I got the idea for this article while doing laundry. As I threw my favorite sweatshirt into the washer, I noticed several discolorations clearly caused by bleach getting on my clothes while I was cleaning the bathtub. It annoyed me enough that I did some research to find a replacement product that wouldn't ruin my clothes and also wouldn't ruin the environment. The winner: 20 Mule Team Borax. At least that's according to Grist, a leading website covering environmental issues.
This led me to the company that makes 20 Mule Team Borax: Dial Corporation. Dial, in turn, is Henkel's (OTC:HENOY) American subsidiary, bought in 2004 for $2.9 billion. In the end I found an interesting company, committed to sustainability and also to the bottom line. Many investors are in a similar situation (minus the ruined sweatshirt). They want to invest, but want to make sure their money isn't going to companies that are poisoning the planet. In this article we'll look at three ways to get involved: individual stocks, mutual funds and exchange-traded funds (ETFs). (To learn more, see For Companies, Green Is The New Black.)
The Whole World's Gone Green
Al Gore's Nobel Peace Prize win in 2007 gave corporate sustainability a permanent seal of approval in business circles. It is no longer just trendy for executives to discuss social, economic and environmental issues; it is essential to corporate survival. Companies can no longer ignore them. Every one of us must step up and do our part. Businesses that do so will grow; those that don't - won't. It's that simple.
Socially responsible investing (SRI) got its start in the 1960s during the Vietnam War when it became clear to many that their investment dollars were going to companies that were profiting from the unfortunate events in Southeast Asia. Investors began to look more closely at a company's operations, weeding out those participating in unacceptable activities like polluting or child labor. (To learn how to spot a true green convert from a phony, check out The Green Marketing Machine.)
In 1990, the Domini 400 Social Index came into being, bringing together 400 companies that met a strict group of social and environmental criteria. By 1995, there was $639 billion in socially responsible investments. In 2007, assets numbered $2.7 trillion, representing more than 10% of the total assets under management in the United States.
The first way to grab a piece of the SRI pie is through investing in individual stocks. This brings us back to my sweatshirt and the 20 Mule Team Borax. In addition to 20 Mule Team Borax, Henkel makes Purex laundry detergents, another product I use faithfully. In terms of sustainability, Henkel is leading edge, one of the Global 100 Most Sustainable Corporations in the world. The company even publishes an annual sustainability report detailing its successes and failures. The result of all this activity is that from 2003 to 2007 the company saw compound annual growth rates of 8.5% for sales and 12.6% for earnings before interest and taxes.
Mutual Funds Do the Research For You
Two actively managed funds stand out: the first, Portfolio 21 (PORTX), has outperformed both the S&P 500 and MSCI EAFE index since its inception in 1999. One of its top holdings is none other than Henkel. It is a big believer in sustainable investment management, choosing international companies with solid financial underpinnings, which demonstrate a true commitment to sustainable business practices. With a long-term perspective, it knows that companies that do good, also do well.
The second fund to watch is Winslow Green Growth (WGGFX). Winslow Green Growth is likely the most successful socially responsible mutual fund in existence. Over the last five years, it's had a 22% annualized return, better than every major index, including the MSCI EAFE. If you invested $10,000 in the fund at inception (1994) it is worth over $100,000 today - $62,000 better than the S&P 500. (For related reading, see Socially Responsible Mutual Funds.)
ETFs Coming On Strong
Currently ETFs represent just 1% of all socially responsible investments with $2.25 billion in assets. In 2007, five ETF came into being that tracked indexes involving environmental and/or social issues. Add to that eight already in existence, and you have the makings of a new growth area for SRI investments. As ETFs get more complex, so too will SRI ETFs.
One fund worth a second look is the iShares KLD Select Social Index Fund (NYSE:KLD), which tracks the KLD Select Social Index. There are 228 holdings in the fund and assets of $124 million. Open for business since 2005, the fund's total return is 8.49%, which is less than the 9.08% return for the index, but slightly better than the Russell 1000 index.
Another green ETF that has faired fairly well is the iShares KLD 400 Social Index Fund (AMEX:DSI). This fund is based on the KLD 400 Social Index. Since the index inception in late 2006, it has returned 4.15% annually, which is a little behind the index of 4.67 for the same period.
Socially responsible investing is here to stay. Investors can' get enough of it and the financial services industry is eager to provide products of all kinds to meet this insatiable demand. In the future, the question won' be whether you own an SRI fund, but rather, which one.
For in-depth analysis of the various green options, check out Evaluating Green Equity Investments and Green Bonds: Fixed Returns To Fix The Planet.