Hospital executives are interested more than ever in socially responsible investing, and say they are reaping the benefits.
At Catholic Healthcare West, their defined benefit plan and the funded depreciation fund earned 18% and 17% respectively, for the year ended June 30, according to Jesse Bean, treasurer.
The San Francisco-based hospital system screens its combined $1.8 billion portfolio and has a full-time ethicist and a shareholder advocate on the investment staff.
Stock is sold if a company hits a certain percentage of its revenue from a business considered by the hospital to be unethical. The percentages the hospital has set are: 10% tobacco; 4% any weapons manufacture; 2% nuclear weapons; and zero tolerance for companies with revenue from primary abortifacient drugs (those causing abortion, such as RU486).
The funds are externally managed, with nine equity and five fixed-income managers.
CHW is recognized as a leader in socially responsible investing, according to Doug Corgan, a director at the Investor Responsibility Research Center.
CHW was one of the first hospital organizations to adopt the CERES principles, a set of environmental guidelines set up by the Coalition for Environmentally Responsible Economics to help institutional investors watch enviromental issues.
The system also is part of the Healthcare Without Harm Campaign, started by the Interfaith Center on Corporate Responsibility, Washington. This program asks members to assist hospital waste reduction programs, eliminate mercury use and reduce use of polychlorinated plastics.
The system also makes direct community investments such as guaranteed loans and a community grant program that provides $1 million to $2 million to the communities in which it has hospitals each year.
Through a relationship with BankAmerica, Chicago, beginning in the early '90s, CHW allocated money to a development bank run by BankAmerica, that in turn lends money to community organizations.
That relationship is now being reconsidered since the bank's merger with NationsBank Corp. of Charlotte, N.C. Sister Susan Vickers, director of advocacy at CHW, said the organization testified in opposition to the merger's approval.
Sister Vickers said CHW officials weren't sure they would be able to maintain the same relationship they had with BankAmerica; they were concerned NationsBank wouldn't be as willing to work with them.
Officials are willing to accept lower than market return for the social good that is accomplished through the program, Sister Vickers said.
The board recently added a specific screen for for-profit hospitals. CHW's money managers will be excluded from investing in for-profit hospitals that perform abortions and euthanasia.
The defined benefit plan's target asset mix is 42% midcap to large-cap domestic equities; 15% small-cap domestic stock; 10% international stock; 30% U.S. fixed-income; and 3% international fixed-income. The annualized performance for the past five years ended June 30 has been 14.7%.
The funded depreciation portfolio has a mix of 33% midcap to large-cap domestic stock; 10% domestic small-cap stock; 7% international equity; 47% domestic bonds; and 3% foreign bonds. This portfolio's annualized performance for the five years ended June 30 has been 12.3%.
"We don't believe we are giving up any return whatsoever," the treasurer, Mr. Bean, said.
The key, as in nonsocially responsible portfolios, is to find good managers, he said. All of the plans' managers have incorporated the social screens willingly, he added.
There are two routes hospital executives can travel, when it comes to investing socially: advocacy or avoidance.
Avoidance often seems to be the path of choice.
"We divested all tobacco holdings after being active (shareholders) for a number of years, and realized there didn't seem to be much room for change," said Sister Vickers.
Timothy G. Solberg, a consultant with Lincolnshire, Ill.-based Hewitt Associates, saw the decision to divest tobacco stock by many hospital plan sponsors as an important one.
Many of the stocks' prices took hits following class-action litigation. The poor performance shows "that the smoke-free movement has worked," Mr. Solberg said.
The IRRC offers a tobacco information service to hospital executives and others that provides a directory of product manufacturers, leaf tobacco processors and industry suppliers worldwide, in addition to proxy resolutions on tobbaco resolutions.
Daughters of Charity National Health System, St. Louis, also took the path of avoidance, with a restriction on investing in companies where 20% or more of the revenue is derived from taboo products. These areas include alcohol, tobacco, pornography, war materiel, and "abortive agents" and birth control devices.
Managers have been supportive of the hospital's $1.4 billion defined benefit plan's restrictions. "Whenever you set this up on the front end, contractually, they (managers) take it very seriously," said Mark O'Amiri, treasurer.
The guidelines for managers have been in place for about 10 years.
The plan also has invested in funds specializing in local not-for-profit organizations that provide financing for low-income housing. So far $5 million has been invested and officials are expecting a small return on the investments.
The board of trustees is expected to allocate more to the program by the end of the year.
The Daughters of Charity defined benefit plan has an asset mix of 60% stocks and 40% bonds. Mr. O'Amiri would not say how many managers the fund uses.
Hospital system officials also are looking for a socially responsible fund option for inclusion in the $500 million 403(b) plan at the beginning of next year.
Michael Kelly, director-investments at Sisters of Charity Health Care System, Houston, doesn't ask managers to be Catholic theologians, but does expect them to follow the social restrictions in place.
For his defined benefit plan, there are taboos on Time Warner Co. and General Electric Co. stock related to enviromental harm in production of paper and polychlorinated plastics.
They also have restrictions on Northern Ireland, tobacco, pharmaceuticals, wages and housing issues. Many shares are held in order to take part in shareholder activism, Mr. Kelly said.
"This is important work. This is who we are," he said.