CLEAN PROFITS Transcript 11/08/2013 #1020

November 19, 2013

CONSUELO MACK: This week on WealthTrack, a Financial Thought Leader in socially responsible investing explains why promoting women and water conservation can boost your portfolio’s bottom line. Calvert Investments’ powerhouse CEO, Barbara Krumsiek, is next on Consuelo Mack WealthTrack.

 

Hello and welcome to this edition of WealthTrack, which we are delighted to be taping once again at the Museum of American Finance in the heart of Wall Street. I’m Consuelo Mack. Over a year ago we did a two part series on socially responsible investing, a growing area of interest among governments, institutions and individuals around the world. It turns out the momentum towards SRI, now also known as sustainable and responsible investing, is building. The most recent comprehensive count done in 2012 showed that total SRI assets in the U.S. have reached nearly $4 trillion, a 22% increase since year end 2009. And a 486% jump since 1995 when the size of the U.S. sustainable and responsible investing market was first measured. Individuals and institutions interested in SRI-focused investing have many more choices. The number of mutual funds, ETFs and other pooled products that incorporate environmental, social and corporate governance criteria have exploded from 55 vehicles in 1995 to 720 by 2012 and their assets have grown from $12 billion to over one trillion.

But what about performance, probably the most frequently asked question about this approach? Comparing index to index, SRI is more than holding its own. The MSCI KLD 400 Social Index, which is based on the Domini 400 Social Index, one of the first socially responsible investing indexes has delivered 10% annualized returns since its 1990 inception, outperforming the S&P 500 for the same time period.

 

Another growth characteristic is the scope of what socially responsible investing covers. It’s gotten much broader than avoiding the “sin” stocks involved in alcohol, gambling and weapons. Calvert Investments, one of the pioneers in SRI, has developed its Calvert Social Index with seven criteria which it uses to measure the performance of U.S. based companies. They range from governance and ethics, which includes company policies to promote women and minorities; environment which considers water usage and conservation; and how companies run their international operations, considering community impact and the rights of indigenous peoples.

 

This week’s guest is a Financial Thought Leader in the field. She is Barbara Krumsiek, President, CEO and Chair of Calvert Investments which she has run since 1997. Krumsiek currently serves as co-chair of the United Nations Environment Programme-Finance Initiative, a partnership between the UN and 200 financial institutions around the globe mandated to develop links between sustainability and financial performance. She is a powerful advocate for advancing women in business. Under her leadership, the Calvert Women’s Principles were created, the first global code of corporate conduct focusing exclusively on empowering and advancing women. I began our interview by asking Krumsiek why the amount of money flowing into sustainable and responsible investing is taking off?

 

BARBARA KRUMSIEK: I think there are a few drivers. The asset owners, the state pension funds and corporate pension funds, have really woken up to the fact that environmental and sustainable factors are very important to investment performance and, in fact, there’s been explosion of interest in principles for responsible investment on the part of asset owners. Secondly, companies are seeing that this is good business to be sustainably invested in their products and in their markets and, therefore, I think there’s the potential for good returns and for good outcomes.

 

Third is engagement. The assets that we count under sustainable and responsible investing, almost four trillion as you say, up 22% in four years, include assets that are being actively governed by the asset owners, the proxy voting- really very, very different kind of engagement by asset managers and asset owners to really improve the performance of companies. So those three I think have really contributed.

CONSUELO MACK: Calvert is a leader in this field and has been since it started, and you conduct a sustainability audit in order to qualify companies for your Calvert Social Index. There are now 708 companies that are part of it, the most ever. Right?

BARBARA KRUMSIEK:  Right.

CONSUELO MACK: What are the things you really emphasize the most now in order for a company to qualify to be in your social index?

BARBARA KRUMSIEK: Well, I’ll touch on a few of them, obviously environmental liabilities and opportunities. The SEC has added more disclosure requirements of companies, and companies themselves are seeing that if they don’t invest in understanding their carbon footprint, their climate change impact, that they themselves are doing to suffer financially as well as in the public eye and in their reputations. So certainly environment has always been a very key area of analysis for us.

 

Secondly I’d say would be workplace and diversity, and we find many studies that tell us that diverse boards, diverse management teams create stronger outcomes, better stock performance and certainly appeal to a broader client base. Eighty-five percent of financial purchase decisions are influenced by women. This is an area that a lot of companies pay attention to, and we will not own a company that does not have a diverse board. We will, in fact, vote against that board. If we do own that company, we’ll vote against that board.

CONSUELO MACK: So what’s the criteria for a diverse board?

BARBARA KRUMSIEK:  A diverse board would be women or minorities, but also we understand that companies have processes to really embed sustainability practices for the future, so what we really look for is a commitment on the part of the board through their nominating committee charter, that they would include diverse slates of candidates for every open board seat. So that, to us, is as important as the number of women or minorities on the board, is the process.

CONSUELO MACK: Is the process, right. What are a couple of the other major criteria and standards that you expect companies to meet?

BARBARA KRUMSIEK:  In an increasingly global world, we look at human rights. We look at supply chain factors and factory standards of major retailers. We look at a Wal-Mart. We look at other companies that source globally. We expect that they’re going to be investing in anti-corruption. They’re going to be investing in safe factory, safe work places for workers, so human rights, and that’s just one element of human rights but is a very important area of study for us. Very important as well is governance. That has long been an area of focus, but the ESG, environmental, social, governance is the bedrock of what sustainability investors look at.

CONSUELO MACK: Right, and what do you mean when you’re talking about governance? What’s kind of the gold standard of governance?

BARBARA KRUMSIEK:  Independent boards, solid pay practices. Diverse boards, frankly, is part of governance. Attention of the board on matters of critical importance to the future of the company, for example, scarce resources. We like to see that if it’s a company or an industry that really relies on water or relies on access to natural resources that the board itself is cognizant of this and has risk committee and a risk oversight that will really factor in sustainability factors as well as maybe more conventional definitions of risk.

CONSUELO MACK: When I was looking at the guiding principles of Calvert, it basically said that investment returns and responsible corporate behavior are inextricably linked. So where is the proof basically that investment performance and responsible corporate behavior, especially the kind of really high standards that you’re setting for companies, are linked, that it really makes a difference?

BARBARA KRUMSIEK:  Well, there have been a number of studies that have looked at single issue and have demonstrated that, for example again, diverse companies with diverse boards outperform. McKinsey has done a study along these lines as has Catalyst, a women’s research organization. In terms of the comprehensive, we believe, for example, looking at the Calvert Social Index, which is a broadly diversified index of companies that have satisfied our seven criteria, that our index has outperformed the S&P by over two percent this year, and it is certainly an index that may, at different points in time, underperform or outperform, but over time will at least perform at or above the unscreened index, the S&P500.

CONSUELO MACK: One of the criticisms of socially responsible investing from an investor point of view, from an investor return point of view has been that, in fact, these funds, that you’re giving up some performance. So what do you tell us about performance and what we should expect from socially responsible funds?

BARBARA KRUMSIEK:  Well, our expectation for ourselves in our asset management, the funds we offer as Calvert funds is that we will perform at or above benchmark averages. Now, this may not occur day in, day out, but over longer periods of time, we do expect that. We at any point in time do have some funds that are outperforming and are delivering good returns, and we’re very heartened by the performance of the index. We certainly think that is the universe of stocks from which one can select. You can really create performing at or above index averages through this universe.

CONSUELO MACK: Right. So one of the things that you mentioned was board diversity, and I know that you have been a leading global advocate for women in business. So why are advancing women in business, why is that such a passion of yours?

BARBARA KRUMSIEK:  I’ve always believed that really equality is a bedrock of our society and our culture, and I’ve been in financial services for over 30 years and, to me, equality is not that exceptional women and exceptionally well-performing women will be leading companies or serving on boards, but very honestly that there’s an average playing field, that just as many average men would get just as many average women serving, and it’s fairness. It’s really the right thing to do, and I do think that there are many, many advances that women have made over the years. We’ve seen that. However, there are some stubborn, stubborn roadblocks, and some of them women themselves can address through their educations and their commitment to math and financial services, but others are within the cultures of companies, and that’s where Calvert has a very special place for me in that we do look at that. We do look at what can companies do to really break down the norms that might be inhibiting women from advancing and really realizing their full potential and delivering value to companies. I do want to say there’s going to be a global war for talent, and we can’t afford to have 65% of women who have graduated from elite MBA programs are out of the workforce.

CONSUELO MACK:  Why aren’t more women making it to the top, and why is there a dropout of these highly educated women from the workforce?

BARBARA KRUMSIEK:  There are many other factors. Frankly, politics and, frankly, norms in the workplace, and I believe women seem to struggle a little bit more in that middle career, mid to upper career and, frankly, if women have other choices, sometimes they opt out, and a study out of Vanderbilt University suggests that 65% of women with MBAs from elite institutions have left the workforce, and I think as a competitiveness question for our country and for our economy, we can’t afford to let that happen.

CONSUELO MACK: So it is fair? Then I’m going to ask from a company point of view. It is fair to ask companies, knowing that there’s kind of a systemic or institutional problem in this country as well that say, hey, if you don’t have a percentage of women on your board, you’re not going to make it into the Calvert Social Index, for instance, or if you’re…

BARBARA KRUMSIEK:  Well, many countries are imposing quotas on women on boards, Norway, for example.

CONSUELO MACK: Norway since 2003, right.

BARBARA KRUMSIEK:  Right. I don’t think that works in our country and our society, but what I do think is important is that companies realize the corporate culture is not a soft quality. It’s a hard quality in a company, and we should be as attentive to corporate culture for women and minorities for all underrepresented populations as we are attentive to risk management and to audit quality and other factors. In fact, Harvard Business School did a fascinating study in their class of 2012, which entered Harvard Business School in 2010. They completely dissected their culture with respect to women, because they were not happy with the outcomes in terms of achievements of women at Harvard Business School. They were admitting them at wonderful achievement levels and high standards, but they weren’t graduating at the same rate of achievement as when they came in, and they found there were a lot of dynamics in the classroom that contributed to women having less confidence and being called on less in the classroom.

CONSUELO MACK:  What was interesting with Harvard Business School is that they changed some of their approaches. Right? And in fact, women then did achieve in the kind of numbers that they expected them to, being Baker Scholars or whatever.

BARBARA KRUMSIEK:  Yes, yes. They found that when they taped classroom interactions and coached professors on how to be more fair in how they called on students, and when they did their testing on a blind basis- in other words, 50% of the grade on tests, but there’s no name, there’s a number, so there’s no gender take on the test results- they found that the class of 2012 which was this experimental class graduated with the same percentage of women entering the graduating class graduated as Baker Scholars which is the top five percent. So something was happening there that they paid attention to, and they developed a good result.

CONSUELO MACK: Yeah, and it worked, and they weren’t lowering their standards or … right, exactly, which is …

BARBARA KRUMSIEK:  Yeah, exactly.

CONSUELO MACK: So one of the things, let me just one more point on this, and I know Norway since 2003 had required public boards to have 40% of the boards of public companies be women.

BARBARA KRUMSIEK:  And actually, it’s an interesting statistic. It’s 40% diverse, so they don’t actually specify women or men. It turns out it has to be 40% women, but it can be done in a gender-neutral way.

CONSUELO MACK: But there was a University of Michigan study that I read the results of, and in fact, in 2011 or whatever, the Norwegian firms suffered declines in value because the boards were younger and less experienced and, therefore, there was deteriorating operating performance. I mean, what do you say to that? Because they did have to reach down, because there aren’t women who have the same levels of experience that men do because we haven’t reached those levels, and so what do you say to that criticism is… ?

BARBARA KRUMSIEK:  Well, the criticism of the Norway approach… first of all, I’d say I wish they had looked globally because, frankly, if they had looked globally, but I believe they looked locally, and absolutely they set a very fast timeframe to get that right percentage, and they did wind up having to include perhaps women that weren’t as experienced, but I do think that’s a particular model, a particular approach. I think we have many, many, many qualified women, and there are many sources of databases of qualified women. In fact, CalPERS maintains a database and other institutional investors interested in seeing diversity have these sources to go to look for these pools, and certainly in the United States where I don’t believe quotas make sense, but I do think reaching out and finding very experienced qualified women to be candidates, we will get to that 40% if there’s a proactive effort to include women in the search process.

CONSUELO MACK: So let me talk about another area that’s of great interest to Calvert, and also I think to anyone who’s concerned about socially responsible investing, and that is water, and so I know Calvert has a Water Fund and the Calvert Global Water Fund, but why is that such a key issue for all of you as to how companies treat water?

BARBARA KRUMSIEK:  Well, it’s probably the most pressing humanitarian issue combined with environmental issue on the planet. Eight hundred million people do not have access to clean water. There is going to have to be an investment. It’s estimated $22 trillion in water infrastructure to simply provide water to growing populations and industries…

CONSUELO MACK: And there’s an investment opportunity right there.

BARBARA KRUMSIEK:  That’s an investment opportunity, and water use in companies that I think historically water was perceived as a free…

CONSUELO MACK: Infinite resource.

BARBARA KRUMSIEK:  … infinite resource as air and clean water, but it is not infinite, and so we feel there are great opportunities in investing in water transportation, water infrastructure, clean water. The technology field has advanced here. So we think this is a great investable… not only an investable premise for investors to seek out companies in this space but also for improvements in companies that use a lot of water in their processes. Take Coca-Cola, for example.

CONSUELO MACK: And you’ve worked with Coca-Cola. Right?

BARBARA KRUMSIEK:  Yes, yes. Involved …

CONSUELO MACK: So tell us about what Coca-Cola has done. Obviously, it’s a soda company, so they use a lot of water.

BARBARA KRUMSIEK:  They have been real leaders in both affirming commitments to UN principles on water, and they were one of the original signatories of that, and they did engage sustainable investors to help them think through their water use, and they’ve committed to targets to reduce water usage and to restore the cleanliness of water in those communities where they’re accessing this. So they really are a leader there, and through those efforts and other factors, they’ve become a company in which Calvert has invested where historically they were not.

CONSUELO MACK: So another area that I think is so fascinating, too, which I never really would have thought of… of course, Calvert runs a lot of bond funds, too, and there are such things as green bonds. I mean, what are green bonds?

BARBARA KRUMSIEK:  Well, this is a whole new and exciting area, I think, for investors, good opportunities, but the bond area which may be thought of as pretty sleepy, there are a lot of new issues and offerings in the areas of clean energy, in the areas of land management, pollution prevention, water and waste treatment. And Calvert recognized this and we’ve been running a strategy in this area for the last two and a half years. We’ve outperformed the broad bond index by two percent over that period annualized since inception.

CONSUELO MACK: Great.

BARBARA KRUMSIEK:  And examples are state authorities, Massachusetts pollution bonds or the World Bank is issuing bonds that would support clean energy and alternative energy in developing nations. So these are some of the issues that are of interest to us, and we see more and more of that in the future.

CONSUELO MACK: And so these are both governmental agencies that are…

BARBARA KRUMSIEK:  Correct.

CONSUELO MACK: …involved in, as you said, clean air or pollution or whatever it is, and also in companies that you… so would a company that is designated to meet your criteria, and if they issue bonds, are those green bonds or is it… ?

BARBARA KRUMSIEK:  Yes. You might on the surface say, well, why is GE here, but we’re looking at companies that are investing in clean technologies and in energy-efficient technologies, and those become really the building blocks for a green economy and carbon-reduced economy, so corporate bonds are definitely part of the array of securities that we would invest in.

CONSUELO MACK: You know, there is such a broad array of opportunities actually and, as we’ve discussed, the opportunities are getting much larger as well as how to participate in socially responsible investing. So if we had to do One Investment for a long-term diversified portfolio, what would you… if I wanted to be a socially responsible investor, is there one thing that I should own some of?

BARBARA KRUMSIEK:  Well, I’d have to say first of all I would want to know your timeframe, but if you told me it was like three to five years…

CONSUELO MACK: Long term, yes.

BARBARA KRUMSIEK:  Okay, it’s long-term. I’d say water. Water is a very, very compelling theme. There are ways to access water investments. There are indices, ETFs, mutual funds that really have focused on the investment opportunity in this space, and then the second one I would say is green bonds. This is new and different, and I think it’s an unrecognized opportunity in the marketplace where we have information content that we think is a positive for the creditworthiness of these issuers, so we think that these are themes that will definitely be positive performers.

CONSUELO MACK: One of the things that’s happening now in the mutual fund space is that a lot of investors are moving from actively managed funds into passive index funds. How has that affected you at Calvert, and how has it affected the socially responsible investing space?

BARBARA KRUMSIEK:  I still think there are tremendous opportunities for active management and for stock selection and really what I would say is that investors have moved away from the three-star fund, if I could put it that way, the Morningstar three-star, because they have other options for just beta, no alpha delivery. They have index funds. They have ETFs. There’s a great role for four and five-star funds for true value added in the investment space, so I think the bar’s been raised for sustainable investors as it has for all investors to be really good stock selection, sector selectors and to really deliver that extra value, and actually I think in the sustainable investing space, as leaders in this space, there are more opportunities in this space than in the broad investment world. Looking at it through the lens of stability, it’s future thinking and value added.

CONSUELO MACK: Barbara, it’s so great to have you here from Calvert Investments. Thanks so much for joining us.

BARBARA KRUMSIEK:  Thank you, Consuelo. Thank you.

 

CONSUELO MACK: At the close of every WealthTrack, we try to give you one suggestion to help you build and protect your wealth over the long term. This week’s Action Point is: Consider applying your values to your investments. As we just learned, there are now numerous opportunities to invest in companies, indexes and funds that consider various environmental, social, and governance issues. More than half of S&P 500 companies now publish sustainability reports, available to read on their websites.

 

Of the 1,000 largest companies in the U.S. found in the Dow Jones Total Market Index, Calvert has found 708 that meet its seven ESG criteria, the most ever. And as we just reported there are nearly 1000 funds that consider ESG factors in their investment approach. So happy hunting!

 

Next week we will sit down with two Morningstar veterans. Christine Benz and Russ Kinnel will join us with the latest trends in mutual funds plus their favorite and least favorite fund names. Don’t forget to go to our website to see past shows and also new interviews and research in our Extra feature. And stay connected with us through Facebook and Twitter. In the meantime, have a great weekend and make the week ahead a profitable and a productive one.


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