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How filthy is your 401(k)?

How Utahns' Retirement Dollars Profit From Genocide, Terrorism and Environmental Disasters.


Jeff Cline hangs an original Jefferson Airplane poster behind his desk at Responsible Asset Management in Salt Lake City. Though he started his financial career in the go-go stock market era of the 1980s, he has lasting sympathy for the idealism of the 1960s. “It keeps me grounded,” the investment adviser says of the poster. “It’s very easy to stray. Money is a strong pull.”

Money can pull otherwise kind, humanitarian Utahns to invest in companies whose profits come by way of polluting the planet, ignoring human rights, or indirectly supporting terrorism. Those who believe alcohol, tobacco or pornography are major social ills may be surprised to find they are profiting from investments in companies that make those products.

About 40 percent of Cline’s business is helping clients find "socially responsible investments" (SRI) that allow clients to invest in companies which, through their practices or products, are in line with the investor’s ideals. The other 60 percent of Cline´s clients follow the traditional approach of maximum investment returns with minimal risks.

Cline doesn’t push or urge traditional investors to make the switch, but he’s excited when they want to.

“My biggest joy is finding somebody who has no clue that they can invest like this,” Cline says. “They’re writing checks to GreenPeace, but they don’t realize they can literally support their conscience by investing their money.”

The market for those types of investments is growing, Cline says, albeit slower in Utah than other places. He couldn’t sustain his business in Utah if he didn’t also offer more traditional investment advice, he says.

That may change, however, as perhaps the most persuasive argument against investing with one’s conscience—that investment returns are lower—is beginning to be undermined. “SRI has now proven itself equal to if not stronger than traditional investing,” he says.

Since 1990, an index of SRI mutual funds called the KLD Domini 400 has outperformed the Standard & Poors 500 index, a collection of 500 large-cap stocks frequently traded in the United States. The value of Domini grew 10.83 percent since that time, while the S&P grew 10.33 percent.

So, it raises the question: Why isn’t everyone investing this way? Utah Retirement System executive director Robert Newman offers plenty of reasons. He’s batted away multiple attempts and suggestions by legislators to mix financial and social policy in the 25 years he’s worked at URS.

Newman´s opposition to SRI in all its forms may sometimes appear callous—lawmakers have sought SRI-like solutions to genocide in Darfur and state-sponsored terror in Iran—but he maintains he’s merely operating as the laws instruct him to do.

“We’re not experts in social policy,” he said to a legislative committee last year, voicing the objection to SRI for traditional investment advisers. “We don’t want to appear cold and heartless to social issues. However, we believe there are other ways to make social statements. We believe that keeping social policy separate from investment policy is the right standard.”

And so do a majority of Utah lawmakers. But one lawmakers hopes to change that. For the third time in three years, Rep. Julie Fisher, R-Fruit Heights, will submit a bill in the 2010 Legislature that would instruct the URS to minimize investment in those companies.

As world leaders consider how best to deter Iran from obtaining nuclear weapons, many are considering economic sanctions. Such actions could affect the retirement plans for Utah state employees because the URS—a set of trust funds for 181,000 of Utah’s current and former public employees—has approximately $55 million invested in foreign companies doing business in Iran’s petroleum sector. (It’s already illegal for U.S. companies to do business in Iran.)

Utahns are sending their sons and daughters to fight wars in Iraq and Afghanistan, but are investing some of their dollars in the opposing side. “We should not be supporting the economy of a country that is willing to take their dollars to perpetuate terrorism,” Fisher says.

Not to worry, says Utah Retirement System´s Newman. If immoral or irresponsible corporate behavior might devalue an investment—like sanctions against Iran could—the system already responds. “If [fund managers] see that a particular position a company is taking is going to make an impact on share value, they are going to make a buy or sell decision based on that,” he says.

But that’s not good enough for Fisher, who wants Utah to join 19 other states who have installed divestment policies regarding Iran. Worrying about questionable corporate behavior only if it could become damaging to the stock value is exactly the philosophy that socially responsible investments reject.

Growing Movement
In recent years, the SRI movement has grown. Socially responsible investors owned roughly $2.7 trillion%uFFFD(pdf) in global assets in 2007, according to Social Investment Forum, up from $639 billion in 1995. It’s hard to know how large the movement is today after the stock-market crash of 2008, but about 300 mutual funds now use various responsibility “screens” to divest from companies deemed unworthy by the fund managers. Some workplaces offer socially responsible mutual funds for their employees’ 401(k)s.

The types of socially responsible investors vary widely, as do their values. Some SRI mutual funds screen alcohol, tobacco, pornography or gambling stocks only. Others focus on the environment, human rights or even animal rights. Some cater specifically to Muslim, Jewish or Catholic investors, according to the dictates of those religions.

Strategies differ as well. Some SRI advocates believe investments and moral values should align, and irresponsible companies should be removed from one’s portfolio. Rather than divest, some funds and investors with adequate financial leverage urge—sometimes force—corporations to change policies through proxy voting at shareholder meetings. Others keep to a strict regimen of community investing, not unlike "buy local" philosophies.

Across the spectrums of moral values, size and strategies, the unifying theme among SRI advocates is that finances and social values should mix. SRI is an opportunity—some say obligation—to use investment dollars to make a better world. Cline says SRI is not some hippy-dippy socialist scheme but a way to insert morality into the globe’s dominant economic system: “Capitalism is a tool. Now, how do you want to use that tool?” Do-it-yourself SRI is relatively easy for investors with stock invested in individual corporations, or “direct holdings.” Reading news and monitoring policies of one or a few companies is manageable. One false move by the company, and the investor can liquidate his or her stock within minutes using online stock-trading Websites.

But most Americans with investments have a 401(k), 403(b) or an IRA—options that rely on mutual funds, which reduce risk through diversification of investments. Mutual funds often invest in hundreds of companies and sometimes even other mutual funds, which themselves are invested in hundreds of companies. Researching each company in a mutual fund is a full-time job.

That’s where groups like Calvert Investments come in. Calvert employs researchers who assess not only traditional metrics of stock value—price-to-earnings ratio, for example—but also the social impacts of various companies, including the companies commitment to gender equality, rights of indigenous peoples and environmental sustainability.

Calvert’s first act of SRI came in 1982, when it became the first American mutual fund to divest from South Africa because of apartheid. The apartheid divestment was a seminal moment in the history of contemporary SRI. However, responsible investing dates back at least to the Quakers, who forbade members from profiting from the slave trade in the 1600s.

Using investment dollars to further social change was also promoted by Martin Luther King Jr.