A growing desire among investors to align their portfolios with their personal and political beliefs is transforming the financial services landscape and creating opportunities and challenges for financial advisers.
"I have to admit, the recent popularity of socially responsible investing is sort of astounding," said Phil Kirshman, director of business development at Progressive Asset Management Inc., an Oakland, Calif.-based hub for a national network of financial advisers who concentrate on social and environmentally conscious investing.
Mr. Kirshman attributes part of the recent popularity of socially conscious investing to the rising price of oil and to the global warming message spread by Al Gore and his documentary, "An Inconvenient Truth."
"A lot of the traditional Wall Street players are now trying to get involved because of the obvious marketing opportunities," he said. "People have come to realize there is a lot of money to be made on environmentally friendly solutions."
A study of investor behavior released last week by the Social Investment Forum in Washington showed that socially conscious investment assets grew by 18% in 2005 and 2006, to $2.7 trillion.
Over the same period, the overall universe of professionally managed assets in the United States increased by less than 3%, to $25.1 trillion, according to the report.
GROWING DEMAND
The growth in socially conscious investing — now represented by $1 in every $11 invested — is being driven both by "growing institutional investor demand and by a host of factors driving retail investor demand," said Cheryl Smith, executive vice president at Trillium Asset Management Corp. in Boston.
Institutional investors have acquired the largest slice of the socially screened assets. The $1.9 trillion in institutional assets was up 27% from 2006, when the last bi-annual report was released.
For retail investors, the study counted 260 fund offerings, including mutual funds, closed-end funds and exchange traded funds.
The $202 billion invested across those various funds compared with $179 billion in 201 funds at the end of 2005.
Separately managed accounts offering socially conscious screens grew by almost 28% during the two-year study period, to $1.9 trillion.
"I think we are all benefiting from the overall green movement," said Francis G. Coleman, executive vice president with Christian Brothers Investment Services Inc., an Oakbrook, Ill.-based firm that manages $4.5 billion for various Catholic institutions.
"Non-financial indicators, such as reputation risk, do have an impact on companies," he added. "And the [socially conscious investment] movement has turned the attention to some of the non-financial components that play a role in investment performance."
"Socially conscious" is a broad term for a wide range of investment screens that reflect affinity for various religious, personal and political viewpoints.
While the growth spurt in such investments is fueled largely by an increased focus on global warming, it is only the latest evolution of socially conscious investing, according to George Gay, chief executive of First Affirmative Financial Network LLC, a Colorado Springs, Colo.-based platform offering advisers access to socially conscious portfolios of mutual funds and separate accounts.
"We don't try and define what 'socially responsible' is. We ask our [adviser] clients to define it, and our job is to identify what's out there to meet their needs," Mr. Gay said.
The latest socially conscious movement is attracting a generation of investors in their late 20s and 30s to an investment category that previously had been most popular with baby boomers, he said.
"We're seeing a new wave of investors," Mr. Gay said. "First we had the apartheid era, and then the Exxon Valdez era, and now we've got the climate change era."
And with the evolving appetites come evolving products and services.
"We're seeing products from firms that never before have been involved in socially responsible investing," Mr. Gay said. "I bet I've seen five new climate change funds go into registration in the past six months."
Hot-button issues might come and go, but some advisory firms maintain a strict dedication to the socially conscious movement.
"Socially responsible investing is our specialty, and people don't come to us unless there's something about it that appeals to them," said Shane Johnson, a partner with Blue Summit Financial Group Inc. in San Diego.
Mr. Johnson, whose firm oversees $80 million in client assets, uses a mix of mutual funds and separate accounts to construct mostly socially screened portfolios.
'MAKES SENSE'
"We have to match clients with the right investment vehicles," he said. "More and more people are realizing that this makes sense from an investment standpoint, because it's just good business to be socially responsible."
Despite the trend lines, some advisers remain skeptical, turned off by negative assumptions related to higher fees and lower performance.
"We don't think there's a whole lot of evidence that these funds can outperform, net of fees," said Jon Yankee, a partner with the advisory firm of Fox Joss & Yankee LLC in Reston, Va., which oversees $250 million in assets.
"We've certainly had clients ask for socially responsible investments," he said. "But we think the impact could be greater if clients just put their money where their mouth is and volunteer or donate directly on the charitable side."
The association of socially conscious investing with subpar performance and higher expenses is outdated, according to Alisa Gravitz, executive director of Co-Op America in Washington and a board member of the Social Investment Forum. "Mutual fund expenses are in direct relation to the size of the fund, not the style of the fund," she said. "Socially responsible funds are totally competitive."
E-mail Jeff Benjamin at [email protected].
