for LED lighting compared to conventional technologies such as incandescent and CFL, but what’s interesting about LED light is that it requires 85% less energy than conventional light and it last on average for 50,000 hours, where conventional lighting lasts 2,000 hours. So you don’t have to necessarily do a lot of math to realize that you could save a lot of money in terms of energy. You could also save a lot of money in terms of going back and forth to the store and buying new bulbs and the amount of waste usage. So Cree has high quality best in class products.

BILL PAUL:  By the way, with Cree you cut labor costs too. You cut janitorial costs because you’re not up there replacing the bulbs all the time. That’s actually a quantifiable cost. Mine would be Zipcar (ZIP) which is a car sharing service. It started in Europe, as well as on college campuses in the U.S. It is for green kids, basically, except they are now in their twenties or thirties. They do not want to own a car either because it’s too expensive or, in a city like New York, too much of a hassle. The company went public. It has surprised any number of vocal critics along the way because it’s going strong and is showing no signs of running out of gas, shall we say.

CONSUELO MACK:  And on that note, we will leave this very fascinating conversation. I thank you so much, number one, for being involved as early pioneers in this area. Also in enlightening us in how much it has changed even in your experiences with impact investing. So Mary Jane McQuillen, it’s great to have you here for ClearBridge. Thanks so much for joining us.

MARY JANE MCQUILLEN:  Thank you.

CONSUELO MACK:  And Bill Paul, always lovely to have you on WEALTHTRACK.

BILL PAUL:  Thank you.

CONSUELO MACK:  At the conclusion of every WEALTHTRACK, we try to leave you with one suggestion to help you build and protect your wealth over the long term. This week’s Action Point is: start applying your values to your investments. There are numerous ways to do so.

For starters you can read the sustainability reports put out by numerous large public companies. You will find them on their websites. You can also check out some of the socially responsible indexes for company ideas and the index funds and ETFs tied to them. The oldest is the FTSE KLD 400 Social Index, launched over 20 years ago. There is an iShares MSCI KLD Social Index Fund based on it. MSCI has ESG indexes and there is the iShares MSCI Select Social Index Fund based on it. All fertile ground for value-based investment ideas

Next week, we will have part two of our focus on impact investing with specific strategies for you to consider. If you want to see our WEALTHTRACK interviews ahead of the pack, subscribers can do so 48 hours in advance. To sign up, go to our website, wealthtrack.com. You can also watch previous shows and find past One Investment and Action Point recommendations there. And that concludes this edition of WEALTHTRACK. Thank you for watching and make the week ahead a profitable and a productive one.

Mary Jane McQuillen & Bill Paul

June 29, 2012

Aligning Financial Goals With Personal Values

We are kicking off a new season of WEALTHTRACK with the first of a two part series devoted to what’s being called “impact investing,” the practice of aligning financial goals with personal values. Impact investing goes beyond what used to be called socially responsible investing, which was designed to avoid certain businesses such as gambling, alcohol and tobacco. It is now pro-active as well, investing in companies that are making a positive impact in a wide range of areas including environmental, societal and governance (ESG).
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