To Divest or Not to Divest. That is the (new) Question.

With apologies to William Shakespeare, investors are increasingly asking that question that should be never raised at cocktail parties : 

     "Should I invest in companies that I know are wrecking the planet?"

In simpler times, "serious investors" didn't worry with the social aspects of investing in tobacco or alcohol or defense contractors. Our pragmatism stated that legal products were acceptable investments in a free society.   

That was prior to our knowledge of climate science... before the flooding of Pacific islands and Alaskan coastal towns... and well in advance of breaching 400ppm of CO2 in the atmosphere -- a level not seen in the totality of human history...  That was before we learned that the publicly traded energy companies own enough of the stuff in the ground to literally cook the planet in its own juices.  

This one is harder to ignore. 

So, true to form, college students are leading the charge, as they did in the mid-1980's -- pressuring the big college endowments to divest from companies doing business with a regime that perpetuated the now infamous apartheid system of discrimination.  Their little stunt turned into shareholder resolutions and ultimately changed history. 

The kids are getting some traction again.  Ten US cities have pledged to divest their modest sums invested in fossil fuel companies. (The real test will be when their massive public employee pension plans are confronted with the same lobbying.)  Brown University's investment committee just recommended divestment from all coal companies. Other smaller schools have taken more aggressive steps toward full divestiture.  Individual investors are taking notice. 

Over the past few months, we at Boardwalk Capital have been struggling with this conundrum. Clearly, the current path is unsustainable.  But how would divestment impact performance? And would divestment have any real impact on these companies or the planet?  After all, these companies won't really feel the pain of our selling these shares. The real pressure would come from using less of their products. 

In the end, two arguments did sway our thinking: Risk and Reputation.

The risk element is real. Were climate/energy policies to change over time to ensure that most of these reserves remain in the ground, then upwards of 60 - 70% of these companies' market value would be impaired.  Since oil, gas and other energy firms account for about 15% of the world's stock market value, this could be a massive hit to savings, pension plans and other investment pools. This is serious "fiduciary duty" stuff, and boards would be wise to consider the issue. If nothing else, market investors may demand a discount to account for increasing regulatory risk (putting downward pressure on share prices.)

Reputation is another issue. Oil and gas companies have carefully cultivated their corporate reputations. Despite spills, disasters and explosions, they remain decent corporate citizens in the eyes of the public. Should divestiture programs take on an "apartheid" flavor, the valuations accorded to these firms could be decreased. "Rogue industry" status seldom carries a P/E premium. 

With these risks in mind, and the societal costs clearly before us, Boardwalk Capital undertook a research project to determine the performance impact of a zero fossil fuels portfolio. In this exercise, we proportionately increased other economically sensitive sectors to account  for the missing "beta". The results were surprising -- no performance penalty was evident and volatility was only modestly higher. 

So, investors then need to ask a different question: If past performance is similar, and certain specific risks are reduced, what's holding you back?

What do you think?  How should investors attack this monumental challenge?  

And what if there were a performance penalty? How much is "too much" to pay for a livable planet?

Finally! A 401k plan with social impact investments

401k plans are the yeomen of the investment world, doing hard work behind the scenes with little fanfare or notice. Of course, in some cases, these workhorses are neglected or are poorly utilized. Sparsely maintained and improperly allocated, their strength is wasted as they toil in silence. 

In the best circumstances, they are practically invisible, tax-deferred and dull wealth builders. No one gets excited about their 401k. Even the best mix of American Funds can hardly get the blood pumping...  Unless something is wrong, of course. 

And much is wrong...  Besides undersaving, low participation, misallocated money and excessive costs, many plan participants also get no advice whatsoever on what to do with their money.  And now, even what appeared to be right (the mutual funds themselves) appear to be wrong. 

Recently, plan participants have begun to  scrutinize the holdings of their 401k mutual funds. Finding them "loaded to the gills" with the likes of BP, Halliburton, Wal-Mart and Exxon-Mobil, they are requesting more " responsible" options for their retirement assets. Plan sponsors (the employers) are finding decent performance among the SRI fund crowd and are increasingly including them in their plans. And so, the path is being paved for sustainable 401k's to accompany the newfound sustainability goals of corporate America. 

It's clear that investors increasingly care about the "footprint" of their investments. This is a big trend. In fact, JPMorgan believes that so-called "impact investments" (profit seeking enterprises, but with a positive social benefit) will eventually be a $1 trillion asset class. 

Unfortunately, "social impact" funds have been off limits to retirement plans. Their long term, illiquid nature and short track records frankly make them unsuitable for investment plans that need a high degree of credibility. 

But what if investors could have the same "sustainable" mutual funds in their 401k's and participate in social impact partnerships?  Would this be the best of both worlds?

Boardwalk Capital, the South's only Certified B Corporation investment advisor, has designed a 401k program that includes a suite of both sustainable and conventional funds while simultaneously creating a "social impact charitable foundation" to invest in impact partnerships. The foundation is funded with 20% of the firm's profits, allowing the firm's clients to participate in the "impact" aspect of these investments without putting capital at risk. 

All plan participants are regularly informed of the foundation's investments and their social impact. They even get to weigh in on the selection of the specific investments. Yet their fees are no higher than those of conventional plans. 

Revolutionary?  Maybe. 

Inspiring? We hope so. 

Fun?  Darned right!

One of the Best Steve Jobs Stories: Gorilla Glass

This excerpt from Jonathan Koomey's new book "Cold Cash, Cool Climate: Science-based Advice for Ecological Entrepreneurs" courtesy of CSRWire.com

Inventing the Future:  There are many examples of the power of this technique, but one of my favorites is in the recently released biography of the late Steve Jobs.

In the 1960s, Corning Glass had developed a very durable type of glass they called "gorilla glass", because it was so tough. They had stopped making it, but in 2005 the CEO of Corning (Wendell Weeks) explained the material to Jobs, who immediately wanted to use gorilla glass for the first iPhone.

"[Jobs] said he wanted as much gorilla glass as Corning could make within six months.'We don't have the capacity,' Weeks replied. 'None of our plants make the glass now.'

'Don't be afraid,' Jobs replied.

Investing for Foundations: Mission or Purpose

This article is excerpted from http://www.boardwalkcm.com.
B. Scott Sadler, CFA -- President, Boardwalk Capital Management

Charitable organizations are in a unique position among investment entities; being able to enhance the public good though grants that are consistent with their charitable "mission". And while a foundation's mission is often narrowly defined (arts, health, environment, education, etc.), the purpose of every foundation is arguably the same:

"A charitable purpose... is for the public benefit."                                                            Charity Commission Website 2011)

With this broader definition, how does a foundation's purpose factor in to its investment decisions? There are bigger issues at work here than many recognize.

Never have foundations had more choices when it comes to investments that provide societal benefit. Even choosing between two large cap companies in the same industry can have vastly different environmental and social impacts. So, where does an "investment" end and a "grant" begin?

Better yet, why must one even choose to define such a question at all, when both can further the organization's purpose and mission?

"Harmonizing a charity's giving and financial investing best serves the charity's public benefit purpose.   Separating the two poses a false dichotomy. As investing and giving become more seamless, value is added." Stephen Viederman, former president of the Jessie Smith Noyes Foundation

Climate Action May Impact Dividend Growth

B. Scott Sadler, CFA -- President, Boardwalk Capital Management

Out-of-control firestorms in Colorado and 100-degree heat index in the nation's capital served as an apt backdrop for an important court ruling on climate risk... And an important marker for investors that their world is changing in ways they may not yet understand.

Earlier this week, the U.S. Court of Appeals for the District of Columbia found that the EPA's interpretation of the Clean Air Act to regulate carbon dioxide regulations is "unambiguously correct." The three-judge panel unanimously agreed with the Environmental Protection Agency's finding that carbon dioxide is a public danger.

According to David Doniger of the Natural Resources Defense Council, "These rulings clear the way for EPA to keep moving forward under the Clean Air Act to limit carbon pollution from motor vehicles, new power plants, and other big industrial sources."

Three Characteristics of Responsible Corporate Citizens

This post authored by Daniel Baylis, Director of Content for N/A (the actual name). It appears courtesy of FastCompany.com.

To be "good" in the past meant a variety of things. Perhaps a company's product made people's lives easier. Or maybe they provided jobs in economically challenging times. But chances are the environmental effects of manufacturing were never considered, and overseas production was a financially intelligent decision free from ethical implications. Big businesses and marketing agencies were focused on selling the American Dream. Problematic environmental and social consequences hadn't yet come on the radar.

In the 1970s, a new marketing movement was born. It was called "cause marketing" and it matched for-profit businesses with charitable endeavors. Over the next few decades, the measure of doing good was how much your foundation gave to cancer, AIDS, dolphins, or any other topical issue. Cause marketing had its tangible benefits, but would prove to be trendy and lacking actual commitment.

Today there is an increased consumer value in supporting businesses that don't simply do well, but that do good. Cultural values are shifting, and this sea change is catalyzing corporations to revisit the choices they are making. And this will continue. But we are far from a world where corporations are making choices based upon the triple-bottom line: profits, people, and planet.

Managing the Unmeasurable -- Where are My Risks?

B. Scott Sadler, CFA -- President, Boardwalk Capital Management

Investors for decades have equated risk with volatility. But as we learned in the economic crisis of 2008-09, unseen and external factors can wreak havoc on portfolios. 


So, what do we investors do with our newfound concern over risk? 


If the past is any guide, we dutifully build our concern over those past risks into our portfolio thoughts and allocations (knowing full well that the past seldom repeats itself in exactly the same way...)

THAT is a recipe for failure.

So, what risks are we missing?  What actions should we be taking now to protect from those risks?

There is a new school of thought called Integrated Risk analysis that refuses to ignore risks just because we can't quantify them.


Take ecological risk:  We know that society is consuming more of the earth's resources than it can replenish.  Our activities are even inhibiting the planet's ability to produce at the earlier rate and same cost.  And we are painfully learning that the available quantities of potable water and arable land are insufficient to support the growth forecasts that underpin our valuations.

Something in this equation is incorrect -- either valuations or growth -- and as fiduciaries, we have a responsibility to manage this risk.