Kate Walsh

Dan DiBartolomeo and Lloyd Kurtz on the KLD400 Social Index: 20 Years of "SRI as a Free Good"

The FTSE KLD 400 Social Index (KLD400) celebrates its 20th anniversary this month. The world’s first benchmark index constructed using environmental, social and governance (ESG) factors, the KLD400 sparked a new era of responsible investing, helping transform the field from a small niche into today’s $6.7 trillion global market. [Source: Eurosif 2007] Since 1990, the KLD400 has outperformed the S&P 500, proving that a portfolio constructed using ESG criteria can, over the long term, deliver competitive risk-adjusted returns.

Dan DiBartolomeo and Lloyd Kurtz, who was one of the original KLD employees apart from the firm's founders, have studied the risk and return characteristics of socially screened portfolios over the past two decades.

Dan and Lloyd spoke to us about the KLD400’s contribution to mainstream investing, how SRI has evolved over the past 20 years, and some of the challenges that remain. [Ed. Note – Biographical info for Dan and Lloyd can be found at the end of this interview.]

Continue reading Dan DiBartolomeo and Lloyd Kurtz on the KLD400 Social Index: 20 Years of "SRI as a Free Good"

ESG Issues for 2010 Proxy Season: Green Century and As You Sow Seek Action on Coal Ash

Earlier this month, Green Century Capital Management and As You Sow filed shareholder resolutions calling for utilities to disclose how they will address the risks associated with coal ash. Boston-based Green Century and As You Sow, an advocacy group, believe that the storage and reuse of coal ash could have broad consequences for both the environment and shareholders.

Coal ash made headlines in 2008, when a storage pond operated by the Tennessee Valley Authority (TVA) spilled 5.4 million cubic yards of the ash into nearby waterways. The EPA has indicated that the spill won’t be contained until 2013, and TVA estimated the resulting costs at $231 million through 2009.

In a press release announcing the shareholder resolution, Emily Stone of Green Century (a KLD Index client) said that the TVA spill shows that existing regulations don’t adequately mitigate ash’s environmental and financial risks. 

Continue reading ESG Issues for 2010 Proxy Season: Green Century and As You Sow Seek Action on Coal Ash

Responsible Investments to be 15% of Global Assets by 2015: New Study by Robeco/Booz & Company

The socially responsible investing (SRI) market is poised to grow dramatically, predict the authors of a new report from Robeco and Booz & Company. According to Responsible Investing: A Paradigm Shift, socially responsible investments will reach $26.5 trillion assets under management (AUM) by 2015–over 15% of the global total.

Responsible Investing Grows Faster than the Overall Market

As of 2007, global SRI AUM was $5 trillion, with $2.7 trillion of that total invested in the United States, according to the Social Investment Forum's 2007 Report on Socially Responsible Investment Trends in the United States. SRI assets increased more than 18% between 2005 and 2007 in the US, while the broader universe of AUM increased less than 3%. Globally, the SRI market has grown at an annual rate of 22% since 2003, while global AUM growth rates have stagnated around 10%.

Growth Factors: Governments, UNPRI, and the Public

Robeco and Booz studied industry projections and also interviewed experts throughout the financial services industry. They found that SRI's growth drivers include growing demand from consumers and investors for corporate responsibility and government efforts to curb greenhouse gas (GHG) emissions. Also, more firms have sought to sign and comply with the UN Principles for Responsible Investment, and pension disclosure regulations in the UK have forced money managers to expand the scope of research on the impacts of their investments.

Some Big Players Still On Sidelines – For Now

SRI has room for even more dramatic growth, partly because many large players haven't actively pursued it yet. According to the report, "The top [SRI] fund managers are not necessarily the [mainstream] market leaders in terms of AUM."

But by 2015, niche players will have to grow considerably to remain competitive as major global players enter into the space. A Paradigm Shift notes that Deutsche Bank already has three funds with $2.8 billion AUM, and BlackRock seeks to increase its SRI holdings to 15% of its total AUM by next year. The report predicts that many more institutions of similar size will begin to take action in the near future.

Growing Market, Shifting Tactics

The authors of the Robeco and Booz report predict that as big new players enter the SRI space, the practice of responsible investment will evolve. The European Sustainable Investment Forum (Eurosif) already segments the market into "Core" and "Broad" SRI:

"Eurosif continues to segment the SRI market with Core SRI estimated at €512 billion and Broad SRI at €2.154 trillion. Core SRI consists of elaborated screening strategies systematically impacting portfolio construction and often implying a values-based approach while Broad SRI partly represents the mainstreaming of SRI and the growing interest of responsible investors, particularly large institutional investors, in this area."

Despite this segmentation, Robeco and Booz believe that the growth of SRI will accelerate: "This trend will significantly reshape the asset management landscape over the next few years…SRI will become mainstream within asset management by 2015."

KLD's Global Climate 100 Index Marks Third Anniversary

July marks the third anniversary of the KLD Global Climate 100 Index (GC100)–the first global index focused on climate change solutions. The success of the GC100, which has outperformed its benchmark (the S&P/Citigroup BMI World) for all three years, is a testament to the strength of its mission and its methodology. (Click here for GC100 performance data.)

The GC100 serves as the basis for a number of investable products, including three mutual funds sponsored by Shinko Investment Trust Management in Japan; a mutual fund from Cominvest Asset Management in Germany; a unit investment trust sponsored by Advisors Asset Management; and several other separate and institutional accounts. Click here for a list of products based on KLD Indexes.

For the GC100, KLD looks for large and small companies that produce and distribute renewable energy like solar and wind power and/or future fuels such as hydrogen and biofuels. Companies committed to developing and applying new technologies to reduce resource consumption and carbon emissions are also candidates.

The GC100 is equal weighted, which means that each constituent accounts for 1 percent of the 100-company index. Each constituent contributes equally to the performance of the index. This gives smaller niche companies more exposure than they would receive in a similar index constructed using market-cap weighting. In that scenario, the weight of each security on the index would be in proportion to its market capitalization.

While the GC100 includes large companies in industries that impact climate change the most, KLD seeks to capture the growth potential and performance of smaller companies as well. An equal weighted index levels the playing field between small- and large-cap companies, rewarding thought and innovation leadership, not just market-cap leadership.

Because the GC100 is equal weighted, it requires more active monitoring than a market-cap weighted index. This presents KLD with unique challenges in maintaining the GC100.

"The GC100's success in raising assets has required that additional scrutiny be placed on the index's liquidity characteristics," said Jed Sturman, manager of the GC100. Equal weighting has a greater impact on liquidity than market-cap weighting, requiring active monitoring of daily trading values for each company on the GC100.

"The liquidity standards that KLD established at the GC100's launch were revised last fall. We made this adjustment to accommodate both the current asset levels of investable products based on the GC100, and the potential for significant future growth," added Sturman.

Despite these challenges, the GC100 has shown that an equal weighted index can provide greater returns, not only in relation to the benchmark, but historically as well. To confirm this, KLD built a hypothetical market-cap weighted index that included GC100 constituents, but represented them in proportion to their market capitalization. The actual equal weight GC100 has returned 57 percent (17.23% annualized) since index launch, as of May, 2008. The same constituents under a market-cap weight would have returned only 39 percent (12.54% annualized) during the same period.

"The GC100's emphasis on innovators, rather than just big players, has paid off for its investors," Sturman said.