In this guest post, model and sustainable business consultant Summer Rayne Oakes recounts her recent interview with socially responsible investing expert Thomas Van Dyck. (Read more about Oakes in a Grist profile.)
I first met Thomas Van Dyck in June 2005 during the height of San Francisco’s World Environment Day celebrations. It was a brief two-minute introduction wedged between a chaotic green trade show and a trippy drum-circle gathering. All I managed to find out during that time was his job description: investment consultant. In my mind, I lumped him in with the typical French-cuffed, Ferragamo-tied, Rolex-wearing beings I see on my occasional sojourns to Wall Street. I couldn’t have been more wrong.
As I learned after running into him a few more times, Thomas Van Dyck is one of the top socially responsible investment (SRI) consultants in the business. He happened into the field in the early ’80s, while working as an environmental activist, and he’s helped to shape and grow SRI ever since. Van Dyck and his team, who work in the heart of San Francisco’s Financial District, consult on close to a billion dollars in assets, with clients ranging from foundations, unions, and pension funds to entrepreneurs and celebrities. Ninety-nine percent of his clients have at least one socio-environmental screen on their portfolios, and the vast majority has multiple screens. In addition to his investment work, Van Dyck founded As You Sow in 1992, a nonprofit organization that uses shareholder advocacy to push for more enlightened corporate practices.
The goal of his work, Van Dyck says, is “to create social change.” Monetary success is just the byproduct of what he believes in, not the ultimate goal.
On my last trip to San Francisco, Van Dyck and I sat down to discuss his history in the industry, how nonprofits can use capital markets to push for positive change, and how novice investors can put their money to work for the greater good.
How did you get involved in SRI?
When I was in my 20s, I was working on shutting down nuclear power plants for a nonprofit called Funds for Secure Energy. We helped other local nonprofit groups raise money to fund media campaigns to help close down their local nukes.
We would raise money through pledge programs, door-to-door donations, and the occasional philanthropist. Our budget wasn’t huge, but I was aware that we would quickly go through the money we had raised. The epiphany for socially responsible investing came when I decided to take the money I made and invest it in a company called American Fuel Technologies, which was converting cow manure to ethanol. When the stock doubled, I thought, “Wow, this is the answer! We can invest in the solutions that we are fighting for and take the profits and fund the causes that we believe in.” I was 25 when I applied to six brokerage firms in San Francisco. I got hired by Dean Witter after selling them the idea of socially responsible investing.
SRI was just emerging at that time. How did you sell the idea?
I believed that there was risk associated with utilities that invested in nukes compared to companies that didn’t. Wall Street didn’t take into account qualitative measures of risk and instead focused strictly on traditional quantitative measures, such as revenues, cost of sales, margins, and ratios, all which are still very valid, but just part of the whole picture. We showed in a study that you could make more money, and take less risk, if you invested in utilities that were not exposed to the risk of owning or building a nuclear power plant. Of course, people at first thought we were idealistic activists, but they realized we had a case when we were able to combine economics with the work of social justice.
It was the social justice issue that spurred you to start your own company at the time, correct?
We wrote a white paper concerning divestment of South Africa during the apartheid which clashed with the company’s other business, so it was suggested to me that my team start our own company. I became the youngest founding member of Progressive Asset Management in January of 1988. We were the first broker-dealer in the country to specialize in SRI. We were the phoenix out of the [1987 stock market] crash, so to speak.
Due to an ethical conflict with the other main revenue producer, I left Progressive Asset Management in 1997 and began practicing SRI at Piper Jaffray. This past April, when our division was sold to UBS, which does not support SRI, my team decided to move to RBC Dain Rauscher. It is important for us to be with a firm, like RBC Dain Rauscher, that walks the talk of diversity, sustainability, and environmental and social responsibility.
What are the different aspects of SRI?
SRI uses capital markets to create social change. It adds qualitative measurements to evaluating a company. We do customized qualitative screening and engage companies in dialogue with their shareholders to change practices that are not sustainable. It is a check-and-balance system like democracy. It is accountable to people, like teachers and government employees, who own more stock than any other group through their pension funds.
Your team has been described to me as “different from all the rest,” partially for your research and partially for your shareholder action. Can you explain what you do that is so different?
We have an in-house socio-environmental qualitative research department that works with the independent third-party managers we hire for our clients. Combining the quantitative financial screens of top performing independent money managers with qualitative screens like diversity, sustainability, and environmental responsibility helps to identify the top management teams in a portfolio. Investing with high-quality management teams will lower your risk and increase the potential for strong long-term performance. It is that simple.
We are also active in shareholder resolutions, an arena which many other companies won’t touch. Shareholder resolutions are very important. That is why I helped found As You Sow in 1992. AYS is an organization that pressures companies to adopt more sustainable and humane business practices.
What other type of work does As You Sow do?
AYS has two programs. The Environmental Enforcement Program seeks to reduce and remove carcinogenic contaminants. We have reached settlements with more than 300 companies to remove hazardous ingredients in products. The money we get from the cases is then distributed in the form of grants to nonprofits working in this area. In the past decade, we’ve given over $2 million in grants.
In 1997, we also launched the Corporate Social Responsibility Program to use shareholder advocacy and financial markets to catalyze positive change within publicly held companies. That has led to actively participating in more than 50 shareholder dialogues to nudge companies to employ better practices. We have worked on a range of programs including the recycling of e-waste, sweatshop labor, old-growth forest protection, indigenous rights, and genetically modified food.
AYS is a true testament that nonprofits can work in tandem with capital markets to promote environmental sustainability and social equity.
There has been a major firestorm of press around the Gates Foundation’s investments contravening its good works. Responses have been all over the map, including that good investing won’t reap good returns. What would you say to a naysayer of SRI?
Qualitative screens help identify strong management teams, like Microsoft’s, while avoiding weak management teams, like Halliburton’s, that exploit environmental and labor issues. Stronger management teams will ultimately give you a higher, more sustainable, long-term return on investment. It is like Bill Gates’ good friend Warren Buffet has said: “I’ve never made a good investment with bad management.”
The research is out: CalPERS (the California Public Employees’ Retirement System) and others are seeking to invest smartly by using qualitative screens. The long-term investment strategy of taking environmental, social, and governance issues into consideration and treating your employees as an investment rather than a cost will increase [companies'] bottom lines by increasing productivity and energy efficiency.
Why wouldn’t Gates want to represent his values through strong management teams rather than ones that he doesn’t respect? If he did this, his foundation’s work would be astronomically more effective because he would be using 100 percent of his money to create change, not just the 5 percent he gives away [each year].
Paul Hawken of the Natural Capital Institute (NCI) has criticized the term SRI as “so broad it is meaningless.” He has said that the SRI industry lacks transparency, and that “SRI mutual funds have no common standards, definitions, or codes of practices.” Do you think he has a point?
SRI encompasses environment, social, and governance issues. Those are the key issues that make up strong management teams.
NCI is right about transparency: We need more disclosure on qualitative screens. Our own practice at RBC Dain is really beginning to set the standards for transparency. SRI is rooted in value-based investing, which can be broad. That is why we need to focus on management practices that deal with environment, social [concerns], and governance to give [SRI] specificity.
We’re seeing more companies like GE and Toyota respond to environmental issues like climate change, while some companies are barely lifting a finger. What does this mean for businesses in the long run?
The president of the United States has fogged the mirror of the reality of global warming, and has lulled weaker management teams into complacency. Global warming is a reality and not a theory. Companies that look forward, like Honda and Toyota, and not backward, like Ford and GM, will prosper. They are reacting to the realities of a carbon-constrained economy and will benefit both in the short-term and the long-term. Management teams that are perceptive of this will outperform their competitors who do not have this foresight.
What are your goals for pushing SRI into the mainstream marketplace?
The goals are to:
- Build a financial institution that combines wealth management with our clients’ values.
- Bring sustainable companies public.
- Bring municipal bonds to communities in areas of wind, biofuels, and other alternative energies.
- Hire analysts that are following these practices.
- Drive qualitative screening so that more money or assets are investing this way across the entire market.
When that happens, the market will drive change by rewarding companies with best practices by increasing the stock prices and decreasing the cost of capital, and conversely penalizing companies for bad practices. This will cause the latter to lose market share to those who promote sustainable business practices, environmental responsibility, and diversity in the workplace.
Do you have suggestions for a person with a modest amount of money who would like to start investing more responsibly?
First, you need to determine what the objectives are for the money. Second, you need to figure out what is the return you desire and how much risk, if any, you want to take in achieving that return, and over what time frame. Third, you need to determine what values you want reflected in your portfolio. Fourth, you need to determine what your asset allocation is among stocks (e.g., large, small, and international), bonds, and money markets. If you have a substantial amount of money to invest, you can add alternative investments like private equity, cleantech, and others. Fifth, you need to find a good set of mutual funds or money managers to represent each asset class and style of investing (growth, core, or value).
In the SRI mutual fund area, I would recommend looking into the Calvert Funds (especially Social Equity, Large Cap Growth, Social Bond, and World Values), Pax World Funds, Portfolio 21, Neuberger Berman‘s SRI fund, Ariel Fund, and the Winslow Green Growth Fund.
If you have a fair amount of money, you should consider using individual money managers, and screen their portfolios. Then you monitor the performance and make changes when necessary. Remember: the key to investing is diversity!