Earlier this month, the US Social Investment Forum (SIF) released its 2010 Report on Socially Responsible Investing Trends. The Report has been a standard reference for the American SRI market since the first was produced in 1995. (MSCI is one of two lead sponsors of the 2010 Trends Report.)

SRI has grown steadily over that period, and since 2007, its growth has accelerated dramatically. While total US assets under management grew less than 1 percent, sustainable/SRI assets expanded more than 13 percent over the past three years.

Along with other data to support this growth story, the Report also explores themes that deserve wider notice. These include the pivotal role played by institutional investors; the expansion of "positive" environmental, social and governance (ESG) integration methods; and how public policy changes are driving further ESG integration by investors – including those who aren’t explicitly “socially responsible.”

During the 2010 US proxy season, shareholder resolutions seeking enhanced disclosure on climate change and sustainability attracted greater approval than in years past. 2010 also saw increased support for proposals that ask companies to report on their political contributions. Another hopeful sign was the withdrawal of an unprecedented number of environmental and social resolutions, as more companies agreed to address such issues before they came to a vote.

The FTSE KLD 400 Social Index (KLD400) celebrates its 20th anniversary this month. The world’s first benchmark index constructed using environmental, social and governance (ESG) factors, the KLD400 sparked a new era of responsible investing, helping transform the field from a small niche into today’s $6.7 trillion global market. [Source: Eurosif 2007] Since 1990, the KLD400 has outperformed the S&P 500, proving that a portfolio constructed using ESG criteria can, over the long term, deliver competitive risk-adjusted returns.

Dan DiBartolomeo and Lloyd Kurtz, who was one of the original KLD employees apart from the firm's founders, have studied the risk and return characteristics of socially screened portfolios over the past two decades.

Dan and Lloyd spoke to us about the KLD400’s contribution to mainstream investing, how SRI has evolved over the past 20 years, and some of the challenges that remain. [Ed. Note – Biographical info for Dan and Lloyd can be found at the end of this interview.]

[Ed. Note: Earlier this month, ESG Insight shared a piece from RiskMetrics analyst Carolyn Mathiasen about environment-related proxy proposals for 2010. Here she continues her survey with an overview of social-issue proxy campaigns. For more information, also see the Proxy Season Resource Center.]

Corporate political contributions, pay disparity, and board diversity are among the top social issues for the 2010 U.S. proxy season. So far, investors have filed more than 200 proposals on social issues, which also include human rights, sexual orientation discrimination, and Internet "neutrality," according to data tracked by RiskMetrics Group's ISS Governance Services. (Investors also have submitted 130 environmental and sustainability proposals this year.) And as the annual meeting season draws near, there have been some interesting withdrawals and omissions. 

A broad study of publicly-traded US corporations links the strong presence of churches in corporate headquarters locales with an aversion to financial risk-taking and a focus on slow, steady growth.

Miller-McCune, the invaluable magazine on research, reports in detail on a study by Giles Hilary and Kai Wai Hui of the Hong Kong University of Science & Technology, “The Influence of Corporate Culture on Economic Behavior: Does Religion Matter in Corporate Decision Making in America?” which appeared in the September 2009 edition of the Journal of Financial Economics.

Last week, I asked the Social Investment Forum listserv to recommend organizations who are working to help the people of Haiti. I was heartened by the response. Links to donate to these groups are listed below.

I also spoke with RiskMetrics analyst Yasmine Lonon, who helped research a study of developing-nation disaster risk for the World Bank's Disaster Management Facility. In response to a question from our colleague Jane Meacham, who noted that there's almost no private insurance in Haiti, Yasmine explained how a lack of insurance hinders disaster preparedness:

On October 2, The Motley Fool surveyed the proposed Shareholder Bill of Rights Act. For the benefit of the site's audience of retail investors, Alex Dumortier wrote "Let's Reform Say-on-Pay," a helpful primer on the Act's requirement that firms submit their executive compensation practices to a non-binding proxy vote.

Say on pay (SOP) has gained public attention through a sustained effort by some institutional investors. Major companies – including, recently, Microsoft – have accepted SOP provisions championed by Walden Asset Management and Calvert, among other firms and investor groups. These shareholders' efforts have helped convince the Obama Administration and key Congressional leaders to include say on pay in their reform proposals.

Heading off "Shareholder Rebellion"

The cases of Microsoft and General Mills illustrate two common responses to say on pay campaigns. A SOP proxy resolution at General Mills won majority shareholder support despite management opposition, according to an update from Tim Smith of Walden and Aditi Mohapatra of Calvert. Despite this vote, the firm has yet to adopt SOP. Microsoft's management, by contrast, committed to triennial shareholder review of compensation without the issue ever coming to a vote.

Paul Hodgson has considered management efforts to forestall "shareholder rebellion" at The Corporate Library blog. In his "Brief History of Say-on-Pay," Mr. Hodgson describes a contentious SOP battle in Britain in 2003, the first year in which the UK required a vote on firms' "remuneration reports." After a majority of shareholders rejected a compensation package for the head of GlaxoSmithKline, the firm undertook a third-party review of its practices, resulting in major revisions to CEO Jean-Paul Garnier's pay package.

Mr. Hodgson writes that this could have "been the signal for a new contentious era in UK compensation practices," but this was not the case. He explains why:

"Given the imminent introduction of say on pay in the US, and the fierce corporate opposition to it, a brief discussion of why this period of relative tranquility [in the UK] occurred is useful. … In each of the cases where controversy appeared to have been brewing, behind-the scenes-discussions between the company and major institutional shareholders were taking place. … "In most cases in the UK today, companies regularly work closely with shareholders to ensure that there is full agreement on pay issues – mostly those having to do with equity incentive plans – prior to the annual meeting."

Microsoft Accepts Triennial Review

Microsoft provides an American example of this negotiated approach. In a company blog, the firm's Brad Smith and John Seethoff write of their "open and constructive dialogue with our shareholders."

They also explain why Microsoft has agreed to an every-three-years compensation proxy vote. Their reasoning should interest environmental, social and governance (ESG)-focused investors, who typically advise managers to take a long view of their companies.

Messrs. Smith and Seethoff write:

"Our discussions led us to the conclusion that a three-year cycle is optimal for say on pay votes at Microsoft. Although we acknowledge that some constituencies support an annual say-on-pay vote, a number of considerations led us to our conclusion. Among them: 21bb37598146c54a272be26da55cd7ee "Most compensation programs can't be changed overnight. Triennial votes give the Board and the Compensation Committee sufficient time to thoughtfully respond to shareholders' sentiments and implement any necessary policy changes."

Tim Smith and Aditi Mohapatra note that while Microsoft has chosen "the triennial approach, it is very likely legislation will require an annual vote."

More Fund Managers Should "Think Like Owners"

As for the prospects for federal reform, Paul Hodgson writes that "say on pay now seems an inevitability, given President Obama's manifest support for it."

Perhaps another motivation is the example set by the investors who've led the American SOP movement. It's telling that a voice for retail investors, like Motley Fool, is taking a stand on this issue. Alex Dumortier connects the concerns of individuals to the efforts of institutions who support governance reform:

"…Individual investors are right to question whether their small voices will be heard. But remember: Not all institutional investors are created equal. You have a choice when you buy a mutual fund or select a fund manager in your 401(k). All other things being equal, you should certainly favor fund managers who have a straightforward proxy voting policy and who vote their proxies in a manner that proves they think like owners."

Bruce Bartlett of Forbes recently wrote a defense of both John Maynard Keynes' economic theories, and the federal government's $787 billion Keynesian stimulus package. The title was surely meant to raise eyebrows among Forbes readers, but Peter Kinder, in forwarding the story, said that Bartlett's is "a judgment I agree with."

Does it matter what political label we "really" affix to an economist? Or vice-versa? Disciples of Milton Friedman were upset when, in the 1970's, Richard Nixon declared himself a "Keynesian," but should these name games mean anything to the rest of us?

In fact, these categorizations can profoundly influence policy debates. Bartlett writes that Keynesian macroeconomic measures – like the Obama administration's stimulus efforts – protect the "microeconomic" status quo. "At the end of the day," Bartlett asserts, Keynes' "cure for unemployment was to restore profits to employers."

Writing as an alumnus of the Reagan administration, Bartlett tells his audience of capitalists that "the alternative to stimulus could have been something far worse."

A Republican, then, can be "for" the actions of a Democratic government. Bartlett's sort of intellectual reassurance is a necessary part of political discourse. Former Massachusetts Governor Mitt Romney has described the state's health care plan as conservative, because of its mandate that individuals buy insurance. As a Republican, Mr. Romney had to make a "liberal" expansion of health care more palatable to his political base.

This summer's debate over federal health care reform – an important task for the political base known as "everyone" – has shown the damage that the wrong words can do. As Medicare recipients fight "government health care" and protesters wave pictures of Hitler at their Congressman, public discourse is revealing fears and biases, rather than policy questions or opinions.

As an engaged community of investors, what can we do about this? Organizations like the Interfaith Center on Corporate Responsibility (ICCR) have steadily supported productive, bipartisan discourse on health care policy. In our own spheres, perhaps we can take a lesson from Bruce Bartlett, and explain how one side of a political divide can benefit from the other camp's ideas.

Along with the rest of my peers today, I'll invoke the legacy of the late Senator Ted Kennedy, as he lies in state here in Boston. Whether passing school reform or brokering peace in Northern Ireland, the Senator worked at the nexus of distrust and misunderstanding. That's where the right words are most powerful.

The Madoff Madness and the Banking Crisis: At one extreme, trustees must dodge sociopathic fraudsters; on the other, they must avoid the hubris of "the smartest guys in the room."

Modern Portfolio Theory and the legal thinking it's influenced address the problem by means of risk analysis and diversification. This approach has limits, as Investments & Pensions Europe reported recently: "Dutch pension funds have lost €166m to the Ponzi scheme run by Bernard Madoff, Wouter Bos, the Dutch finance minister has claimed."

The Age Before the "Prudent Man"

In other times, courts have taken different views of how a trustee should deal with risk.

Harvard College v. Amory, 9 Pick. (26 Mass.) 446, 461 (Mass. 1830) was the case that first stated the Prudent Man Rule. The Massachusetts Supreme Judicial Court said that trustees should model their stewardship "on how men of prudence, discretion, and intelligence manage their own affairs, not in regard to speculation, but in regard to the permanent disposition of their funds, considering the probable income, as well as the probable safety of the capital to be invested."

The Court rejected Harvard's argument that the trustees should have invested in an annuity which would have been less risky than common stocks, but would have provided the beneficiary a much lower income. Harvard's position seems ludicrous today. It wasn't in 1830.

In rejecting Harvard's position, the Court quoted critically an English case (Trafford v. Boehm, 3 Atk. 440, 444, 26 Eng. Rep. 1054, 1056) decided 86 years earlier:

"Neither South-sea stock nor Bank stock[s] are considered as a good security, because it depends upon the management of the governors and directors, and [both] are subject to losses; for instance, it is in the power of the South-sea company to trade away their whole stock while they keep within the terms of their charter…. "But South-sea annuities and Bank annuities are of a different consideration; the directors have nothing to do with the principal, and are only to pay the dividends and interest till such time as the government pay off the capital, and it is not in their power to bring any loss upon them, and therefore are only and properly good securities."

Two things one should note here. First, the court held that annuities backed by government debt were appropriate trust investments. But stock shares issued by the same entities that sponsored the annuities weren't. It's this very limited scope of trust investing the Prudent Man Rule overturns.

The Lessons of the 18th Century's Bubble Economy

Second, note how the court contrasts the relative investment merits of "South-sea stock" and "South-sea annuities." Here one sees the aftershocks of probably the greatest financial and political crisis in Anglo-American history between the English Civil Wars and today.

The collapse of the South Sea Company in 1720 shook the British state to its core. The South Sea Bubble combined a completely fraudulent investment scheme with political intrigue and mad speculation in everything from real estate to trading voyages. (See generally Malcolm Balen, The Secret History of the South Sea Bubble (New York: Fourth Estate, 2002) and James Macdonald, A Free Nation Deep in Debt (New York: Farrar, Straus & Giroux, 2003), pp. 206-219, 223-29.)

It would be hard to identify an area of commercial law or of political and social history that the Bubble did not affect. Trust law certainly changed.

In 1723 the South Sea Company shareholders began receiving perpetual annuities backed by government debt (the Company's only asset) in exchange for their devalued shares. The "Bank" mentioned in Trafford is the Bank of England, then still a private institution but, from the South Sea Bubble onward, the unquestioned central bank for the Empire. It too issued annuities backed by government debt. But even its stock, the Trafford court held, was not a proper trust investment.

I can't imagine a swing in the law back to Trafford. But the devastation of pensions and other trusts, such as the Harvard University endowment (see Richard Bradley, "Drew Gilpin Faust and the Incredible Shrinking Harvard", Boston Magazine, June 2009) – whether caused by fraud, hubris or faith in failing models – will lead to changes in trustees' fiduciary duties.

As noted by Robert Kropp at Social Funds, 2009 is witnessing a dramatic increase in "say on pay" shareholder resolutions. He gives some credit for this to "public outrage" over executive compensation levels during a worldwide recession. Shareholder engagement is also driven by sustainable and socially responsible investment (SRI) advocates, who help investors work together to achieve common goals.

Green America (formerly Co-op America) recently launched a "proxy education center" for shareholders. With support from Ceres, the AFL-CIO, and the Interfaith Center for Corporate Responsibility, the site offers guidance on proposed resolutions in four topic areas at 23 major companies.

Even for those who don't own stock in any of these firms, Green America's list provides a snapshot of what issues top the SRI agenda for the 2009 proxy season. The center's four topic areas are:

• Climate Change
• Human Rights
• Credit Cards
• Executive Compensation

All of these subjects are perennial concerns of social investors, and the second two seem to address particular anxieties of this recession. Green America's favored resolutions call for better reporting of corporate practices in all four areas, while "say on pay" resolutions seek non-binding shareholder votes on executive compensation.

Green America notes that non-binding resolutions may still have teeth, as Entergy agreed to "say on pay" before the issue came to a formal proxy vote. Robert Kropp writes that so far this year, 22 companies have agreed to shareholders' resolutions in advance of a proxy vote.

For a Canadian perspective on this issue, see Ethical Funds Company's Shareholder Action Focus List (thanks to Alicia Woods).