Beyond profits: Millennials embrace investing for social good

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Once she gets her MBA degree from UC Berkeley in May, Leigh Madeira’s dream is to help find funding for young companies devoted to improving the lives of the world’s poor.

That isn’t quite what her family had in mind. When she told her 90-year-old grandfather about her plans, “He gave me this look,” she says, laughing.

For 29-year-old Madeira and others in her generation — the millennials — the goal of a high-priced business degree isn’t a job in traditional Wall Street finance anymore. Many are embracing “socially responsible” investing, which steers money to businesses and organizations that pledge to have a positive effect on society and the planet.


The socially responsible investing segment of money management has been around since the 1970s, but its growth has exploded over the last decade and by some estimates now covers more than $6 trillion in invested assets. The strategy also has become much broader in scope and ambition.

In the 1980s, most socially responsible mutual funds simply avoided stocks of so-called vice industries — gambling, alcohol, cigarettes and weapons. All other stocks were fair game.

Now many of the funds say they specifically seek out companies that treat all of their constituents well: not just shareholders, but employees, suppliers, customers and local communities. The funds also want to see strong pro-environment corporate policies that focus on resource sustainability.

The idea of investing with a social purpose matches well with the “sharing” economy that has grown up around the millennials, the 80-million-plus Americans born between about 1980 and 2000.

“The millennial generation believes what we believe,” said Bennett Freeman, senior vice president for sustainability research and policy at Calvert Investments, one of the biggest advocates of socially responsible investing.

That has investment firms in the sector ecstatic about their growth prospects as millennials enter their prime saving and investing years, and potentially inherit trillions of dollars from grandparents and parents. Some even see a new style of “caring capitalism” emerging to reverse the global trend of income and wealthy inequality.


Nydia Cardenas, a 28-year-old MBA student at the University of Michigan, believes that Wall Street needs a makeover.

“I feel like the system is set up to breed greed,” she said. “But I think finance can be used in a really positive way to transform society.”

Yet there are questions about how far millennials will be willing or able to take socially responsible investing — especially if it means their nest egg earns less than the stock market overall. As people age, the fear of outliving their money can trump the willingness to sacrifice personal financial gain for the greater good.

Over the last 10 years, the average U.S. socially responsible stock mutual fund has trailed the benchmark Standard & Poor’s 500 index, according to investment research firm Morningstar Inc. But then many funds that don’t screen stocks for social benefits also have lagged behind the market overall.

Proponents of socially responsible investing say it’s a common misconception that their movement favors businesses that de-emphasize profit growth. In fact, some of the most widely held stocks in socially responsible mutual funds also are some of the most profitable U.S. companies, including Apple Inc., Qualcomm Inc., Google Inc. and Johnson & Johnson.

Cardenas is on this year’s leadership team of the Social Venture Fund, an investment portfolio overseen by students at the University of Michigan’s Ross School of Business. The fund, launched in 2009, invests only in small companies that are “committed to positive and measurable social or environmental impact.”


But the fund isn’t interested in not-for-profit enterprises. “When we do our due diligence we ask, what’s the return on investment we think we can get?” Cardenas said. “We’re trying to make sure that the fund is sustainable.”

This year the fund invested $50,000 in Powerhouse Dynamics, a 6-year-old Newton, Mass., company that has developed a cloud-based energy management tool for small businesses. The program controls power use for each piece of equipment in a business, with the goal of reducing power consumption and utility emissions.

Madeira’s path to UC Berkeley’s Haas School of Business began with her undergraduate degree in finance from the University of Notre Dame in 2007, then six years of work analyzing companies and markets at investment firms, including banking giant Credit Suisse.

She enjoys the challenge of “putting together that puzzle of what makes a company work,” Madeira said.

But she said she didn’t feel a connection to the businesses she was researching. That led to a 2010 fellowship with Kiva, a nonprofit group that arranges microloans to help lift people out of poverty. Madeira worked with borrowers in Ecuador.

The Kiva gig helped cement her desire to meld her love of finance with community service, Madeira said. At Berkeley, she is a managing fellow of the Haas Impact Investing Network, a hands-on student program that evaluates business concepts that aim to tackle specific social problems.


In the U.S., companies such as Playa del Rey-based Toms Shoes and New York-based eyewear maker Warby Parker have become symbols of business success in the sharing economy. Toms donates a pair of shoes for every pair it sells. Warby Parker does the same with eyeglasses.

Alexandra Korijn, a 26-year-old MBA candidate at Northwestern University’s Kellogg School of Management in Chicago, said many older people have the impression that it’s not possible for a business to be socially responsible and make money.

“I think our generation feels very different about that,” she said.

More money managers are buying into the idea of doing well by doing good. A new report from the Forum for Sustainable and Responsible Investment, an association of investors that follow social precepts, estimates that $6.6 trillion in U.S. portfolios is invested with social goals. The total has soared from $2.2 trillion a decade ago.

That money is invested in traditional socially responsible mutual funds, community investment organizations and huge public pensions funds that apply social standards to companies whose shares they own.

Even so, that $6.6 trillion is a modest 18% of the $36.8 trillion in total U.S. invested assets that the forum surveyed.

Some investors believe that there is too much risk of suffering poor returns by excluding a large number of companies from a portfolio using subjective social standards.


Vanguard Group, the mutual fund titan that advocates “passive” investing — that is, owning the entire market rather than trying to pick winners — also offers the Vanguard FTSE Social Index stock fund, which screens companies for certain social, human rights and environmental criteria.

The fund has $1.5 billion in assets, a tiny sliver of the $3 trillion in total Vanguard assets.

Chris Phillips, a senior analyst at Vanguard, says one key concern investors have is that standards of social responsibility can vary widely. “The subjective nature is the critical issue. It can be a very individualistic discussion to have,” he said.

Even some of the pioneers of socially responsible investing admit that one fund’s saintly company can be a sinner to another.

“We all look at each other’s portfolios at times and say, ‘I don’t know how they can justify that one,’” said Amy Domini, founder of Domini Social Investments in New York.

What’s more, socially responsible fund managers are wrestling with how to address the crucial economic issue of income inequality, including how otherwise conscientious companies can defend record corporate earnings and enormous executive salaries against stagnant worker wages.


“We’re not seeing companies go head-on to address these issues,” Domini said.

John W. Rogers Jr., who manages one of the largest socially responsible stock funds, the Chicago-based Ariel Fund, said he is disappointed that more of his peers aren’t pushing for greater racial diversity in companies’ executive ranks and on boards.

“Race has sort of been left out of the equation,” said Rogers, who is African American. “There is an assumption people have that things are better, that everything is resolved.”

Still, for many investors, it’s enough that a fund tries to invest with a social conscience. And some say earning the highest possible return isn’t a requirement.

“I am quite comfortable with the idea that a fund with a strong social or environmental component would produce a weaker return” than the market overall, said Jennifer Krill, 42, who heads Earthworks, an organization that advocates for environmental protection. Her retirement savings are with the Calvert group of socially responsible funds in Bethesda, Md.

But she concedes that she hasn’t looked closely to see how her fund has performed compared with the market.

“I probably haven’t thought about it as much as I should,” Krill said.

Proponents of socially responsible investing flip the performance issue on its head: They argue that screening out companies that ignore social or environmental concerns can eliminate stocks that could be time bombs — for example, polluting firms that could eventually face mammoth cleanup settlements.


“We think that if you don’t take these things into account, you’re going to miss risk exposure that could turn around and whack your performance later,” said Jed Emerson, chief impact officer at ImpactAssets, an organization that links investors with socially responsible money managers.

“It becomes a way to actually protect a portfolio,” Emerson said.

Depending on the fund and the time frame, it’s easy to find performance data that support both the pro and con arguments for socially responsible funds.

For example, the Vanguard FTSE Social Index stock fund has earned an average of 16.5% a year over the last five years, beating the 15.7% return of the S&P 500 index. But over the last 10 years the Vanguard fund trails the S&P 500, 6.8% to 7.9%. The average socially responsible fund also trails the S&P, earning 6.7% a year in the period, according to Morningstar.

Still, facing a struggling global economy, severe income inequality and frightening climate change, many younger people see investing for the greater good not as an option, but as the only way.

“I think we don’t have a choice,” Krill said.