ENVIRONMENT: Crossing the Black Waters, March 1999
SOCIAL TOPICS (Archive): ENVIRONMENT
Crossing the Black Waters
Published, March 1999
Ancient Hindu law and practice prohibited travel across the black waters (seas) to foreign lands for fear the traveler would be “polluted” by contact with the outlandish practices of unknown peoples. Any adventurous souls, including Mahatma Gandhi, who ventured out and took on the pollutants had to perform elaborate penance to cleanse themselves upon return.
Until recently, social investors had held international investing in the same uncomfortable light. Some shunned foreign stocks because of unfamiliarity, certain that the data didn’t exist to conduct corporate social research. Others felt international social research itself should not be done, because in the process we would be using our American standards for corporate conduct to judge companies that operated in vastly different cultural settings. To be fair, information of consistent quality and reliability is harder to find overseas. And definitions of good corporate citizenship vary widely across nations.
Nonetheless, in an investment sense, we have crossed the black waters. The Walden International Index Fund was launched on June 1, 1998, creating the first ever socially responsive international index fund based in the U.S.
Why an Index Fund?
We had several goals in launching the Fund, both financial and social. We wanted the Fund to have country and sector diversification while maintaining social standards, to have portfolio returns reflective of the broader international market as measured by Morgan Stanley Capital International’s Europe, Australia and the Far East (EAFE) Index, and to serve as a platform for meaningful dialogue between committed long term investors and international corporations.
We wanted to offer the Fund as a core choice for social investors, neutral to portfolio manager style. Another goal was to quantify the “costs” of international social investing. Our experience with actively managed international portfolios showed that social investors did not need to sacrifice their financial goals for their social mission.
Walden wrestled with many complex trade-offs in order to pick stocks from an international universe. After companies were excluded on the basis of product screens – alcohol, tobacco, gambling, weapons and nuclear power – those remaining were then evaluated for environmental, labor and human rights issues. Overall, roughly one third of the market value of EAFE was eliminated.
As with screened domestic portfolios, energy and materials companies were two sectors that were disproportionately excluded for environmental reasons, while labor and human rights screens reached across all sectors. Still, many companies with positive social or environmental records were selected for the portfolio. Examples include: Novo Nordisk A/S, the Danish pharmaceuticals company noted for its advanced environmental management and reporting; Norske Skogsindustrier ASA, a Norwegian paper and forest products company with a zero emissions goal for its mills; Abbey National PLC, a U.K. bank with progressive home mortgage lending policies; and Carrefour of France, one of the world’s biggest retailers that has banned genetically modified foods from its stores until these products are proven safe.
The Fund’s investment in Novartis AG, the giant Swiss pharmaceuticals and chemicals company created in 1996 from the merger of Ciba-Geigy and Sandoz, is illustrative of the difficult trade-offs inherent in matching the EAFE index. The large European chemical companies we researched all had major environmental problems, but for portfolio diversity we still needed to find a number of suitable investments in the industry. Each of the component Novartis companies has a well documented, troubling legacy of product liability and environmental problems. But each also responded with a significant turnaround in internal environmental management systems and openness to dialogue with their critics. For example, in response to concerns about its historical practice of exporting products that were not approved in industrialized countries to the non-industrialized world, Ciba-Geigy adopted a policy of not manufacturing a product unless it was approved in at least one OECD country. More recently, Novartis’ Ciba unit was ranked the seventh best environmental performer out of fifty chemical companies worldwide by the German environmental group, Hamburger Umwelt Institut.
Beyond Screening: Our Social Change Approach
Investing in a company gives us the opportunity to raise awareness on social issues through company dialogue and written communications, as well as to collaborate with coalition and activist groups worldwide. We also vote proxies consistent with the Fund’s financial and social objectives.
Sometimes our advocacy is focused on an industry. For example, strong concerns about the rights of children led us to encourage global retailers to join the RugMark campaign, a labeling program certifying that carpets are made without child labor. Other times we address concerns about a specific company’s conduct. In correspondence with Novartis, we helped build its awareness that a constituency of investors, not only activists, cares about the environmental and human impact of improper pesticide use in developing countries.
We also presented labor concerns to Astra, the Swedish pharmaceutical company that gained notoriety for the highly publicized sexual harassment controversy in its U.S. subsidiary. Top Astra USA executives met with us and pledged to work to improve their policies addressing sexual harassment and equal employment opportunity. Astra has agreed to meet with us on an ongoing basis to review its progress. Finally, we look for local partners to leverage our voice. We worked with the Britain-Ireland Human Rights Center when we wanted to dialogue with National Westminster Bank regarding its employment practices in Northern Ireland.
A Work in Progress
Although we are encouraged by the Fund’s development thus far, we are aware that it is a work in progress, to be improved upon as more information and tools become available. We feel we have the wind at our back as we journey the black waters. More standards are being set. For example, we look forward to the wide adoption of ISO 14000 environmental management guidelines and to more regions harmonizing regulations and reporting within the European Union. We are also developing better contacts in global shareholder groups. Large institutional investors are making a concerted push for greater transparency and better reporting, including issues of social concern. Social investors can take comfort from these trends as they contemplate diversifying their investments into international securities.
The information contained herein has been prepared from sources and data we believe to be reliable, but we make no guarantee as to its adequacy, accuracy, timeliness or completeness. We cannot and do not guarantee the suitability or profitability of any particular investment. No information herein is intended as an offer or solicitation of an offer to sell or buy, or as a sponsorship of any company, security, or fund. Neither Walden nor any of its contributors make any representations about the suitability of the information contained herein. Opinions expressed herein are subject to change without notice. The writings of authors do not necessarily represent the views of Walden Asset Management, its parent, or affiliated entities. There are certain risks involved with investing, including various risks depending on the type of investment vehicle being used.
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