2017 Social Impact Report

Corporate Engagements

Natural Investments is involved in a variety of efforts with our industry colleagues that facilitate positive economic, social, and environmental change, including shareholder engagement with companies and public policy advocacy. Some of our efforts in 2017 include:

We signed a letter to the dozen major banks, including Wells Fargo and Citibank, that are financing the Dakota Access Pipeline, urging them to avoid legal liabilities and financial and reputational risks associated with financing the controversial project—and to advocate publicly for the rerouting of the pipeline away from tribal land.

We signed a global investor statement to leading consumer and agriculture companies asking them to adopt zero—deforestation policies for sourcing key agricultural commodities such as palm oil, soy, beef, paper, and lumber. Deforestation in Latin America, which is largely caused by commercial agriculture, is a leading contributor to climate change, and the recent Soy Moratorium in Brazil proves that the rainforest can be protected while expanding agricultural production.

We signed a letter to sixty of the world’s largest banks calling for more robust and relevant climate-related disclosure to be supplied to investors on four key areas: climate-relevant strategy and implementation, climate-related risk assessments and management, low-carbon banking products and services, and banks’ public policy engagements and collaboration with other actors on climate change. Banks have an essential role to play in ensuring that we meet the Paris Climate Agreement goal of “making finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development.”

We supported shareholder engagements with three top carpet manufacturers—Mohawk, Shaw, and Interface—to encourage them to develop plans for sustainable carpeting redesign to make it more recyclable, to use higher levels of appropriate recycled materials, to develop national recycling goals, to help develop end markets for discarded carpet, and to take at least shared financial responsibility to implement these actions.

We signed a letter to major motion picture studios urging them to eliminate tobacco depictions in youth-rated movies. We believe this is warranted to protect the company’s reputation and consumer base, to avoid legal liabilities, and to eliminate the reputational and potential financial risks caused by the company being associated with this public health issue.

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NI Newsletter Spring 2018

Newsletter Contents

Supporting the Youth-Led Movement for Gun Control by Sylvia Panek

The Rule of Law, Wealth Inequality, and Our Response by Joel Koerner

Post-Disaster Lessons for Resilient Investors by Christopher Peck

Fighting Deregulation with Community Investment by Evan Quirk-Garvan

Your Money: Smart Strategy and Positive Impact by Eric Smith

What’s Up on Wall Street: Q2 2018 by Scott Secrest

Download the NI Spring 2018 newsletter (PDF)

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Post-Disaster Lessons for Resilient Investors

My family and I survived the Northern California firestorm of 2017. We were incredibly fortunate; unlike many our friends and residents in our area, we did not lose our home or livelihood. At the peak moment of fear, the fire came within 3,400 feet of our home. I spent hours wetting the roof, talking with panicked neighbors, and gauging the wind and the smoke. We got ready to evacuate by packing the car, letting our chickens loose, and making peace with the thought of starting over. Thankfully, some can-do neighbors with tractors plowed down the fire front, and we were spared.

Months later, our lives returned to normal. But as a planner, I am surprised at how unprepared we were when disaster arrived. We had planned for this. We’d held meetings with family and neighbors, checked on each other’s stores of water, food, and supplies, and located the water and gas shut-off valves for each home. We had back-up phone numbers of relatives, battery packs for our phones, and emergency radios. But still, we were missing critical elements. I share these insights now, with the hope that they will encourage others to prepare well in advance of fire season.

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Your Money: Smart Strategy and Positive Impact

“I want my money to have a positive impact in the world but my dad (uncle, mom, broker) said that was a stupid idea. Is it?”

That depends. If what you mean by “a positive impact in the world” is that your broker simply screens out investments in certain companies or industries, well, sorry, yes, that on its own might be a bad idea. That approach could damage a portfolio.

If you’re serious about getting your money to make a real difference for people and the planet by investing in all kinds of good things with smarter financial analyses and strategies, yes, we believe this is a really good idea.

“Ok, but how can I do all that?”

Natural Investments maintains stringent and thoroughly researched investment due diligence standards and procedures. No system is perfect, but we have developed a strong process over the last few decades of work. Here are some of the pillars of our investment strategy:

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Supporting the Youth-Led Movement for Gun Control

For those of us who remember Columbine, the Parkland massacre and its immediate aftermath evoked a colossal feeling of failure. How could it be that two decades and dozens of mass shootings later, nothing had changed?

But as the days turned to weeks, a steely resolve grew within the Parkland students’ collective trauma. They joined forces with Black and Latino youth organizers across the country that have been laboring for decades— ignored by the mainstream media—to stop the scourge of daily gun violence and police shootings that have ravaged their communities. Together, these young people are growing the resistance movement that our generation did not. Serious gun control discussions are finally on the table in America, thanks to children who are tired of executing active shooter drills in closets or taking different routes home to avoid stray bullets.

As socially responsible investment professionals, not only are we deeply inspired; we have a range of tactics to support these young activists in their quest for commonsense gun control laws—many of which we have been using for years already.

At Natural Investments, none of our client funds hold stock in companies with assault or military weapons. Our Heart Rating process asks mutual funds about their weapons and defense holdings as well. Complete purification of the portfolio is, admittedly, difficult. In fact, Bloomberg published two articles—one for and the other against the effectiveness of divestment—within two days of each other.

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What’s Up on Wall Street: Q2 2018

In an exceptionally volatile quarter for investors, markets ended lower, with US large company stocks down 0.8%, US small company stocks lower by 0.1%, foreign stocks down 1.7%, and domestic bonds lower by 1.5%.

The stock market swooned in February as traders showed alarm about rising US interest rates. The market sell-off was related to the long-anticipated rise—and possible accelerating future rises—in US interest rates (considered a negative for stocks and bonds) as well as concerns that inflation may be brewing. It may not be just coincidence that this reaction happened in the wake of the recent federal tax cuts, which analysts say will stimulate—unnecessarily say some—the US economy, leading to things such as higher interest rates and inflation.

Tax cuts, along with stepped-up government spending (in March Congress passed a $1.3 trillion budget), may serve to overheat the US economy in coming months, though it is an open question as to whether the tax cuts will actually spur economic growth. Following the passage of the tax bill, there was a series of well-publicized employee bonus and capital investment announcements. (Keep in mind bonuses are one-time and not the same as wage increases.) These were meant to show  that big businesses were sharing the bounty of the tax cuts with workers. Since then, however, studies and polls have shown that business investment has not increased as a result of the tax cut—and neither have wages.

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Shareholder Value vs. Stakeholder Value

Shareholder supremacy has roots in a legal dispute between Ford and Dodge.

The term shareholder value is often used as a way to describe the theory that a company is successful if its shareholders are enriched. In and of itself, that theory seems perfectly sensible to most investors and not inherently controversial. Socially responsible investors, however, take issue with the way today’s corporate executives have distorted shareholder value into shareholder supremacy, which they use to justify the pursuit of short-term earnings at all costs—even if it means sacrificing long-term growth, environmental responsibility, and human rights.  

When executive compensation is directly tied to shareholder value, the conflicts become obviously apparent, as was seen in the case of Enron’s spectacular collapse and the subsequent discovery that the company had engaged in years of fraud to boost shareholder value and short-term profits. “Very few people haven’t heard of Enron, but very few people understand what structurally permitted it to take place,” said Dennis Vegas, a former Enron employee who joined labor leaders and progressive activists in lobbying for greater control by workers over their own retirement investments, in a 2002 interview with Mother Jones the year after the company filed for bankruptcy.  When asked whether he considered himself an activist, he said, “I don’t know if that label applies. If that’s being socially responsible, I’ll take that one.”

Corporate executives often justify ethically questionable decision-making with the adage that corporations are legally bound to maximize profits to shareholders. Yet the predominant legal precedent supporting the primacy of shareholder value is a single line in the dicta of a 100-year-old court ruling that pertained to a dispute in a privately held company, according to Lynn Stout, professor of corporate and business law at Cornell and author of The Shareholder Value Myth: How Putting Shareholders First Harms Investors, Corporations and the Public. The dispute arose when Henry Ford learned that Horace and John Dodge, who owned Ford Motor Co. stock, wanted to start a new company to rival Ford. Ford responded by drastically reducing dividends being paid out, instead lowering prices on vehicles and increasing employee wages. The Dodge brothers sued, asserting that the dividends should be paid out. The Michigan Supreme Court split the difference, ruling in favor of increased dividends, but they were not nearly as high as the Dodge brothers had hoped. Henry Ford was still able to pay his employees higher wages and decrease the price of vehicles.

The dicta of the court’s decision said, “A business corporation is organized and carried on primarily for the profit of the stockholders.” The judges who wrote the dicta could hardly have known that today’s publicly held, transnational corporations would lean so heavily on one word“primarily”—to justify so much unethical conduct. These days, a common feature of a company’s incorporation document is the statement that a corporation’s purpose is to do “anything lawful.” The statement leaves the option open for a board to pursue what they see fit at the moment—thereby creating leeway for ethical relativism in perpetuityinstead of being held to stringent policy on what should or should not be allowed in an ever-changing world.

As socially responsible investment advisors, we see an alternative to the primacy of shareholder value: stakeholder value. We interpret this legal precedent to mean that corporations have the right to make a wide variety of choices, including those that negatively affect shareholder value—and that the qualifier of “primarily” leaves open many options. Stakeholder value takes a long-term, holistic view of a company’s successone  that considers stakeholders other than just investors: employees, customers, the state, and the broader community. According to our view, even nature should be considered a stakeholder, since biodiversity, clean water, and healthy soils are all required for business to continue, let alone thrive.

Today we are seeing many positive examples of stakeholder values at work, whether they are B-Corporations (including Natural Investments), or traditionally structured corporations choosing to take a stand. There are companies offering living wages to all employees and demanding that its suppliers end human exploitation in their supply chains. Others are building LEED certified structures, recycling their waste in innovative ways, providing employees with childcare, and working on solutions to other pressing issues. One example that recently crossed my desk is Panasonic, a company that is transitioning to renewable energy through a four-part strategy: Saving (efficiency), Creating (solar and fuel cells), Managing (grid maximization), and Storing (Tesla is using Panasonic batteries in their latest, and most affordable so far, vehicle). Although Panasonic is not a B-Corporation,  its pursuit of renewable energy exemplifies the idea of a “company as a public entity.”

As fossil fuels become more resource intensive to extractand less desirable given their carbon tollrenewable technologies such as those being implemented by Panasonic will, in the long run, provide plenty of shareholder and stakeholder value. To access these long-term and sustainable returns, however, the company must invest resources that could be used to maximize short-term shareholder returns into research and development.

By thinking more broadly, emphasizing long-term benefits for stakeholders instead of short-term profits for shareholders, we can encourage better corporate practices and help create a future where corporate values alignment isn’t just a pipe dream.

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Rethinking the Purpose of Investing

In our combined decades of work as investment advisors, we’ve had the privilege of sitting down and talking deeply with hundreds of clients about what matters most to them. One thing that kept coming up in these conversations is that, although they liked our “invest with your values” approach, they didn’t like thinking about investing very much. We, on the other hand, think that investing is really cool, a focal activity where people make decisions that change their lives and the world. Are we just geeks, or do we see something that others don’t?

Eventually, we realized that most people have a rather narrow image in their minds about what “investing” really means. Do an image search on the word, and you’ll see lots of coins and dollar bills, graphs and charts, bullion bars and Wall Street suits. What generally comes to mind is that investing is done by those who have extra money, in order to turn this into even more money, using the methods promoted by Wall Street. While most of us are interested in becoming more prosperous, this concept of investing leaves many people out of the game, and even for those who do invest this way, it is a cold and abstract prescription that fails to touch on what gives deeper meaning to our lives.

We say that it’s time for a new approach. Rather than wrinkling up one’s nose and doing “investing” the way we’ve been taught, we’re asking people to take a step back and really think about what a powerful and creative role this activity can play in our lives. This begins with expanding our notion about what investing truly is. Try this on for size: investing is something that we all do by directing our time, attention, energy, or money, in ways that move us toward our future dreams, using a diverse range of strategies.

Let’s start with dismissing the popular notion that investing is an activity that is only available to those with discretionary capital to play with. The fact is, neither the investment, nor the return, must necessarily be in the form of money. Financial investments are just one side of the coin; on the flip side is time, our most precious resource. We can and should bring this to the investing table by being thoughtful in the ways we focus our attention or channel our energy. Throughout this book, we’ll look at ways that the choices you make with your time, attention, and energy are as central to your long-term investments as the ways you work with your money.

Next, we rethink the purpose of investing. As the Beatles so joyously pointed out, money can’t buy us love. Still, the single-minded pursuit of most investors is to increase our financial “net worth,” though our real goals in life are much broader than this. Resilient investing recognizes that we are actually interested in cultivating several types of assets: personal (relationships, community, learning, health, spiritual growth), tangible (home, efficient energy systems, local food supplies, a healthy ecosystem around you), and financial (stocks, bonds, savings). By including all of these valued objectives in our resilient investment plan, we have the opportunity to shape virtually all aspects of our lives.

Finally, it’s important to rethink how we pursue those goals. Are the recommendations proffered by traditional investment books, magazines, and financial services firms the one and only valid methodology? Are there other strategies that you can use to diversify and seek out new opportunities that are largely ignored by Wall Street? And in this volatile, uncertain, complex, and ambiguous world, might it be wise to consider the possibility that strict adherence to traditional, buy-and-hold-on-to-your-hats dogma may leave us vulnerable to systemic risks that threaten to send our economy reeling?

We refer to this notion of spreading our wings into more spacious skies “weaning off Wall Street.” It opens our minds to exploring strategies beyond the one that rules today’s herd, with its all too familiar mantra of “show me the money” and creates space to think about what’s important close to home, how to support a sustainable global economy, and thinking in a visionary way about evolutionary investing.

 

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Together We Rise: Reflections on the 2018 Women’s March

 

When I boarded the El on January 20, I felt encouraged by the bits of pink I saw throughout the packed train car. “Please, let us look at least close to the size of last year’s Chicago Women’s March,” I remember thinking. I tempered my hope by reminding myself that the anger over the 2016 election might have subsided—and that many who marched in the unprecedented global display of resistance in 2017 could be burned out after a year-long assault by the new administration.

I met a friend at our appointed spot, Hero Coffee Bar on South Dearborn, and we joined the stream of pink plumage coursing down Michigan Ave. Even if we were only half of the quarter-million demonstrators counted on the frigid Chicago streets last year, it would be enough. The signs and the speeches buoyed me. On this unusually warm, sunlit January day, we chanted and marched, riding an electrifying surge of energy.

The stamina and strength of organized resistance to the destructive policies of the current administration has manifested not just in the streets, but also in a marked rise in interest for women-led investments within the finance world over the last year. We have seen encouraging growth in women-centric investment funds operating in the impact investment field. What’s more exciting is that the trend for more equitable treatment in finance is not only relegated to the US. A recently issued gender equality bond in Australia was 20x oversubscribed upon release.

In the decades leading up to the 2016 election, SRI investors had labored for years on gender parity issues without gaining much traction. Although numerous studies have shown that companies with more equitable gender representation, at the board level and in management, perform better financially, only 2% of venture capital dollars went to women entrepreneurs in 2017.

Natural Investments has long advocated for gender equity and more diverse boards through shareholder dialogue. Indeed, one long-standing and important aspect of the Natural Investments Heart Rating is a company’s diversity and inclusion policy. We have also always believed in the promise of gender-lens investing, based on research showing that investing in women has a 50% greater positive impact on primary drivers of long-term, intergenerational change, as well as the reduction of hunger and poverty.

Although investment that directs capital into women-led enterprises is certainly not new, we are thrilled to see the increase in interest and demand. Natural Investments advisors have developed specialized expertise in mutual funds, notes, and microenterprises in developing countries that bolster female-driven businesses and initiatives. We have also hosted a Women Invested interview series, highlighting professional women in the SRI field championing these causes.

As an SRI professional who rarely marched before the 2016 election, I am still riding high off the energy of the 2018 Women’s March. Whereas I once thought of civic protests as largely symbolic as compared to the more tangible work of socially responsible investing, I now understand that hitting the streets is an important way to motivate ourselves and others to undertake more substantive actions like moving our money, divesting from fossil fuel, and engaging with companies and elected officials to advocate for a sustainable future.

After my day on the streets of Chicago, I returned home after the march feeling tired yet accomplished, and of course, eager to see the numbers. So, how did we do? News outlets reported the next day that Chicago’s turnout saw 300,000 attendees—a 20% increase over the 2017 march in our city and indicative of huge and boisterous rallies across the country. Even more inspiring was the news that more than 20,000 women have contacted Emily’s List about running for political office as of 2017, up from only 920 women who contacted the group in 2016. These are all positive indicators of a new body politic fueled by “sheros” ready to change the world.

 

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The Resilient Investor

What Does Resilience Really Mean? 

Excerpted and adapted from The Resilient Investor, by Hal Brill, Michael Kramer, and Christopher Peck

For the past few years, the term “resilience” has been the buzzword du jour in economics, climate science, leadership, online security, and community planning. Surprisingly, it has managed to span the ideological spectrum even in these partisan times. The Post-Carbon Institute recently re-branded their website as resilience.org, while the World Economic Forum in Davos jumped on the bandwagon by focusing its 2013 conference on “Resilient Dynamism.” If resilience science speaks simultaneously to re-localization activists in their transition towns, as well as the 1% gathered in their enclaves, it’s clearly an idea whose time has come.

 

Let’s take a look at what is meant by resilience and why it has arisen from so many quarters as a concept that is truly emblematic of our times. In Resilience: Why Things Bounce Back, authors Andrew Zolli and Ann Marie Healy frame resilience as “the capacity of a system, enterprise, or a person to maintain its core purpose and integrity in the face of dramatically changed circumstances.” They see resilience as “an essential skill in an age of unforeseeable disruption and volatility.” A unifying and powerful lens, resilience can focus our awareness and actions at all levels—for individuals, businesses, communities, nations, and the entire planet.

Many people become aware of the importance of resilience only after a disaster. Do a search for “Hurricane Sandy & Resilience” and you’ll find numerous articles and conferences convened as decision-makers tried to figure out what we could learn from this super-storm and how we might rebuild in ways that will leave people less vulnerable. But the time to focus on resilience is before disaster strikes; in 2014, President Obama proposed a $1 billion “resilience fund” to help communities protect themselves from climate change impacts such as floods, drought, and wildfires.

Futurists and systems theorists are having a heyday, creating a menagerie of frameworks describing resilience, but it really doesn’t need to be a difficult concept; we see it all around us. Anyone who’s over 40 knows that they’re not as physically resilient as they used to be; injured children recover more quickly than injured grandparents. Healthy ecosystems bounce back from fires or storms better than degraded ecosystems. Technology companies become irrelevant if they fail to respond decisively when circumstances change: perhaps the most striking example is Kodak, once synonymous with the very idea of photography, but left in the dust by the shift to digital imaging.

For those with a strong bent on assuring that we maintain the viability of the biosphere, it’s worth taking a moment to see why resilience is starting to displace sustainability as an organizing concept. Zolli points out that sustainability tries to come up with an “equilibrium point” in which a system stays in balance but this is counter to how many natural and human systems operate. As architect and systems thinker William McDonough wryly asks, “Who simply wants a sustainable marriage?” Resilience does rely on the principles of sustainability (unsustainable investments weaken the capacity of a system to maintain integrity), but it strives for a healthy dynamism rather than stasis.

The lens of resilience makes us more cognizant that for better or worse, we have entered the age of the Anthropocene—a new term for a geological age in which humans have become the dominant factor shaping the world. Natural systems have been damaged to such a degree that we need to be prepared for random, extreme disruptions, according to Zolli and Healy. At the same time, resilience points out that we should be designing our systems, and our lives, so that we do more than survive such disruptions.  We’ll want to “capture the upside,” thriving and growing when exposed to volatility and disorder, while also seizing emerging new opportunities as they come into view.

For some, resilience has a flavor of hunkering down, waiting for disaster to hit, and coming out unscathed. That’s not a very juicy way to live, and it’s not what we mean by resilience. Our goal as investors is to make things better, for ourselves, and for the world. We are using “resilience” in its most flexible and optimistic form, still loyal to the goals of sustainability (providing for the needs of the present without harming the future), and with eyes staying sharp for emerging prospects. Here’s our new and improved definition:

Resilience helps us to thrive by anticipating and preparing for disturbance, improving the capacity to withstand shocks, rebuilding as necessary, and adapting and evolving when possible.

Resilience is a powerful remedy for our uncertain times. It helps us learn to live with the fundamental complexity of modern life, rather than trying to simplify our way out of it in order to make decisions. When the inevitable disruptions do hit the system, resilient investors will have the best possible shock absorbers to minimize being rattled, and be positioned to bounce back even better than before. Our favorite one-liner comes from Harvard business professor Rosabeth Moss Kanter, who wrote, “When surprises are the new normal, resilience is the new skill.”

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