SRI soars in 10 years since Calvert asked DOL’s advice

Ten years after the Department of Labor gave its blessing to socially responsible investments in defined contribution plans, the area finally has come of age.

Some $1.88 trillion in assets were held in socially screened separate accounts managed for institutional clients as of year-end 2006, the most recent data available, up 27% from $1.49 trillion in 2004, according to a survey by the Social Investment Forum, a national organization dedicated to advancing socially and environmentally responsible investing based in Washington. At year-end 1996, the total was $433 billion.

But 10 years ago, SRI investments were not generally accepted by many trustees and consultants, who worried they would run afoul of the Employee Retirement Income Security Act’s requirement that plan assets be invested for the exclusive benefit of plan participants.

William M. Tartikoff, chief counsel at Calvert Group Ltd., Bethesda, Md., thought this attitude needed to change and requested an advisory opinion from the Department of Labor.

In a May 28, 1998, response, the DOL advised Calvert that the fiduciary standards of ERISA did not preclude socially screened funds, as long as “the investment was expected to provide an investment return commensurate to investments having similar risks.”

“We were very, very happy to get this letter,” Mr. Tartikoff said. “Now, 10 years later, we don’t have to show it to anyone anymore. The world has opened up to SRI … It’s becoming more and more mainstream as opposed to being the strange ducks.”

While many experts agree the letter has led to a growth in the number of institutions that provide socially screened options to employees, that growth hasn’t been stratospheric.

“I think (the letter) has made some difference. It certainly is a resource for consultants like ourselves, fund managers, trustees and plan sponsors to look at when they’re looking to adding an SRI fund,” said Craig Metrick, U.S. head of Mercer LLC’s responsible investment team in New York. “But not 100% of plan sponsors are convinced.”

Mr. Metrick said many of the plan sponsors and trustees he talks with still harbor performance concerns about SRI strategies performance and don’t want to be in the position of having to define what is “socially responsible.” In addition, some trustees fret that a portfolio company’s socially responsible status might go in and out of favor.

“What is the risk there?” Mr. Metrick said.

However, signs are that SRI is becoming mainstream. Mercer officials recently announced they will start screening all 2,700 active managers in its global database to the extent they integrate environmental, social and governance factors in their investment process.

A June 2007 survey of 129 defined contribution plan sponsors released by the Social Investment Forum and Mercer found that 19% already had an SRI option and an additional 41% planned to add one over the next three years. Mr. Metrick didn’t have any more recent data, but “from where I sit, we’re certainly seeing a greater frequency in inquiries,” he said.

Calvert has seen significant growth in the past 10 years. At the time the advisory opinion was released, the firm managed eight socially screened funds with a total of $1.8 billion in assets. As of May 31, 2008, the firm managed 21 socially screened funds with total assets of $6.6 billion.

“I think we’re just at the tip of the iceberg,” Mr. Tartikoff said. “Ten years from now, I think we’ll see a huge increase in that number.”

One company that offers an SRI mutual fund in its 401(k) lineup is General Motors Corp. Spokeswoman Deborah Silverman said the company offers the Neuberger Berman Socially Responsible funds in its $20 billion plan. It previously offered Domini Social Equity and the Promark Social Equity funds, but those were eliminated in July 2007, Ms. Silverman said. Company officials made the decision to offer only the Neuberger Berman funds because they were the best performing.

“Our goal is to provide a broad array of strong investment alternatives to our plan participants,” Ms. Silverman wrote in an e-mail. “We offer our plan participants a variety of investment options that allow them to make investment decisions that reflect their personal investing goals and objectives. Offering an SRI fund is part of that equation.”

She said about $41 million, or about 0.2%, of GM’s Savings Plan assets are invested in the Neuberger Berman funds.

“While the investment is relatively a small percent of the total savings plan assets, it still is an important investment option in the plan, which meets the needs of a number of our plan participants.” Ms. Silverman said.

While the numbers might still be relatively small, several SRI advocates say the Calvert ruling certainly has helped as the area has grown.

“The coin has flipped to the other side” with many pension fund executives discussing whether they have a fiduciary duty to look at the sustainability of a company to gauge future profits, said Tim Smith, senior vice president and director of socially responsive investment at Walden Asset Management, Boston, and immediate past chair of the Social Investment Forum

Cheryl Smith, executive vice president and senior portfolio manager at Trillium Asset Management Corp., Boston, and current chair of the Social Investment Forum, said in the 10 years since the ruling, there has been a growing amount of academic evidence that SRI funds are competitive with non-SRI funds in terms of returns.

“Twenty years ago, you could find a study on either side if you wanted to,” Ms. Smith said. Now, well-designed studies are finding that there isn’t a penalty over time if a retirement fund goes with socially responsible investing, she said.

There were some institutions that offered SRI funds before the 1998 advisory opinion was issued, but what the letter did “was say you don’t have to be a brave trustee facing possible legal action for putting them in and that, yes, this is a reasonable choice,” Ms. Smith said.

Contact Jennifer Byrd at [email protected]