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More than $1 out of every $9 under professional management in the United States is involved in socially responsible investing.
Whether or not global warming and the whole "going green" initiative will save the world—or bankrupt it—is a question I'll leave to the philosophers, or to Al Gore, appearing soon in his gas-guzzling private jet on an airport tarmac near you.
From an investing point of view, as I've said in these pages before, the only green that matters is the paper-based variety with pictures of dead presidents on the front and the line "In God We Trust" etched on the back.
So, the question today is: does that kind of green come into play in the burgeoning world of green, or socially responsible investing (SRI)– particularly in the life sciences sector?
First, some back story. SRI is nothing new. The modern roots of it can be traced to the impassioned political climate of the 1960s. During that decade of political and social turbulence, issues like civil and women's rights, the anti-war and environmental movements, generated a new kind of awareness about the issues of social responsibility. These concerns eventually branched out to include management and labor issues, anti-nuclear sentiment, and the care and nurturing of the environment. By the late 1970s, SRI began attracting a significant group of American investors as a result of serious concerns about the racist system of apartheid in South Africa.
Over the past 20 years, the Bhopal, Chernobyl, and Exxon Valdez incidents, along with concerns about global warming, ozone depletion, and the environmental risks of many corporate practices, have made environmental issues almost as important as bottom-line returns in social investors' minds. Most recently, human rights issues and the lack of healthy working conditions in factories around the world producing goods for US companies have turned into major stumbling blocks for investors.
Many socially responsible portfolios have moved beyond selecting companies that are working to limit or cease their negative environmental and social impacts to choosing companies that are actively working to improve their social and environmental performance. At the same time, there seems to be a growing understanding among corporate leaders that the incorporation of socially responsible practices into their corporate strategies can co-exist with long-term corporate profitability. Increasingly, corporations that reflect principals of corporate responsibility are considered to have substantial long-term investor value. Both actively managed mutual funds and indexes have been developed to track stocks in these areas.
Socially responsibly investing, however, does not mean having to accept slower asset growth. In fact, the case is quite the opposite. The growth of assets involved in SRI have often outpaced the broader market indexes. Socially responsible investment assets grew at twice the rate of all assets under professional management in the US. Between 1997 and 2006, total assets involved in SRI grew 82%—from $1.185 trillion to $2.16 trillion. In the same period, according to a comparison of total assets under professional management in the US reported annually in Nelson's Directory of Investment Managers, the broad market grew 42% (including both market appreciation and net cash inflows).
So, does the biopharmaceutical market take a seat in the social investment party? By the most common definition of so-called ethical investing, yes it does. Let's have a look.
According to Amy Domini, founder and president of the Domini Social Equity Fund, SRI is based on three main premises:
1. Every investment, whether in stocks, savings accounts, or bonds, has a social and ethical dimension.
2. Investors can apply their social and ethical standards to potential investments.
3. Investors who apply social and ethical criteria to investments do not have to sacrifice performance.
Under these three themes, investing in the life sciences sector, from a social screening standpoint, has its advocates and its critics.
As Domini puts it, in an article entitled "Socially Responsible Investing: Perspectives on Biotechnology" on her web site (amydomini.com),
"Although the socially responsible investing industry has not yet taken an official position on genetic engineering or related biotechnologies, discussion has begun. Consistent with its underlying concern for safety and sustainability in all corporate practices, socially responsible investing is wrestling with the question of whether biotechnology represents risk or opportunity. Indeed, difficulty exists in deeming the industry socially responsible when public awareness of biotechnology is low and opinion on the industry is split."
From that perspective, any conversation about socially responsible investing in the life sciences market is loaded with "on the one hand" and "on the other hand" caveats. Most socially responsible investors, for example, are warm to the idea of producing genetically engineered food crops that are immune to viruses, drought, and insects. More food to feed a hungry world is a boon to a socially conscious investor, although some social investors do voice concerns over chemically produced agricultural products. On the other side of the coin, socially conscious investors like Domini don't appreciate the trend of big biotech and pharmaceutical firms waltzing into communities and demanding huge tax breaks to set up shop there.
That's just the tip of the iceberg in terms of contradictions in biopharmacutical-based social investing. Domini harkens back to a trade conference in 1996, when the topic of life sciences and social investing first came to the public spotlight. Says Domini:
"At a meeting of the Social Investment Forum in December 1996, the Bull and the Bear positions on biotechnology were presented. The focus was less on high investment returns than on whether developments in biotechnology present benefits. The Bear took the position that while genetic engineering may be absolutely accurate in the test tube, it is not necessarily so in a living organism. Concerns were expressed that biotechnology does not merely accelerate natural science, but instead alters it, leading to the 'fish do not mate with tomatoes in nature' analogy. The Bear also expressed concern about the potential of the industry to engage in potentially harmful research on an uninformed public. The Bull took the position that the contributions of biotechnology, including, for example, a reduction in the use of pesticides, far outweighs the theoretical risk that may exist in developing new products. The Bull's general position was that the science is effective and trustworthy, and the trend, particularly in food development, represents exciting potential for increasing crop production."
I guess the thinking even among so-called ethical investors is that when it comes to the biopharmaceutical market, you can't live with it and you can't live without it. Such investors seem to love the life-enhancing medicines and therapies the biopharmceutical industry produces but hate the financial clout and corporate power that leading lights in the industry often wield.
Whatever your take on the issue, know that SRI isn't going away. In fact, it's growing more powerful on its own. More than $1 out of every $9 under professional management in the United States is involved in SRI. And more than 11% of all investment assets under professional management in the US—$2.16 trillion out of $19.2 trillion—are in professionally managed portfolios using one or more of the three SRI strategies that define socially responsible investing in the US—screening, shareholder advocacy, and community investing.
My take? What's important to you when you make your decisions regarding how you will invest your hard-earned dollars may vary dramatically from your neighbor, your brother, or your friends. So it's important to remember that socially responsible investing is extremely subjective. The issues that are vital to you may not signify much to another investor, whether you're in the life sciences realm or not. You need to make your decisions based on your sense of comfort and your value system. Ironically, in this area of investing that's riddled with questions of right and wrong, there is no right or wrong answer.
Celebrity author and business/finance commentator for CNN and Fox News, Brian O'Connell has written for The Wall Street Journal and Newsweek, Doylestown, PA, 215.230.1070, email@example.com