15th Anniversary of the NI Social Rating (SM)

By Michael Kramer

This article first appeared in the Fall 2007 issue of the Natural Investing newsletter


This year is a watershed for Natural Investment Services. In addition to our ownership change, we are celebrating the 15th anniversary of the NIS Social RatingSM (The Heart Rating) that Jack Brill developed in 1992 while writing Investing from the Heart. The nation’s only social rating system of SRI mutual funds, it is based on the breadth and depth of social responsibility criteria applied by each fund. The presentation of the Rating, from one heart to five hearts , is similar to the star-rating used by Morningstar®, and investors can use this symbol to distinguish funds that address social, environmental, and governance issues comprehensively from those which address only a few items.

Another exciting “first” is that Citizens Advisers, Inc. (manager of Citizens Funds) became the first company to license the Rating for use in promotional materials. It will soon appear on their website and in advertising! We intend to license the Rating to many SRI funds, and will continue to publish it in every issue of Green Money Journal and the LOHAS Journal, and our website.

Avoidance and Affirmative Screening

Fund social analysis involves a fund’s prospectus and verification with the fund managers on how they apply the screens. The evaluation includes a questionnaire and interviews. Recently, given the changes in the industry and the social priorities of investors, we revamped the Rating criteria.

The Rating includes eight categories of social screens. The original “sin” indus- tries – alcohol, firearms, gambling and tobacco – form one category. Other industries addressed by the Rating include military contractors and nuclear power.

The remaining avoidance screen categories address practices across industries:

  • Environmental criteria: EPA violations, major contributors to global warming (most fossil fuels), and toxic releases and spills;
  • Unnecessary animal testing:
  • Employment issues: EEO and International Labor Organization, including working conditions and child labor;
  • Product safety: unsafe or hazardous products, deceptive marketing and consumer fraud, and offensive images in labeling and marketing;
  • Human rights issues: operations in repressive countries and relocation to avoid U.S. laws; and
  • Corporate governance issues: Board independence and diversity, company disclosure, including political contributions, accounting independence, options expensing policy, regulatory violations or other forms of bribery, fraud, or corruption, and excessive CEO or executive compensation.

NIS weights certain Affirmative Screening practices more heavily in the Rating because these are companies which are creating a more sustainable society. Criteria include:

  • Environmental issues: pollution prevention systems, environmentally- friendly products, renewable energy, sustainability reporting, and cleaner public transportation;
  • Healthy lifestyle products: organics, natural fibers, and holistic medicine and wellness;
  • Employment practices: workplace diversity (gender, culture, and sexual preference), organized labor relations, employee health and safety, and family benefits policies;
  • Products and services which enhance a sustainable quality of life;
  • Human rights: community relations, codes of conduct to address abuses and injustices, signing the CERES principles, and the impact of company activity on the lands and rights of and benefits to indigenous peoples worldwide; and
  • Responsiveness to shareholder concerns.

The combination of Avoidance and Affirmative Screening criteria represents nearly 60% of the total NIS Social RatingSM.

Shareholder Activism

The power of owning shares of a company comes when shareholders choose to use direct action to bringing about changes in corporate behavior and pol- icy with regards to the environment, employment practices and corporate governance. When compiling the NIS Social RatingSM we evaluate each fund’s participation in dialoguing with companies, drafting and supporting share- holder resolutions, and publishing a proxy voting guide and results. The shareholder activism score represents nearly 18% of the total NIS Social RatingSM, which is more than double its percentage in the previous version.

Community Investing

Investments in certified community development financial institutions (CDFIs) are included in the Rating. For equity funds, this may reflect only the nature of the cash position, and extra weighting is given to funds that support:

• Community banks, credit unions, loan funds; and

• Pooled products, including international microfinance programs.

Points are awarded to a lesser degree if funds invest in:

• Pooled CRA products, municipal bonds or projects in low-income communities,

• Federal agency securities or municipal bonds in moderate-income communities;

• Agency bonds and Sallie Mae and SBA loans;

• Conventional loans, collateralized mortgage obligations, and corporate bonds.

The community investing score represents nearly 18% of the total NIS Social RatingSM, more than double the previous version, so it is difficult for a SRI fund to receive five hearts without engaging in community investing in a significant way.

Social Research Capacity

A new Rating category addresses how the funds conduct social research. We look at how funds maintain and implement a written social research policy and whether or not they use dedicated internal resources to analyze a company’s social, environmental, and governance performance. The size of the social research staff and the depth and frequency of their social impact analysis of company holdings comprises the score, and this category represents 6% of the total Rating.

Total Score

The NIS Social RatingSM includes 55 qualifying practices. Each item is scored and the results fall into performance quintiles, with those in the lowest percentile group (0-20%) awarded one heart and those in the highest percentile group (81-100%) receive five hearts. The Rating does not consider financial performance and is not therefore a recommendation to purchase funds. Investors are urged to consult fund literature to review a fund’s performance and specific holdings.

NOTE: In the years since this article was written, the Social Rating has continued to evolve.  The Natural Investments website contains the most up-to-date heart ratings, methodologies, and tips on using the NI Social Rating.

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Jim Cummings

Welcome to my archive of newsletter articles and blog posts. For more information on my service offerings, please go to my advisor webpage.

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