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This is the first in a series of three blog posts [part II, part III] chronicling my economic journey as a leader in the movement for Socially Responsible Investment (now called Sustainable and Responsible Investment) and Triple Bottom Line Business (People, Planet, and Profit) in the 1990s and 2000s.

 

The first blog post presents some of my experiences working with Progressive Asset Management. — James Nixon

Progressive Asset ManagementIn 1987, Peter Camejo joined with some other progressive investment brokers to initiate Progressive Asset Management, the first full service investment broker/dealer specializing in socially responsible investment. I knew Peter from encountering him as a leader in the Movement during the 1960s. I had reconnected with him when he did a series of articles on Berkeley in the 1980s. He invited me to help him with launching Progressive Asset Management.

I decided that I would expand my efforts to learn the craft of business into also learning the craft of capital, so I passed the examination, obtained a Series 7 securities registration, and joined Progressive Asset Management.

Capitalism from the Inside

Studying for the Series 7 exam and going to work in an investment brokerage brought Capitalism alive for me in a way that nothing else had. I found the basic principle both intriguing and a little frightening. If you could accumulate enough money ($75,000 to $100,000 seemed to be the lower limit, but $1 million to $50 million or more was much better), you could get in the game of buying and selling securities (shares of a company, bonds of a company or a public agency, shares of a mutual fund, and such like) and your money (capital) would work for you.

I was struck by the fact that most of this buying and selling took place in what was called the “secondary market,” where owners of securities came together to buy and sell securities at a price pretty much established by what the aggregate of owners were willing to buy and sell for. The price of securities in the secondary market had only a very tangential relationship to the underlying entity that had issued those securities.

With a corporation, for example, the price of its shares in the secondary market was impacted by information about the corporation’s sales, how much money the corporation was making, and what the company’s prospects were, but only to the degree that owners of those shares took that information into consideration when they decided how much to buy or sell the shares for. And, in all these transactions, no money actually went to the underlying corporation. A corporation only got money when it sold its securities in what was called “the primary market” through an initial public offering of stock (the famous IPO) or a subsequent sale of stock actually owned by the company. Much more money exchanged hands in the secondary market than in the primary market. As Capitalism had evolved, the secondary market had become more primary than the primary market.

I was also struck by the seeming fragility of the system of buying and selling. Millions of dollars, even billions of dollars, changed hands through computer transactions and phone calls between brokers, many of whom had never met each other in person. The level of trust underlying these transactions astounded me.

I wound up in charge of network services, investment banking, and social screening. During my 12 years with Progressive Asset Management, we built the first network of socially responsible brokerage offices throughout the U.S. and also I coordinated raising $5 million for the Ecumenical Development Cooperative Society to reinvest in a network of micro-lending institutions around the world.

Social Screening and Financial Performance

The social screening—assessing the environmental, workplace, diversity, safety, community, and other performance of publically traded companies—particularly interested me.

Socially responsible investing really took off following the Anti-Apartheid Divestment Movement. Initially, the social screening of investment portfolios meant finding out if those portfolios contained the securities of companies doing business in South Africa. Later the method was extended to look at companies’ environmental, workplace, and community records. A number of the early socially responsible mutual funds had gotten into trouble with poor financial performance, because they made the un-warranted assumption that good social screening would translate into good financial performance.

We took a different approach and produced a social questionnaire for our clients to establish which social screens were important for them and then used their answers to screen their portfolios. If they already had an investment manager with a good financial track record, we screened that manager’s universe of stocks (the pool of stocks that the investment manager made choices from to create actual portfolios). If we had to screen out a stock from that universe, we would make the suggestion to the investment manager of another couple of stocks from the same industry that had met our client’s social and environmental screens.

If our clients needed an investment manager, we would suggest one or more with excellent financial track records and a willingness to work with socially screened portfolios. By working with investment managers with excellent financial performance and then screen their universes, our clients received a combination of excellent financial performance from their portfolios while, at the same time, investing in companies that met their social and environmental criteria.

During the time I coordinated social screening, I worked with 85+ investors and tracked the financial performance of their portfolios compared to the investment performance of their investment manager’s non-socially screened portfolios. This gave me the opportunity to do research on the financial impact of social and environmental screening in a way that factored out the impact of investment management style, since exactly the same investment management approach was used for both the socially and environmentally screened and the non-screened portfolios.

In all cases the socially and environmentally screened portfolios did at least as well financially as the non-screened portfolios and in more than 50% of the cases the socially and environmentally screened portfolios did better financially.

We did a lot of thinking and some writing about why socially and environmentally screened portfolios would tend to do better financially than non-socially and environmentally screened portfolios when the same investment management style was being used. We came up with two main reasons. First, socially and environmentally screened portfolios uncover hidden risk—environmental risk, community protest risk, employee-retention risk, product/service quality risk, etc. For example, we took our clients out of Enron long before it collapsed, because we thought its actions in Latin America were unconscionable.

Secondly, socially and environmentally screened portfolios sorted for high quality, proactive management, which is the factor most highly correlated with the financial performance of a company. When we interviewed some highly successful CEO’s about their social and environmental leadership, we often heard, “Dealing with those dimensions of a company’s performance is a big part of what it means to have a well-managed company.”

At that time in the late 1980s and early and mid-1990s, the common place formulation was that it is the fiduciary responsibility of institutional investors, particularly pension funds only to take company’s financial performance into consideration in choosing an investment manager, selecting an investment style, and, ultimately selecting a portfolio. We turned that argument on its head and said, given the superior financial performance of socially and environmentally screened portfolios, it was the fiduciary responsibility of institutional investors to screen explicitly and proactively for social and environmental performance. We even ran very successful conferences for institutional investors on this theme.