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What products and services does KLD offer for investors and money managers looking to invest using social, environmental, or governance criteria?
What universe of stocks does KLD cover through its research?
Portfolio screening: What is it?
Screened portfolio investment: What can it accomplish?
Screened portfolio investment: What issues can it touch?
Screened portfolio investment: How and what does it communicate?
Screened portfolio investment: What goes in the investment policy?
What products and services does KLD offer for investors and money managers looking to invest using social, environmental, or governance criteria?
KLD’s research is designed for investors and money managers who integrate environmental, social and governance factors into their investment process. KLD’s research can be used for screening, stock picking, or fund creation. KLD offers the following research products: SOCRATES, KLD Compliance, KLD PASS, and KLD STATS.
KLD also offers customized products and services through KLD Consulting, including customized portfolio audits, universe reviews, buy lists and restricted lists; specialized issue research; social investment policies and screening guidelines; customized company reports; and social investment products for financial institutions.
What universe of stocks does KLD cover through its research?
KLD covers the global publicly traded universe of companies for a number of issues.
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Portfolio screening: What is it?
A screen is a criterion used in the process of making an investment decision. A screen may reflect the standards of financial quality a potential investment must meet. Or, it may reflect non-financial criteria, such as a manager's specialization, in, say, large capitalization companies or Pacific Rim equities.
Screened portfolio investing is the application of social criteria (or social screens) in investment decisions about conventional investments, such as stocks, bonds, and mutual funds. These criteria augment the institution's financial criteria; they should neither replace nor weaken them.
A social screen is a non-financial criterion that augments an investor's financial standards and reflects the investor's social, ethical, or religious concerns. In mission-based investing, the institution's mission defines the parameters for the social screens. The effect, if any, on investment performance of the application of particular social screens remains an open question. But in the authors' view, the evidence -- index performance, fund performance, scholarly studies -- appears to indicate that social screening does not require an institution to sacrifice performance. See Part VI, The Performance of Screened Portfolios.
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Screened portfolio investment: What can it accomplish?
Portfolio screening has two objectives: consistency and communication. Thus:
- it can reassure an institution that its investments are not working contrary to it's mission, and
- it can serve as a means of communicating and educating on issues central to an institution's mission.
An example of the first objective might be a foundation concerned with land-use issues which found owning shares in developers of agricultural land, such as Wal-Mart and Home Depot, inconsistent with its mission and decided not to buy them. The second objective is more subtle yet more important: to make a public statement of its mission in a financial context.
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Screened portfolio investment: What issues can it touch?
In certain areas, screening can assure that an institution's domestic investments are not inconsistent with its mission. For example, a hospital may regard profiting from tobacco as at odds with its healthcare mission. Harvard and Johns Hopkins reached this conclusion, even though their overall educational mission includes more than health care.
It is relatively easy to screen out the main companies in the lines of business covered by the exclusionary screens such as alcohol, gambling, tobacco, military contracting, nuclear power and firearms. The most difficult questions involve tangential businesses. Was 3M in the business of selling tobacco when its outdoor advertising subsidiary sold billboard space for cigarette ads? Are groceries that sell beer, snuff, and scratch tickets in the business of selling alcohol and tobacco products and gaming chances?*
Beyond the basic exclusionary areas, screening becomes more difficult. The exclusionary screens usually have clear-cut answers: a company makes cigarettes or it does not. For the other type of screen -- qualitative screens -- a "yes" or "no" is rarely an appropriate answer. In these areas companies can have negatives or positives or both.
Qualitative screens are sometimes used affirmatively. Some institutions seek to invest in companies that advance their mission. An environmental group might include in its investment guidelines a preference for companies selling ecologically sound products.
By their nature, qualitative screens require a nuanced evaluation of a company's performance. Evaluating the relationship between a company and the environment in which it operates poses difficult questions for researchers and investors. Qualitative screening becomes harder if the companies are multi-nationals or are not subject to U.S. reporting requirements, thus limiting the information available on their operations.
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Screened portfolio investment: How and what does it communicate?
Portfolio screening is a means of communicating with an institution's constituents and with companies.
Communications with constituents usually occur in the process by which the institution develops its screening policy and then in periodic (usually annual) reviews of the policy and its results. This type of communication is described above. Communication with companies occurs in two contexts: first, in the process of screening, itself; and second, in specific instances where a company's conduct is of concern.
In order to screen, an investor needs information. Directly or indirectly, the main source of that information will often be the company itself. Companies pay attention to the requests and questions they get from shareholders or potential investors. They also heed the queries they receive from research firms, because the questions represent those of the firms' clients who are primarily institutions.
In the context of mission-based investing, publicly traded companies certainly know the social research firms and the clients they represent. They are aware of and respond to the issues that concern these investors. To respond, of course, does not imply a commitment to change. But it does acknowledge receipt of the communication. The information received by research firms often goes into reports which they provide to their clients. Most research firms ask a report's subject to review it before publication. Again, the company hears what investors' concerns are and has an opportunity to respond.
Investors who hire a manager specializing in SRI or who buy a socially screened mutual fund achieve the same objectives when the manager or the fund puts questions to a company. Of course, investors have an on-going responsibility to communicate their social concerns to their managers or fund management. Supervision on social issues should not end with hiring. A 1998 survey by the AFL-CIO revealed that two union pension fund managers had failed to follow substantive guidelines on how to vote proxies.*
In out-of-the-ordinary situations, an institution may feel it must communicate directly with a company. But, that end is not required, even if the company fails to respond satisfactorily. Options range from doing nothing apart from registering displeasure to filing a shareholder resolution. The types of statements made through screening or direct expressions of concern let companies know the standards to which they are being held. They affirm for the public, an institution's constituencies, and the institution itself the value of its mission for society.
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Screened portfolio investment: What goes in the investment policy?
An investment policy is a written statement of an institution's objectives for its portfolio. A policy statement may include general guidance for implementing social investment objectives. The statement may simply require that the institution's funds "be invested consistently with our mission." Indeed, statements of a mission-based policy should be kept simple.
In most cases, a set of working guidelines (usually devised by a board's investment committee) will amplify the general statement in the investment policy. The working guidelines might include:
- affirmative guidelines specifying the types of policies and activities the institution wishes to support;
- negative guidelines on products and practices from which the institution would prefer not to benefit; and
- exclusionary guidelines on what types of companies should not be considered for the portfolio.
Since managers will use working guidelines in their day-to-day decision-making, clear examples and brightly drawn lines are important.
A few institutions require managers to submit proposed buy lists for screening. Others provide their managers with restricted lists, the names of companies whose securities a manager may not buy. Still others require their managers to work with a screening consultant. But, most place the responsibility for screening on their managers.
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