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Cover Story

How filthy is your 401(k)? Page all

How Utahns' Retirement Dollars Profit From Genocide, Terrorism and Environmental Disasters.

By Jesse Fruhwirth
Posted // October 28,2009 - Jeff Cline hangs an original Jefferson Airplane poster behind his desk at Responsible Asset Management in Salt Lake City. Though he started his financial career in the go-go stock market era of the 1980s, he has lasting sympathy for the idealism of the 1960s. “It keeps me grounded,” the investment adviser says of the poster. “It’s very easy to stray. Money is a strong pull.”

Money can pull otherwise kind, humanitarian Utahns to invest in companies whose profits come by way of polluting the planet, ignoring human rights, or indirectly supporting terrorism. Those who believe alcohol, tobacco or pornography are major social ills may be surprised to find they are profiting from investments in companies that make those products.

About 40 percent of Cline’s business is helping clients find "socially responsible investments" (SRI) that allow clients to invest in companies which, through their practices or products, are in line with the investor’s ideals. The other 60 percent of Cline´s clients follow the traditional approach of maximum investment returns with minimal risks.

Cline doesn’t push or urge traditional investors to make the switch, but he’s excited when they want to.

“My biggest joy is finding somebody who has no clue that they can invest like this,” Cline says. “They’re writing checks to GreenPeace, but they don’t realize they can literally support their conscience by investing their money.”

The market for those types of investments is growing, Cline says, albeit slower in Utah than other places. He couldn’t sustain his business in Utah if he didn’t also offer more traditional investment advice, he says.

That may change, however, as perhaps the most persuasive argument against investing with one’s conscience—that investment returns are lower—is beginning to be undermined. “SRI has now proven itself equal to if not stronger than traditional investing,” he says.

Since 1990, an index of SRI mutual funds called the KLD Domini 400 has outperformed the Standard & Poors 500 index, a collection of 500 large-cap stocks frequently traded in the United States. The value of Domini grew 10.83 percent since that time, while the S&P grew 10.33 percent.

So, it raises the question: Why isn’t everyone investing this way? Utah Retirement System executive director Robert Newman offers plenty of reasons. He’s batted away multiple attempts and suggestions by legislators to mix financial and social policy in the 25 years he’s worked at URS.

Newman´s opposition to SRI in all its forms may sometimes appear callous—lawmakers have sought SRI-like solutions to genocide in Darfur and state-sponsored terror in Iran—but he maintains he’s merely operating as the laws instruct him to do.

“We’re not experts in social policy,” he said to a legislative committee last year, voicing the objection to SRI for traditional investment advisers. “We don’t want to appear cold and heartless to social issues. However, we believe there are other ways to make social statements. We believe that keeping social policy separate from investment policy is the right standard.”

And so do a majority of Utah lawmakers. But one lawmakers hopes to change that. For the third time in three years, Rep. Julie Fisher, R-Fruit Heights, will submit a bill in the 2010 Legislature that would instruct the URS to minimize investment in those companies.

As world leaders consider how best to deter Iran from obtaining nuclear weapons, many are considering economic sanctions. Such actions could affect the retirement plans for Utah state employees because the URS—a set of trust funds for 181,000 of Utah’s current and former public employees—has approximately $55 million invested in foreign companies doing business in Iran’s petroleum sector. (It’s already illegal for U.S. companies to do business in Iran.)

Utahns are sending their sons and daughters to fight wars in Iraq and Afghanistan, but are investing some of their dollars in the opposing side. “We should not be supporting the economy of a country that is willing to take their dollars to perpetuate terrorism,” Fisher says.

Not to worry, says Utah Retirement System´s Newman. If immoral or irresponsible corporate behavior might devalue an investment—like sanctions against Iran could—the system already responds. “If [fund managers] see that a particular position a company is taking is going to make an impact on share value, they are going to make a buy or sell decision based on that,” he says.

But that’s not good enough for Fisher, who wants Utah to join 19 other states who have installed divestment policies regarding Iran. Worrying about questionable corporate behavior only if it could become damaging to the stock value is exactly the philosophy that socially responsible investments reject.

2009spill1.jpgGrowing Movement
In recent years, the SRI movement has grown. Socially responsible investors owned roughly $2.7 trillion(pdf) in global assets in 2007, according to Social Investment Forum, up from $639 billion in 1995. It’s hard to know how large the movement is today after the stock-market crash of 2008, but about 300 mutual funds now use various responsibility “screens” to divest from companies deemed unworthy by the fund managers. Some workplaces offer socially responsible mutual funds for their employees’ 401(k)s.

The types of socially responsible investors vary widely, as do their values. Some SRI mutual funds screen alcohol, tobacco, pornography or gambling stocks only. Others focus on the environment, human rights or even animal rights. Some cater specifically to Muslim, Jewish or Catholic investors, according to the dictates of those religions.

Strategies differ as well. Some SRI advocates believe investments and moral values should align, and irresponsible companies should be removed from one’s portfolio. Rather than divest, some funds and investors with adequate financial leverage urge—sometimes force—corporations to change policies through proxy voting at shareholder meetings. Others keep to a strict regimen of community investing, not unlike "buy local" philosophies.

Across the spectrums of moral values, size and strategies, the unifying theme among SRI advocates is that finances and social values should mix. SRI is an opportunity—some say obligation—to use investment dollars to make a better world. Cline says SRI is not some hippy-dippy socialist scheme but a way to insert morality into the globe’s dominant economic system: “Capitalism is a tool. Now, how do you want to use that tool?” Do-it-yourself SRI is relatively easy for investors with stock invested in individual corporations, or “direct holdings.” Reading news and monitoring policies of one or a few companies is manageable. One false move by the company, and the investor can liquidate his or her stock within minutes using online stock-trading Websites.

But most Americans with investments have a 401(k), 403(b) or an IRA—options that rely on mutual funds, which reduce risk through diversification of investments. Mutual funds often invest in hundreds of companies and sometimes even other mutual funds, which themselves are invested in hundreds of companies. Researching each company in a mutual fund is a full-time job.

That’s where groups like Calvert Investments come in. Calvert employs researchers who assess not only traditional metrics of stock value—price-to-earnings ratio, for example—but also the social impacts of various companies, including the companies commitment to gender equality, rights of indigenous peoples and environmental sustainability.

Calvert’s first act of SRI came in 1982, when it became the first American mutual fund to divest from South Africa because of apartheid. The apartheid divestment was a seminal moment in the history of contemporary SRI. However, responsible investing dates back at least to the Quakers, who forbade members from profiting from the slave trade in the 1600s.

Using investment dollars to further social change was also promoted by Martin Luther King Jr.


A.Sorog_3.jpgPushback
While SRI is growing, it’s far from universally accepted. Only one out of every $9 invested with a professional adviser in the United States are SRI, according to the Social Investment Forum, an SRI industry group. Oddly, some holdouts are steadfast that SRI is actually irresponsible. SRI requires a substantial up-front cost for researching the companies and an ongoing cost for continued monitoring. Also, investors may miss out on profits if they simply divest from all oil companies, for example, out of a concern for the environment.

That’s what worries traditionalists like URS’s Newman. Any commitment to something other than maximum profits violates fiduciary responsibility.

Newman has voiced that view multiple times in recent years. He believes members of the URS will not want to receive lower benefits or make larger contributions to pay for moral decisions made by legislators. And if the fund is harmed so badly that it can’t pay its obligations to retirees, state taxpayers would have to make up the difference.

“The Utah Retirement System is a trust fund. As the trustee of that fund, you have an undivided responsibility in administering that fund,” Newman says.

“The responsibility is to provide the biggest investment return you can, considering the risk involved in it. If you start considering other things over and above the return, you may be violating your fiduciary responsibility.”

Mixing morality with investing is a slippery slope, Newman said. How irresponsible must a company be before the state divests? For example, what if a large conglomerate owns a tobacco company and also sells Jell-O, which was the case until 2007, when Kraft Foods owned one of the world’s largest tobacco companies, Philip Morris. Should Utah have divested from Kraft because of Philip Morris? “It’s just difficult drawing lines on what is appropriate,” Newman says.

The same applies to Iran. Utah is home to Iranian refugees whose family members back home may experience a lower standard of living as a result of sanctions and divestment.

OilCan.jpgConflicted Interests
It may be difficult to determine how much irresponsibility justifies divestment, but it’s also difficult to mete out seemingly contrary actions of various branches of government. During the Medicaid recovery lawsuits against the tobacco industry in the 1990s, the states were essentially suing little pieces of themselves—the tobacco companies that they, in part, owned.

“Advocates highlighted the contradictions between state justice departments suing the industry, and state health departments expanding tobacco control programs, while state treasurers invested in tobacco companies,” wrote Nathaniel Wander and Ruth Malone in a 2006 paper. Wander is a senior research fellow for the Center for Tobacco Control Research and Education at the University of California-San Francisco. Malone is a registered nurse, professor at UCSF and editor-in-chief of the peer-reviewed journal Tobacco Control.

Brigham Young University undergraduate and activist Greg Smith thinks a similar contradiction exists between Utah and Iran. The Pennsylvania native, economics major and returned LDS missionary has worked with Rep. Fisher on her Iran legislation and also volunteers for American Israel Public Affairs Committee (AIPAC). He says states that invest in companies that work in Iran are contributing to the death of American soldiers in Iraq and Afghanistan.

“My roommate is in Iraq right now and I think it’s completely asinine that the state workers of Utah are investing in the country that is the leading statesponsor of terror,” he says.

Newman says no divestment scheme has ever been approved by the Legislature, not even one to remove tobacco or alcohol stocks from the portfolio.

Fisher says she will return next session with a new bill regarding Iranian investments, though she wouldn’t discuss its specifics. Last year, she passed a bill that requires the Utah Retirement System to report each year how much money the system has invested in companies doing business in Iran’s oil sector.

Other states have dabbled in SRI, however. When the National Association of State Treasurer’s sent an e-mail inquiry to each of its members on City Weekly’s behalf, eight of the 14 who responded said they have divestment policies. The association’s director of federal relations, Jim Currie, responded to the survey, saying, “I have to admit to being surprised at how many states have policies on divestment.”

Indiana, for example, instructs its public retirement system to divest from any company doing business in a country listed on the U.S. State Department’s list of state-sponsors of terror, currently Syria, Cuba, Iran and Sudan. Georgia and others have passed laws demanding divestment from Iran only.

Iran and terrorism divestment appeared multiple times in the informal survey, followed closely by another country: Sudan.

Utah Rep. David Litvack, D-Salt Lake City, sponsored a bill in 2008 asking the URS to divest from companies working in Sudan that support genocide, directly or indirectly. He didn’t have a hard time convincing fellow lawmakers that Utahns’ investments were supporting genocide in Sudan’s Darfur region. The difficulty was convincing them on the basic premise of SRI: that investments should be used to further social goals.

Another objection to his bill was Newman’s view of a slippery slope, which Litvack acknowledges. When he originally conceived of his Sudan divestment bill, he wanted a moral slope built right into the law.

“When I first approached this issue a few years ago, my original thought was, ‘Gosh, this isn’t just a Sudan thing, it’s all genocide. We need to put a mechanism in place where, if there’s a genocide, this would go into effect,’” he says.

That sort of provision is probably unconstitutional, Litvack says, because it lacks specificity, so the bill was changed to target only Sudanese genocide. Any other slippery-slope arguments, Litvack said, are just a “distraction.”


What To Do
While state retirees’ money is locked away in a trust fund they can’t easily manipulate, some private-sector workers are “captive” to investment decisions made by their employers as well, Cline said. Most businesses offer employees only traditional mutual funds for 401(k) plans and many companies offer a “match,” or extra funds invested by the employer on the employee’s behalf. But, to get the match, the employee has to invest in the list of mutual funds offered by the company. Rarely in Utah does that include an SRI option, he says.

City Weekly employees’ 401(k)s, for example, are managed by Lincoln Financial Group, a traditional investment firm without any SRI options. Lincoln´s options for CW employees include significant investments in companies accused of human-rights abuses like Chevron, companies that may face sanctions for operating in Iran like Gazprom and Royal Dutch Shell, environmental offenders like Massey Energy Company who’s often criticized for mountain-top removal in the Appalachian Mountains, and drugstore chain CVS whose shareholders accuse the company of selling toxic cosmetics in the United States that are illegal in Europe. Lincoln account manager Angie Mounsivais responded to City Weekly’s inquiries by saying, “I’ve been told we have not had any questions like that, and we haven’t discussed [SRI] within our marketing team, but I think they’re going to look at this to see what we could include.”

Employees in that situation should simply ask their employer to offer an SRI mutual fund. “If you ask, ‘Can we have a fund like this?’ generally, the answer is going to be ‘Yes.’ There’s no reason not to. … That’s how you do it. You´ve just got to ask for it,” Cline says.

But, he warns, it’s not prudent for a worker to put all their retirement money in one mutual fund, SRI or otherwise. Diversifying your portfolio, he said, decreases risk. That means employees may be able to invest some of their money in SRI, but creating a completely SRI retirement portfolio can be difficult without several SRI options.

That’s OK, Cline says, “because it’s better than doing nothing.”

But is it better than doing nothing? Do corporations become more responsible because of SRI?

Sometimes, the results of SRI are direct and obvious. For example, in May, the Sisters of St. Dominic of Caldwell, N.J., submitted a shareholder petition demanding that oil-giant Chevron Corporation document the carbon content of all products the company makes. Other faith-based investors joined the sisters, but a vote was never taken because Chevron opted to comply with the sisters’ demands voluntarily.

Other examples of shareholder activism meet considerably more resistance. Chevron has fought against the National Jesuit (Catholic) Committee on Investment Responsibility for five years, resisting that and other groups who demand a corporate human-rights policy. Chevron has been accused of numerous human-rights abuses and environmental disasters worldwide, each chronicled in a 2009 report sponsored by labor and environmental groups titled The True Cost of Chevron.

The Utah Retirement System owns approximately $32 million in shares of Chevron, according to its 2008 annual report(pdf), making it the seventh largest investment the system makes in an individual company.

While Newman expressly opposes divestment schemes, he says URS does engage in shareholder proxy votes regarding corporate policy. He could not discuss specific examples of so-called “shareholder activism,” he says, not because it’s private information—but because “I just don’t remember.” But, Newman said, “We’re not a key player. Our voice is relatively small.”

At just over $15 billion, URS is dwarfed by the California Public Employees Retirement System, known as Calpers, the largest public pension fund in the country, which controls about $173 billion and warmly embraces SRI principles. And though $32 million invested in Chevron is a lot of money, that represents less than a one-tenth of one percent stake in the company, whose market capitalization is about $143 billion.

But size isn’t everything. Connecticut Treasurer Denise Nappier, for example, heads the $20 billion Connecticut Retirement Plans and Trust Funds. In September, she released an annual report(pdf) of how the system helped change corporate policies, bragging about “breakthroughs on climate and energy policies.”

When asked about the Connecticut report, Newman said other state-trust fund leaders use shareholder meetings to grandstand: “Some of these other people are politicians trying to make political statements, using those to get their name known, or may have political aspirations beyond where they already are.”

To what extent divestment changes corporate behavior is less clear.

Shareholder fights are like elections— one share equals one vote—with clear winners and losers. Divesting means not voting at all and the impact is more difficult to quantify.

In 2000, Calpers sold all of its tobacco stock—more than $500 million—and estimated it would lose about $30 million in the process through broker fees and selling when share prices were low. Six other states made similar moves. While that didn´t destroy the tobacco industry, the divestment push “added to ongoing, effective campaigns to denormalize and delegitimize the tobacco industry,” concluded Wander and Malone in a 2006 paper. At the time, the California state treasurer said divestment was not to be politically correct, but to remove the state from exposure to tobacco lawsuits— several of which were brought by California municipalities, and even the state itself.

jeff_cline.jpgGood Business
A major selling point made more frequently in recent years by SRI advocates: Responsible investing is not morality for morality’s sake, it’s just good business. While SRI requires big upfront costs in research, SRI advocates say they have balance sheets to prove SRI pays off in the long term.

Meg Vorhees, the deputy director of research at Social Investment Forum, says good corporate policy and long-term business performance are intertwined.

“One idea you hear often among SRI investors is that corporations basically need to operate with the consent of society. When you violate the public trust, you may have problems running your business,” she says. “You may find you’re under more pressure from regulators; you’re slapped with lawsuits; or if you’re looking to expand, your bid isn’t considered as favorably as the competitor that has a better reputation.”

Vorhees pointed to the KLD Domini 400 index and its performance over the S&P 500.

Cline concurs: “The data show now that not only are [SRI funds] equal, they’re better. They’re outperforming simply because it’s good to be green. It’s good business.”

In regard to Iran, two U.S. congressmen in May sent a letter to Royal Dutch Shell Group, an Anglo-Dutch oil giant, warning the corporation that its continued involvement in Iran could cost it. A bill to impose sanctions against companies doing work in Iran has stalled in Congress, but Rep. Dan Burton, R-Indiana, one of the letter writers, is working to get that bill passed. He warned Royal Dutch Shell what would happen if sanctions are put in place. “The potential losses to Royal Dutch Shell could be staggering,” the congressman wrote.

That could harm the URS, which has nearly $13 million invested in Royal Dutch Shell, and another $42 million invested in other companies also doing business in Iran’s oil sector. A bill passed by Congress Oct. 14 explicitly allows states and municipalities to divest from Iran, minimizing the risk of court fights.

Are investors, in any small way, responsible for the behavior of corporations they are invested in? For example, if Utahns invest in Royal Dutch Shell, which in turn sells refined petroleum to Iran, which in turn enables the regime to train insurgents who then harm American soldiers, do the Utah investors bear any personal responsibility? Newman wouldn’t answer that question. “It doesn’t matter what my opinion is,” he says.

Cline, a self-described “old hippie,” was willing to answer.

“I guess the answer is, of course, yes, they do,” Cline says solemnly. “But you know, it’s really just a matter of how much you’re paying attention to your world. … A lot of people just aren’t aware. But once you are aware, you should ask, ‘Now what should I do?’”

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