Five Questions about SRI – Weekly Expert Interview with Andrew Bellak, CEO, and Terry Mollner, Chairman, StakeHolders Capital, Amherst, Massachusetts, United States of America – June 14, 2013

Each week Emerging Markets ESG publishes an interview entitled, “Five Questions about SRI.”  The interview features a practitioner’s insights about SRI in emerging markets and through Emerging Markets ESG shares this expertise with a wide global audience.  The goals of Five Questions about SRI are fourfold:

  • To collect a catalogue of examples of SRI in practice in emerging markets;
  • To raise awareness about SRI in emerging markets;
  • To reflect on what SRI in emerging markets means to practitioners; and
  • To enable SRI practitioners in emerging markets to network with peers around the world.

This week’s interview is with Andrew Bellak, CEO, and Terry Mollner, Chairman, StakeHolders Capital, Amherst, Massachusetts, United States of America.

StakeHolders Capital is a full service wealth management firm committed to integrating our clients’ values with their financial goals.  It practices socially responsible weath management and values based investing.  The company is uniquely able to offer this by virtue of the expertise of its investment team, which consists of a founder of the socially responsible investing (SRI) movement and three seasoned financial professionals. The team has a broad depth of experience in the wealth management field, and offers comprehensive wealth management strategies to individuals, businesses and institutions.  Getting to know clients is the firm’s top priority. This enables the firm to provide the most advanced wealth management solutions that reflect each client’s values, ethics, and vision for a better world. Together with each client, the firm works to accomplish the client’s financial goals in a way that promotes social justice, stewardship of the planet and the common good of current and future generations. Research supports that the SRI approach offers competitive risk-adjusted returns.  It selects investments within a framework of broad-based global diversification. In addition, if clients so choose, its extensive knowledge of high-impact and local investing opportunities allow it to offer those alternatives to traditional investing for a portion of their portfolios.  StakeHolders Capital is an independent fee-based Registered Investment Advisory Firm and does not receive commissions or referral fees. It is privately held by its three principals.  StakeHolders Capital is proud to be a leader in sustainable, community and impact investing. It is also the birthplace of the Common Good Investing philosophy, which it believes is the next stage in the evolution of SRI and impact investing.

Andrew Bellak, CEO, brings a unique combination of trading experience, business acumen and personal passion for socially responsible investing to StakeHolders Capital. After a decade trading equity options on the floor of the American Stock Exchange he and Brad Stonberg, StakeHolders CFO, started, managed and ultimately sold their trading firm to Goldman Sachs.  Andrew and his wife moved from New York City to Amherst to raise their three boys. It was there that he decided to combine his professional expertise and his personal passion for values based investing.  With Terry Mollner and several other industry professionals, Andrew co-organized the first Pioneer Valley Sustainable Investment Summit in summer 2008. It was through this process that the two decided to join forces and founded StakeHolders.  Andrew has a BA/BS from the University of Virginia and a Master’s Degree in Education from the University of Massachusetts, Amherst. He holds the Series 65 certification.

Chairman Terry Mollner is a founder of the Calvert Social Investment Funds – the first family of socially responsible mutual funds.  He and Robert Swann were the founders of the Institute for Community Economics in the early 1970s.  Under Terry’s leadership, twenty pioneers from around the country met monthly for over a year to write the first comprehensive set of screens for socially responsible investing. Today, as the largest family of ethical funds, Calvert holds over $5 billion under management. Terry continues to sit on its Board of directors. He also sits on the board of Ben & Jerry’s, a company he tried to buy in 2000 to sustain it as a socially responsible company. When this proved untenable, he was one of the main architects of a contract with Unilever, the ultimate buyer, to have the extant Board continue to have primary responsibility for the social mission and brand integrity. Ben & Jerry’s now models how to remain a socially responsible company while inside a multinational.  The Calvert Social Investment Foundation (CSIFdn) also traces its roots to Terry’s leadership. Whereas the CSIFs established a new investment territory in the professional investment community, called “socially responsible investing,” CSIFdn created a new investment territory called “community investing.” Today, to “end poverty through investment,” the CSIFdn raises low-interest capital through the sale of community investment notes.  CSIFdn has over $550 million invested around the world in micro-loan funds, low-income housing funds, social enterprises, etc.  An early chair, Terry continues to sit on its Board and its Executive and Investment Committees.  Terry holds the FINRA Series 65 Investment Advisor registration.

Emerging Markets ESG:  How would you define socially responsible investment (SRI)?

AndrewBellak Andrew Bellak:  It is a much more comprehensive analysis of an entity’s business model that considers all stakeholders related to a company’s footprint not just shareholders.

Terry Mollner:  Adding to what Andrew wrote, the emerging movement in SRI is to add the framework of priorities when considering an entity’s activities.  Like each person who has agreed to be a member of a society of human beings, I assert that we naturally give priority to priorities and the highest priority of a company should be to benefit the common good and any other priority sould be secondary to that, including making a profit.  This is called “common good investing” and there are many examples in the SRI world that fit this criteria: Ben & Jerry’s (even now that it is owned by Unilever because of a contract that had the board of directors maintain ownership of its social mission and grand integrity), Stonyfield (even now that it is owned by Danon because of its contractual relationship), Patagonia, Cliff Bar, Eileen Fisher, and many more. They also include the over 50 businesses started or supported by Muhammad Yunus’s “social business movement” and many non-profit organizations in the business area such as community development financial institutions (CDFIs), microloan organizations, and the program related investments (PRIs) of foundations.

Emerging Markets ESG:  What distinguishes SRI from mainstream investment? 

Andrew Bellak:  As I said before, the main difference is considering extra-financial areas / factors such as environmental impact, labor, fair trade, community, governance, quality of supply chain, and negative effects of products (nuclear power, weapons, alcohol, gambling).

There is another significant piece to discuss and that is shareholder advocacy and activism.  We use funds – mutual funds and exchange traded funds.  The socially responsible mutual fund companies advocate on behalf of the individual investor.  These fund companies also group together with other institutional investors to form an even bigger group of investors.  This gives the individual investor a feeling of empowerment that essentially their ‘elected representatives’ are fighting for their interests.

The institutional investors engage companies regarding specific policies and practices they would like improved.  If they cannot negotiate agreement then the investors may resort to a public proxy vote on the issue.  Often, this is negative publicity companies look to avoid.

TerryMollner5-11Terry Mollner:  In common good investing it is having the publicly declared priority be the common good and profit being a secondary priority and this being evidenced by its behavior.  The behavioral focus is much of what SRI has focused on without taking into consideration its continuous highest priority that ultimately determines everything else. Common good investing gives priority to whether or not this is stated priority and evidenced in all of its behaviors, not just its behaviors on a particular list.

Emerging Markets ESG:  Which extra-financial theme – environmental, social or governance – is the most challenging for companies in emerging markets to manage?

Andrew Bellak:  They are all difficult, but Terry has had more experience with this area; so I will let him answer this one.

Terry Mollner:  They are all difficult. Getting information on all of them is far more difficult than in the developed countries. There are fewer third parties providing information, there is greater ease in hiding actions, and government regulations and monitoring of companies is usually not mature. However, if I was to honor your question, I would say that identifying environment transgressions is the most difficult. The absence of many eyes on the behavior of companies makes it easier for them to cheat on their promises.

Emerging Markets ESG:  Which extra-financial theme – environmental, social or governance – is the most challenging for investors in emerging market companies to analyze?

Andrew Bellak:  Frankly, I have little first-hand knowledge of this area.  My overall sense is that it is more difficult to get reliable and verifiable information in those three areas.  I would defer to fund managers who invest directly in emerging market companies both at the public and private level.

Terry Mollner:  I believe I answered this question when answering the last question. Therefore, I would like to add this.

It is time for us to take a look at the world with national boundaries being secondary in importance and to solve our problems in the private sector as much as possible. For instance, I am currently working on a project that could use crowd funding to create a starter trust fund ($10,000 in US dollars) for children in such a way that it would also create the equivalent for poor children around the world. As more and more people join it can become the equivalent not only of a trust fund that provides an annual payment to the beneficiary but also a private social security system for more and more people and, yes, possibly, for everyone on the planet someday. I am working on another project that will create a forever growing endowment fund around every local community that chooses to participate where the members of that community decide the projects (for-profit and non-profit) into which to direct their membership portion of the capital in the endowment, only in projects that have gone through a due diligence process and are on the website. The members continuously donate a small amount monthly ($11) which eliminates the need to be concerned about losses and it will provide the most difficult capital to raise, the capital needed between family and friends money and profitability. How about the creation of the equivalent of an honest currency: establish a global bond fund where investor’s capital is measured in a new unit of measurement that is an abstraction, like the pint or inch, that never changes value by definition. Therefore, the currency equivalent bond shares will never inflate or deflate (while prices will still rise or fall based on demand). Each investor will be able to credit or debit shares to other investors in the bond fund; thus, like a checking account for every debit there will be an equal debit. Using it as your checking account will allow everyone in the world to use it as a currency equivalent. The multinationals will be most invested in using it to eliminate the need to deal with all national currencies; this will create the liquidity necessary for everyone to use it. These are common good investing kinds of ideas that I think we are ready to create.

Emerging Markets ESG:  The two of you and the institutions you have nurtured are SRI pioneers in the United States.  Despite your efforts, the SRI market has not developed as broadly nor grown as much in the United States as it has in Western Europe.  What do you view as the main obstacles and stumbling blocks inhibiting the mainstreaming of SRI in the United States?  Do emerging markets pose a special challenge for SRI in the United States?

Andrew Bellak:  I think there are two reasons to address the first question and they are related.  Those two reasons are demographics and fear.  Our colleague Stephen Viederman has had a long career in SRI and has identified who makes investment decisions at large institutional investor groups and why they may be reluctant to choose SRI.   The groups I’m referring to are large foundation endowments and pension plans. The gatekeepers if you will who decide and recommend investments are members of an investment committee and/or board of directors.

This is my own conjecture mostly based on conversations with SRI industry people. There are both demographic and political reasons that may explain their investment selections and these tie into emotional explanations as well – behavioral finance.

These committee and board members are often of a certain demographic, usually age 55 or older, male and white.  Even though the younger set may have come of age in the 1960’s they grew up with a certain experience and therefore may have a certain mindset as a result.  Social activism and investing were still seen as separate.  The concept of using investing as a tool to effect change on a large scale was in its infancy.

Furthermore, humans want to avoid embarrassment and protect their position as often times those are paid positions.   So the incentive to take risk by doing something different is perceived as being low while the potential for underperforming and then being held responsible seems high.  So fear is a factor in the decision making.  The gatekeepers need political cover from constituents.  In pension plans it can come from the beneficiaries; for endowments, the donors and founders (if alive) may provide this.

Do emerging markets pose a special challenge for SRI in the United States?  I am not aware of any special challenges in the United States other than a geographic bias. My guess that is not unique to the US and that other developed countries have a different bias but not the depth and breadth of a domestic investing landscape like in the US.  Therefore, non-US countries may naturally seek to diversify and look to emerging markets.

Terry Mollner:  We were the first country to establish a democracy that has lasted and of this we are very proud. However, there are layers of maturity of being a human being and, therefore, a society.

At each layer of maturity we become addicted to it because it solved the problems we had at the layer before it and we are trying to have it solve our current problems rather than looking to discover what the next layer of maturity may be. We are still trying to solve our problems with the skills of the teenage layer of maturity, the layer where asserting our individual independence is our priority. As a result, anything that is seen as giving priority to the common good is easily labeled “socialism” or worse. In our thinking, as in the thinking of many teenagers, there are only two options: giving priority to our individuality or dictatorship, freedom or doing what mom and dad say.

The next layer of maturity is when we discover that our most important free choice is our fundamental belief about reality: we give all of our power to it and follow it. It could be capitalism, Christianity, socialism, individual freedom of expression, or loving thy neighbor as thyself. The next layer is when we figure out the accurate fundamental belief about reality. Yes, anything can be reflected in a language and science has clearly revealed many truths to us, many of which we can verify in our personal experiences.

I believe the accurate fundamental belief is that the universe is an indivisible whole. In America today television, the Internet, and press are full of debates about fundamental worldviews. However, if you look at the direction of the beliefs of the last few generations I think you will conclude that we are moving in the direction of concluding that the universe is an indivisible whole, not an immense number of competing separate parts. We unconsciously take on the latter when we learn a language because it is an immense number of different and separate parts. The universe is an immense number of different parts but they are all connected to each other and there is not a second place to put anything. We have also not found the beginning, end, or edge of the universe. We do not understand how this can be, but someday we will.

Therefore, there is a third way as a result of discovering that the universe is an indivisible whole: freely choosing to give priority to the common good of the one indivisible whole and second priority to our self-interest. Then we will relate with the universe the way our arm relates with the rest of our body: it always gives highest priority to what is best for the body and sees that as what is best in its self-interest. There is no experience of compromise or tradeoff. This is called “the state of grace” in Christianity and “enlightenment” in the East. In behavior it has forever been defined as “moral behavior.”

We are moving in this direction and we will, as a global human society, get there just as we have gotten to each lower layer of maturity. There was a time when none of us knew a language; now everyone does. There was a time when we did not know of the importance of individual freedom and, therefore, making decisions through some form of democracy. Now two-thirds of the nations on the planet are at least technically democracies and they are all maturing in the art of it. We will get to these higher layers as well, eventually.

The wonderful thing about truth is that it is a hard, immovable object. You eventually have to yield to it. Europeans are older societies and not as drunk on individuality as we are or as afraid of socialism or such as we are. However, they have other problems we do not have.

I believe our entrepreneurial skills will have many Americans lead us into the kinds of institutions I described above, all in the private sector because we have to build on individual freedom and free markets, they represent our teenage layer of maturity. Being drunk on individuality is a good thing; it means it has become a habit and when we turn our attention to discovering the next layer the skills of the teenage layer is sustained as the context without the need of our attention.

Are you still with me????? I hope we have at least made this exchange interesting.