KLD Research

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.]

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2010 Proxy Season: Amid Setbacks for Net Neutrality, Open MIC Proposals Still Pending

So far, proponents have been unable to get a 2010 shareholder campaign going on issues involving "net neutrality"—an umbrella term describing Internet service providers' control over access to the World Wide Web.

As shown by the high-level dispute over Google’s presence in China, corporate media practices can have major diplomatic and economic consequences. Indeed, net neutrality advocates include President Obama and Secretary of State Clinton.

But even as leaders proclaim their support for net neutrality overseas, SEC regulators have declined to allow neutrality-related shareholder proposals in the US. Also, a panel of US Court of Appeals judges has ruled that the FCC overstepped its authority in 2008, when it fined Comcast for slowing Web traffic for some users.

A previous ESG Insight article addressed net neutrality, among other 2010 proxy campaigns; this piece provides more detail on a still-pending proposal from Open MIC, the Open Media and Information Companies Initiative.

According to its mission, Open MIC “seeks to use private sector and capital market mechanisms to influence corporate media management policies.” In addition to net neutrality, the group also seeks greater access to broadband data services and better reporting from media and telecom firms on their security, censorship and information access practices.

Investors should note that the government’s position on net neutrality is far from settled.

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Progress & Quackery: Lessons for Today from the Progressive Era

The Progressive Era (1895-1920) is the American historical reference point for most looking at issues of corporate accountability. Its name suggests gradual, conservative change. In fact, the Progressive Era saw changes that were anything but gradual across our social and political systems.

To grasp the Progressive Era’s scope, consider Louis Brandeis, the man most lawyers associate with the time.

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The Impact of ESG Integration: A Roundup of Research on Risk and Returns

On March 24, Responsible Investor reported on a new study of how ESG integration affects portfolio risk and returns. Risklab, a unit of Allianz Global Investors, found “a high probability that companies that don’t manage ESG issues will be more volatile,” in the words of RI’s Hugh Wheelan. The Risklab study, “ESG Risk Factors in a Portfolio Context,” explains the motivation behind its methodology:

“Strategic Asset Allocation (SAA) has been described as the most important factor driving long-term portfolio returns.  Estimates conclude it accounts for up to 90% of portfolio risks, outweighing market timing and stock selection in importance. Yet…little has been researched on the link between ESG and the risk/return profile of an entire portfolio.”

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Issues for 2010 Proxy Season: SEC Guidance on Corporate Climate Risk Disclosure

The Securities and Exchange Commission’s decision to ratchet up corporate disclosure on climate change comes at the right time. The SEC last issued interpretative guidance on environmental disclosure 25 years ago, and the new document comes in time for the 2010 proxy and annual report season.

The Commission took pains to say it was not passing judgment on whether the climate is changing. But it did say companies must meet investors’ demand for carbon emissions and other climate risk data—and that such disclosures may no longer be considered voluntary. 

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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. 

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More Risk-Averse US Businesses Headquartered in Regions with More Churches: Research in Miller-McCune Magazine

A broad study of publicly-traded US corporations links the strong presence of churches in corporate headquarters locales with an aversion to financial risk-taking and a focus on slow, steady growth.

Miller-McCune, the invaluable magazine on research, reports in detail on a study by Giles Hilary and Kai Wai Hui of the Hong Kong University of Science & Technology, “The Influence of Corporate Culture on Economic Behavior: Does Religion Matter in Corporate Decision Making in America?” which appeared in the September 2009 edition of the Journal of Financial Economics.

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Top ESG Issues for 2010 Proxy Season: Climate Change, Toxics and the Impact of Natural Gas 'Fracking' on the Water Supply

[Ed. Note: In the March 5th issue of Risk & Governance Weekly, RiskMetrics analyst Carolyn Mathiasen surveyed this season’s environment-related proxy proposals. While much of the information in that report is available only to RiskMetrics clients, Carolyn and R&GW Editor Ted Allen graciously agreed to share an edited version with ESG Insight readers. Learn more about the 2010 proxy season at the Proxy Season Resource Center.]

Environmental questions are receiving a lot of attention from shareholders during the spring US proxy season, including 39 resolutions about global climate change. Other prominent shareholder concerns include the impact of hydraulic fracturing, a method of extracting natural gas that may contaminate major US aquifers; the toxicity of common consumer goods; and the quality of corporate reporting on environmental, social and governance (ESG) issues.

Investors should note that the SEC has been generally supportive of 2010 resolutions on these ESG topics, which was not always the case in years past. Also notable is that some companies are resisting an AFL-CIO climate-related resolution because, they argue, it is too broad in its demands.

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ESG 'Active Owners,' Like Norway, Have Better Control of Investment Horizons

Responsible Investor has reported that Norway’s sovereign wealth fund is stepping up its engagement with the companies whose shares it owns. In some cases, Norges Bank’s Global Pension Fund will opt for “active ownership” of a company that violates its ethical norms, rather than avoiding the stock entirely. Engagement “might reduce the risk of continued violations of ethical norms better than exclusion, which leaves the fund with no influence once shares are sold,” wrote RI’s Hugh Wheelan.

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Too Much Information on Publicly-Traded Corporations?

US disclosure-based regulation ... suffers from two critical failings. First, it lacks coherence in that shareholder rights are presently too weak to compensate for the hands-off regulatory approach. Second, disclosure has been deployed excessively as a regulatory tool, resulting in inundation of information.¹

So wrote Simon Wong, managing director at Governance for Owners and Adjunct Professor of Law, Northwestern University School of Law, in the Financial Times on Feb. 28.

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