If you read the fund information at many investment families it will often say that the manager will not invest in companies that draw a substantial portion of their revenue from a certain activity. But what is considered “substantial?”
It’s another intriguing SRI question. Consider the conflict a company such as General Electric raises. GE has been involved with nuclear power for decades. That fact alone will leave it out of the portfolios of most environmentally responsible portfolios.
But GE has also steadily morphed into a very large alternative energy company. It makes solar power products for homes, utilities and commercial customers. It makes products for the hydropower market, steam and wind turbines and equipment to improve energy efficiency. Given the market demand, undoubtedly that all represents an increasingly large segment of GE’s total revenues.
Assuming those revenues keep growing – and ignoring for the moment any other SRI flaws GE may have - at what point would GE’s environmentally positive revenues be large enough to outweigh its revenues from nuclear power? For many investors the answer is never. But for others that’s not so clear.
Matthew Zuck, fund manager for the AHA Socially Responsible Equity Fund, doesn’t own GE for a variety of reasons. But his definition of “substantial” is 5 percent. He concedes it is “arbitrary to a degree.” But he’s also trying to give his fund some flexibility while respecting the principles of his clients.
“We want to invest in companies where their primary business doesn’t involve things we don’t want to be in,” says Zuck, whose fund screens for tobacco, as well as faith-based guidelines of the U.S. Conference of Catholic Bishops. “At the same time we don’t want to be in a position where if somebody buys a company that has some ancillary operation that isn’t key to the profitability of their business, we have to sell the holding.”
A case in point: Zuck’s fund includes Emerson Electric, a large industrial company that is in the wind turbine business. But Emerson also derives some revenues from nuclear power. The AHA Socially Responsible Equity Fund screens for nuclear power.
“They are involved with some equipment for nuclear power plants but it’s minimal,” Zuck says of Emerson. “It’s not really material.”
Is this a compromise of principles? Only if you take an all or nothing view of socially responsible investing. But consider the position of Arthur Ally, founder of the Timothy Plan, on his investing niche - morally responsible investing.
“We have a zero tolerance in a very subjective arena,” he says. “When you operate on biblical principles you start out with the understanding that there are none righteous. There’s no such thing as a righteous company. There is a difference between those who are passively unrighteous and those who are pursuing an unholy agenda.”