REC Interview: Steve Schueth, First Affirmative Financial Network - Perspectives on 20 years of work in responsible investment
REC: How did you get involved with responsible investment?
I went to school at Marquette where basketball was the big thing, and we didn’t have anything like the Responsible Endowments Coalition. I had a gradual awakening, but I wish that he had woken up earlier when I was in college, it was 14 years before I got into socially responsible investment.
I joined Calvert in 1989. Previously I had been the director of development at the University of Pennsylvania Wharton School of Business and then was working in the financial services industry. While I was there I met Wayne Silby and John Guffey who founded Calvert in 1981 and were integrating values into investment and learning about the Buddhist tradition and philosophy of ‘right livelihood’, which was a big aha! moment for them. I had been in financial services since 1976 and when I began to learn about the emerging field of socially responsible investing, doing good with money, it was a coming home, it just felt right for me.
For me there are two kinds of people in the world. The majority of folks feel very comfortable having their money disconnected from the rest of their lives. They are okay making as much money as they can and giving a little bit away to solve some of the world’s problems. They aren’t as socially conscious.
The other group of folks is people that are doing good work with their money. We want our money doing good things and making money at the same time. We’re conscious how our money is working in the world and know that it has an impact if we realize it or not. I would have been very grateful if I had realized this in college.
REC: It’s the same way now for a lot of people.
In college most people are thinking about sports and boys and girls. It’s hard to break through the excitement that is happening and the process of leaving home. REC has an important role to play bringing these insights and ideas to students.
REC: Why do you think colleges and universities should be involved in responsible investment?
Think Sustainability. It can be applied to just about everything, companies, colleges, countries, planet. This idea of being sustainable so that everyone lives well for a long time—forever, hopefully—built into that concept is long-term thinking. Schools are places for cultivating long-term thinking. Institutions are long-term investors. Colleges and universities have a really important role shifting the paradigm from short-termism to long-termism. If you look back at the genesis of most of the problems in most of the markets, most of it can be traced to short-term thinking. Even if a college doesn’t get to the point to invest in a more socially conscious way—it needs to spread the message about long-term.
I’ve been involved in some efforts of the last 20 years on responsible investment campaigns on campus. In all cases a small group of committed students was lobbying the university with professional support, and the university successfully stalled and the passion died. REC plays an important role in keeping that flame alive.
Changing policies at schools is challenging: there are many interests. I would not approach them with exclusionary concepts. Encourage them to approach investing by weighting their portfolios with the most responsible corporations.
If you happen to be where, say, Altria is located, you don’t want to totally exclude that stock, but can own less of them. Sustainability in investing is not only very doable, but frankly is necessary.
REC: What message would you send to students advocating for positive changes to investment policies on their campuses?
SS: Students are thinking long-term. Socially conscious investors are very long-term. Investors tend to be there every year. That discipline is important. If you can establish institutional memory, that’s incredibly helpful. You need to be smart about identifying pressure points. Understand the climate and players, and who has influence. If you understand the situation you can be much more effective and efficient in the way you are advocating for change. Maintain information for and educate the next group of students.
REC: How would you convince a university to make community investments?
SS: I think the best is working with a local organization. You can also use an organization like the Calvert Foundation, which can focus on your local area, but get important diversification. Some mutual funds do community investment like Community Capital Management’s CRA Fund and Access Capital Strategies. Pretty much all of our clients get some exposure and don’t even know it. Fixed income in community investments is very competitive.
Also, understand the culture of the situation and the politics. Be positive with trustees and talk about how admirable it is that they are for working with the university. Talk about how from an investment perspective you need to think about the future of the world your students are graduating into, a conversation that can lead to a more conscious set of decisions.
Also, students might remind them of the LA Times investigative report on the Bill and Melinda Gates Foundation where they were invested in companies causing the diseases where they were building clinics. There was such a cognitive dissonance.
REC: Anything you’d like to add?
SS: More and more clients are interested in the advocacy that we are doing. They are interested in what we’re doing to poke and nudge companies to be better corporate citizens and to identify companies embracing sustainability. From a client perspective there does seem to be a shift towards a social improvement type of strategy and there is more recognition that companies have a huge impact on quality of life.
I see a massive erosion of trust in both government and companies. People have turned to us to manage money in a different way. If you have board members and people who are mistrustful, you can use that approach. You can also look at qualitative analysis of impacts, behaviors, and culture. Sometimes research is a way to open eyes and open minds.
It's the end of the semester and many campaigns in our movement are wrapping up with student government resolutions supporting demands for responsible and accountable investment policies at our schools. These resolutions are often the results of hours of petitioning, tabling, and teach-ins designed to educate the campus community and gain support for ethical endowment practices. Two of those resolutions come from committed REC affiliates at Washington University-St. Louis, the University of Michigan-Ann Arbor, and Macalester College.
Washington University-St. Louis students organized Washington University Students for Endowment Transparency (WUSET) last year after learning that many members of the Board of Trustees are connected (by Boards or employment) to dirty energy companies in order to give students and the campus community, not industry interests, a say in how the school's money is invested. After months of rallying, petitioning, meeting with officials, and otherwise raising a ruckus the WUSET has successfully convinced the student government to support their efforts to bring accountability to Wash U investments, predominately by establishing a Committee on Investor Responsibility like those in place at the top universities in the nation. The school plans to begin reviewing other responsible investment policies and develop recommendations this summer. A website about this effort is expected this month.
University of Michigan-Ann Arbor graduate and undergraduate students from Net Impact and environmental groups successfully passed a resolution supporting responsible investment practices of the endowment. That resolution focuses on developing proxy voting guidelines on environmental and social issues to add to the existing guidelines in use for governance and financial issues. If the UM administration agrees it will be largest public university endowment voting environmental and social proxies!
Macalester College students recently passed a referendum defining socially responsible investing for their campus. They have since met with administrators who are eager to integrate students into the investment process and are open to using the guidelines students approved! You can read the referendum here.
If your group is currently pushing a resolution, or has successfully passed one, let us know! We'd love to share the news and are happy to provide you with copies of previously submitted and passed resolutions from other schools as well. For access to those resources email organize (at) endowmentethics (dot) org.
written by Jay Cassano, New England Student Organizer
In April of 2008 Vermont became the first state in the country to approve the low-profit limited liability company (L3C) as a legal business structure. Throughout 2009 the L3C business entity has been growing in recognition, having been ratified by the states of Utah , Michigan , Wyoming , and Illinois . It is also currently being considered by state legislatures in North Carolina, Georgia, Oregon, North Dakota, Tennessee, Montana. In addition, the L3C structure has been ratified by the Crow Indian Nation and the Oglala Sioux Tribe. The fact that Native American communities, which are easily some of the most disenfranchised peoples in the United States, want to make use of the L3C business entity shows that it has significant potential as a vehicle for social good.
The L3C is legally very similar to a limited liability corporation (LLC). LLCs were designed to provide a flexible business structure for small businesses that would have some of the benefits of partnerships and sole proprietorships while limiting the financial risks to members of the LLC. The main difference between L3Cs and LLCs is that L3Cs streamline the process of meeting the requirements for the IRS's Program-related Investment (PRI) regulations by being specifically structured in their legal code to already meet those regulations. PRIs are a class of investments that are generally used by private foundations in order to meet their tax exempt requirements; private foundations are required to either donate five percent of their assets to social programs or to invest five percent in socially beneficial program-related investments, which are investments that would not be made by an investor whose primary motivation was financial return.
The organization that is promoting the adoption of the L3C, Americans for Community Development , describes the L3C as “a new form of limited liability company which combines the best features of a for-profit LLC with the socially beneficial aspects of a nonprofit. It is a for-profit with a nonprofit soul.” L3Cs must include in their charter that their purpose is primarily to be socially beneficial and that earning profit is secondary to their social mission. Some anticipated uses of the L3C structure include newspapers, museums, symphonies, recreational facilities, and certain types of community development projects.
Because L3Cs are allowed to earn a profit, they are not 501(c)3 nonprofit charitable organizations. This means that they will not be attractive to individual donors looking only for tax exemption. But the strength of L3Cs is that they do not compete for these donations, but rather open up a completely underdeveloped field for institutional investors such as private foundations. Because of the complexity and investment of time involved for investors to file and process paperwork for PRIs, many private foundations do not currently make use of PRIs, preferring to meet their exempt requirement through donations to 501(c)3s. Because the L3C is designed to specifically comply with PRI regulations, foundations making PRIs in L3Cs are allowed to skip the bulk of the paperwork involved with filing a PRI. In this way L3Cs position themselves strategically between nonprofits and for-profits. Another advantage of L3Cs is that they are legally allowed to tranch investments, which enables different investors to choose different levels of risk and reward.
In the socially responsible investment movement, L3Cs are mostly useful for private foundations that would prefer to meet their exempt requirements through PRIs in order to gain a small financial return rather than donating 5% of their assets to nonprofit charities. Nevertheless, we should investigate the possibilities of utilizing L3Cs as an investment vehicle for college and university endowments. One possibility is that public universities whose state funding is supplemented with an endowment managed by a private foundation could encourage their foundation to invest in L3Cs. In addition, because L3Cs are required to serve social good but are allowed to earn a profit, they could prove to be an interesting model for providing employment in low-income communities through a for-profit community development venture. These sorts of community development L3Cs might end up serving a greater social good than many charitable nonprofits by providing meaningful employment to disenfranchised peoples. Private colleges and universities without foundations attached to them could use L3Cs as a vehicle for allocating 1% of their endowment in community investments . This would give another option for community investment besides revolving loan funds. L3Cs are still very new and are not yet widely utilized, but in the long term they could prove to be an important component of a diverse socially responsible investment portfolio.
- Americans for Community Development: About L3C
Vermont Secretary of State Corporation Database (search "L3C" to get a list of L3Cs in Vermont)
- Chicago Tribune: "New corporate structure could give social entrepreneurs new funding stream"
- Huffington Post: "How To Save Newspapers"
- Social Earth: "An Insider's Look at the L3C and What it Could Mean For You and Your Social Enterprise"
You can reach Jay Cassano at: firstname.lastname@example.org
Socially responsible investing, or SRI, is a strategy of investing that seeks to maximize financial returns just like every other investment strategy, but also attempts to maximize social good. SRI is becoming very popular recently, accounting for about eleven percent of the $25.1 Trillion of assets under management as of 2007 according to SocialFunds.com, but SRI is not a new concept. Religious institutions have engaged in SRI with their funds as well as encouraging their followers to invest responsibly for hundreds of years. Religious groups have attacked issues such as slavery and workers rights through investment decisions on a strictly moral ground.
In the 1960’s SRI began to grow with the use of negative screens. Negative screens are devices investment professionals use to restrict investment in companies that engage in various activities such as arms production, tobacco, gambling, and liquor. Negative screens have also been used in divestment campaigns, most notably to end apartheid in South Africa.
Although many people contend that negative screens and SRI is a bad financial decision because it limits the investors, recent data has begun to show that may not be the case. Many reports are emerging that show SRI funds outperforming non-SRI funds, and many investors are beginning to understand responsibility as a metric for financial success. Not only does responsibility represent a major risk to organizations due to evolving market drivers such as climate change and resource scarcity, but governmental changes also have the potential to catapult responsible companies into financial success with programs such as sustainable spending from the stimulus, corporate governance reform due to the crisis and cap and trade programs.
Since SRI is not only a moral choice, but also a financial benefit, more institutions will now hopefully recognize it as a necessity. Not only will this earn them better returns, but also make the world a better place!