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GreenMoney Journal - publishing since 1992
Fall 2010 issue
Socially Responsible Investing – Better Companies, Better Communities
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Special Report: COMMUNITY BANKING - Bad Guys Give Good-Guy Funds New Luster
Bonnie McGeer, American Banker
Corporate scandals have spawned a surge of interest in socially responsible investing, and some
community banks are benefiting from healthy growth in investment and deposit products tailored to
this interest.
The bankers behind these products say the rewards are worth the effort and
expense. Two banks have even created common trust funds to capitalize on the opportunity.
"We've always felt that doing the right thing pays dividends, and this is just another
example," said Lynn B. Fuller, the chairman, president, and chief executive of the $2.2
billion-asset Heartland Financial USA in Dubuque, Iowa.
Heartland began offering socially
responsible mutual funds in 1985. After a slow beginning, business has steadily increased, and
there has been a burst of inquiries lately.
Now more banks are taking notice. Convinced
that the growing interest is not just a fad, two of the newcomers - First National Bank and Trust
in Kokomo, Ind., and AmeriServe Trust and Financial Services Co. in Johnstown, Pa. - decided to
establish common trust funds to offer socially responsible investments to their customers.
A rarity these days, a common trust fund is an open-ended, pooled investment that works much
like a mutual fund. Though the legal framework is complex and time-consuming to set up, First
National believes the effort will pay off, said Diane Cramsie, a vice president at the $1.6
billion-asset company.
"Most other banks have done away with common trust funds. We're
getting back into the business," said Ms. Cramsie, who is enough of a fan of the fund that she put
all of her 401(k) money into it.
The fund, managed by Prentiss Smith & Co. of Brattleboro,
Vt., screens out companies with poor records on the environment, employee relations, and human
rights. It also excludes those that produce weapons, nuclear power, or tobacco products.
What sold Ms. Cramsie is not only the investment philosophy, but also the returns, she said.
"The fund's long-term performance is phenomenal," Ms. Cramsie said. "I am not going to
risk my retirement to be socially responsible, but I am enough of a do-gooder, if I can get a
combination of the two, - sociallly responsibility and performance, - it's a win-win."
She
also appreciates the extra scrutiny such funds provide. "Given the corporate scandals, I really
want investment managers to be tearing these companies apart, and I feel like socially responsible
managers are doing that."
In addition to scandals, shifting demographics have spurred the
growth in socially responsible investing, bankers and analysts say. The concept is a hit with
people in their 20s and 30s.
Don Cassidy, a senior analyst with Lipper Inc., said socially
responsible mutual funds generate powerful investor loyalty. "People come to it and don't leave.
It's sort of like getting religion," he said.
Less than 1% of the dollars in mutual funds
are in the socially responsible kind, Mr. Cassidy said, but their market share has more than
doubled in the past four years. Their assets rose 95%, to $24.7 billion, as those in all mutual
funds overall slipped 7%, to $3.8 trillion.
Their long-term performance tends to be
average, Mr. Cassidy said, so investors need not sacrifice returns to moral considerations.
Ms. Cramsie said First National began to consider offering a socially responsible mutual fund
about two years ago. It had two customers, a hospital foundation and an order of nuns, with
investment policies requiring extra due diligence.
Sold on the concept, the bank also
wanted to offer the option to employees as part of its retirement plan, and to investors with
smaller accounts. It therefore "went through the hoops" to create a common trust fund, Ms. Cramsie
said. The bank launched it in February.
AmeriServe set up its common trust fund in April.
But instead of tying it to an established mutual fund as First National did, AmeriServe is creating
its own, with union-friendly screening criteria.
The company is one of only 13 unionized
financial institutions in the country. It already has relationships with numerous unions, which
invest money from their retirement plans in some AmeriServe funds that help finance union
buildings. In all, the company manages $1.2 billion in investments for clients in six states.
Serving unions "is a niche that AmeriServe has developed," said chief investment officer Steve
Krawick. "To me it made a lot of sense to offer an investment vehicle that supports union
philosophies."
Its new Worker Friendly Socially Responsible Investment Fund is a joint
venture co-managed and co-marketed by Fred Alger Management Inc. of New York. The fund uses about
20 criteria - including good records on the environment, labor relations, and human rights - to
choose companies to invest in.
Among those it has ruled out are Wal-Mart, on health-care
and other issues, and Nike, over the use of child labor overseas. Those that pass muster include
Microsoft Corp., Oracle Corp., and Abercrombie & Fitch Co.
Mr. Krawick said he believes
the screening results in less-risky investments. "Companies that are doing the right thing, that
create a good work environment, that are concerned about the environment - over all those companies
aren't the ones having class-action lawsuits filed against them."
AmeriServe initially
plans to target union pension funds, universities, and other large accounts. But after reaching a
critical mass of about $100 million under management, the fund will be made available to the
general public, Mr. Krawick said.
ShoreBank of Chicago is a pioneer in community
development. Jean Pogge, a senior vice president, said socially responsible investing has three
components: social screening, shareholder activism, and community development.
The
$1.4-billion asset bank acts as a retail bank in local minority communities but seeks depositors
worldwide to help fund loans in those communities. By offering FDIC-insured money market accounts,
certificates of deposit, and individual retirement accounts at market rates, ShoreBank has
attracted what it calls "mission-based" customers in all 50 states and 17 foreign countries.
"It's not a donation," Ms. Pogge said. "You get your money back with interest. And you know the
money is being used to help rebuild communities."
ShoreBank's customer base grows every
year, mostly through word of mouth, she said. The bank also advertises in such publications as
Mother Jones and Green Money Journal.
Heartland operates eight community banks in five
states. Its trust and investment
services division manages $1 billion, of which about $80
million is in designated socially responsible accounts, said Mel Miller, the chief investment
officer.
Mr. Fuller said Mr. Miller helped persuade company officials to offer the
accounts almost 20 years ago, even though no customers had requested them. It proved to be a growth
opportunity and an effective differentiator for the company, Mr. Fuller said.
He also
believes it enhances Heartland's reputation. "It demonstrates ... that we care about these kinds of
things," he said. "Especially today, with the problems in corporate America, I think this type of
thing is even more important than it has been historically."
Mr. Miller allows customers
to set the screening criteria for their investments. He says most of them rule out investing in
alcohol, gambling, and tobacco. Many also exclude companies that manufacture weapons.
He
concedes that it takes some economies of scale to make these funds successful. Few small community
banks have trust departments at all, let alone the inclination to test for interest in specialized
mutual funds. But the hurdles are less daunting now than 20 years ago, given a growing number of
retail funds with screening criteria and companies offering affordable research, Mr. Miller said.
"When we first started, not a lot of research was available for socially responsible
screening. So we had to spend a lot of time on the phone, calling companies, trying to get them to
share information, which they didn't want to do back then," he said. "Now we buy a lot of research;
it's much more time-efficient for us."
He said one research company charges $15,000
annually for access to its database of companies and what he calls "basic screening."
Mr.
Miller said Heartland also offers another unique option for the socially conscious: "Alternative
Investment Management," which is high-risk and low-return but meant to do good. Heartland uses the
money to extend loans at below-market rates to worthy projects and to people who don't qualify for
traditional financing.
"During the farm crisis in Iowa we made a direct loan to a farmer
where if we didn't step in, he was going to lose the farm," Mr. Miller said. "He's paid that off
like clockwork ever since."
Wainwright Bank and Trust Co. in Boston promotes itself as a
socially responsible community bank. Steven F. Young, the senior vice president of its consumer
banking group, said thousands of people have switched to Wainwright because of its social agenda.
The bank has made more than $350 million in loans for community projects such as food
banks, homeless shelters, and breast cancer research, he said, and its default rate is near zero.
"It's excellent business," Mr. Young said. "The community benefits. Our depositors know
we're using their money this way, and they love us for that."
The $650 million-asset bank
used to earmark deposits in specially designated accounts for such loans, but stopped years ago
because it was too limiting, Mr. Young said. Now it promotes the idea that every customer who opens
a deposit account helps fund worthwhile projects.
It also has specialized offerings such
as the Green Loan, a home-equity loan with a discounted rate for borrowers installing solar power,
and CommunityRoom.Net, which enables nonprofit Wainwright clients to set up their own Web sites and
receive donations online. About 150 nonprofits have done so, and the service generated more than
$250,000 in contributions last year, Mr. Young said.
Wainwright does not offer socially
responsible mutual funds, but it is a 33% owner in Trillium Asset Management Corp. of Boston, which
is noted for its shareholder activism.
First National Bank of Santa Fe offers socially
responsible options for depositors and investors.
Depositors can earmark their money for
its Community Connection Banking Fund, which was created in 1997 after a customer inquiry. The
designated deposits - which can be made to checking, savings, money market accounts, CDs, and IRAs
- have grown each year and now top $4 million, said Mary Ramier, the bank's marketing officer.
Customers who ask that their deposits be put into the fund receive the same interest rates as
regular account holders. But the bank uses that money solely to make loans for affordable housing,
small businesses, education, and other community projects.
Though the bank does not
advertise the option, Santa Fe residents seek it out. "One existing customer put $500,000 into a CD
with us solely because she wanted to support the objectives" of the fund, Ms. Ramier said.
John Brunett, a financial adviser in the bank's investments department, said he gets frequent
inquiries about socially responsible mutual funds. He offers about 10 such retail funds, but
helping customers select those that meet their standards can be a challenge, he said.
"Everybody's definition of 'socially responsible' is different," Mr. Brunett said. "Some people
think Microsoft is a fine company; some people think it's a large monopoly that's trying to take
over the world."
Santa Fe, home to a lot of artists and aging hippies, is the kind of town
where such considerations are popular, he said. So for the 401K 401(k) plans First National
manages, Mr. Brunett tries to make sure there is at least one socially responsible fund among the
options.
He and Heartland's Mr. Miller said socially responsible investment - which
requires spending time with customers to learn what is important to them - is a natural for
community banks, which pride themselves on personal service.
It is also a selling point
for reaching post-baby boomers, Mr. Burnett said.
"People in their 20s and 30s are more
concerned about this type of things than their predecessors," he said. "This is the kind of service
that's going to draw Gen X and Gen Y. I really think it would be wise to get on the bandwagon."
Ms. McGeer is a freelance writer in New York.
http://www.thomsonmedia.com
http://www.americanbanker.com
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