The headline in a June 2019 Wall Street Journal article was surprising: “Calpers’ Dilemma: Save the World or Make Money?” The California Public Employees’ Retirement System was one of the earlier proponents of the idea of linking social activism to investment strategies. That meant disinvestment in disfavored firms, such as tobacco companies. 

Now that approach has been challenged as unnecessarily limiting, potentially sacrificing higher returns on pension investments. For example, according to a consultant’s report, the avoidance of investments in tobacco companies has cost the pension fund $3.5 billion in foregone returns. On the other hand, some divestments have been profitable, or have avoided losses. 

The Calpers board resisted calls for divestment in gun manufacturing companies last year, as well as moves this year to avoid private prison companies and companies with ties to Turkey. A comprehensive review of all the divestment policies will be undertaken in 2021.

Background
In the 1990s, the idea of “socially responsible investing” took shape. The initial idea was to use negative screening to avoid companies that traded in “sin” or “vice,” such as tobacco companies, gun manufacturers, casinos and liquor companies. Some people added oil companies to the proscribed category as well. Although screening out disfavored firms may have made investors feel virtuous, it didn’t affect the fortunes of those firms in a material way. In fact, these “vice stocks” generally outperformed the market as a whole, because those companies tended to be rather profitable, paying generous dividends to their shareholders. 

A less constricting version of socially responsible investing has emerged in recent years—one that employs positive screens or themes, as well as exclusions. Three categories of factors are involved: environmental, social and governance (ESG). An environmental focus may look at carbon emissions, water stress, renewable energy or pollution. Social factors might include diversity, inclusion, labor, employee welfare or data security. Governance issues might touch upon independent directors, audit standards, women in leadership or executive compensation. 

Companies may be scored for their ESG performance. They may self-report this data, or it may be gathered by third parties who then sell the data. These scores may be combined with traditional financial analysis tools in determining which companies are likely to have the desired impact, while still providing strong returns to shareholders. PM

Sherry Hawkins, MBA, ChFC, CFP is a wealth advisor and trust officer at Heartland Bank and Trust Company. She can be reached at (309) 664-8927 or shawkins@hbtbank.com.

Heartland Bank Wealth Management offers managed ESG portfolios as an investment option for clients. These portfolios are one component of Heartland’s customized comprehensive wealth management solutions. Securities and insurance products are NOT deposits of Heartland Bank, are NOT FDIC insured, are NOT guaranteed by or obligations of the bank, and are subject to potential fluctuation in return and possible loss of principal.