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Understanding Socially Innovative Investing

Rows of bamboo trees

Socially Innovative Investing (S2I), a proprietary strategy developed by U.S. Trust, is based on a growing awareness that strong corporate financial performance and social responsibility are not mutually exclusive; rather, they are mutually beneficial qualities. For investors, S2I seeks to answer yes to an age-old question: Is it possible to do good and do well at the same time?

Utilizing The Principle of Shared Value

Venn diagram showing overlap and separation of corporations and society

The idea of investing according to personal values and beliefs is hardly new. At least since the mid-18th century, when Quakers banned followers from participating in the slave trade, individuals and groups have periodically chosen to avoid investments that conflict with moral, religious, environmental or other values. 

This approach to investing, now often referred to as socially responsible investing, or SRI, is viewed largely in terms of what it doesn't do. Investors choose what not to invest in — such as tobacco, weapons manufacturers and alcohol. And, because SRI entails limiting the universe of potentially profitable investments, the implication is that though this might be a noble endeavor, the investor is challenged by a restricted investment universe.

During the 1980s, Fortune magazine famously described SRI as "feel good investing" and "politically correct investing." But as interest in SRI has continued to grow, a new, more active and demanding approach to social investing has emerged based on the idea that social responsibility and corporate earnings should naturally go hand in hand. Dr. Michael Porter, of the Institute for Strategy and Competitiveness at Harvard Business School, summed up this new idea: "Corporate Social Responsibility can be much more than a cost, a constraint or a charitable deed — it can be a source of opportunity, innovation and competitive advantage."

Inspired by those words, U.S. Trust has created Socially Innovative Investing, which takes traditional socially responsible investing a step further. S2I incorporates an active, proprietary method for reviewing U.S. securities across a wide spectrum of criteria that weight both social responsibility and financial fundamentals .To be considered for inclusion, companies must be attractive fundamentally, as well as fit global macro investment themes established by U.S. Trust's thought leadership team. During the portfolio construction process, sector weights adhere to U.S. Trust's recommendation.

The Principle of Shared Value

S2I stands on the idea that corporations and society don't (indeed, can't) thrive as wholly separate, unrelated entities.

Corporations need vibrant communities in order to create demand for their products and to provide a supportive environment in which to operate.

Society needs healthy, competitive companies able to create jobs, buy local goods from the community and pay taxes. Where these needs intersect, in a zone of shared values, is the sweet spot of S2I. It is our conviction that companies that demonstrate and remain committed to policies and practices that enhance their own competitiveness while simultaneously advancing economic and social convictions in their communities not only meet the ethical criteria of socially minded investors but stand best poised to prosper in a pure business sense.

The Framework

Our framework for assessing a company's commitment to social innovation rests on three pillars:

  • Human capital engagement. How does the company treat all of its stakeholders (employees, shareholders, customers, suppliers and the community)? 

    Considerations include such issues as the pay gap between management and employees, employee ownership, health and wellness, diversity and product quality, among others.

  • Environmental stewardship. What policies does the company employ for interacting with the environment? 
     
    Considerations include greenhouse gas reduction, renewable energy use, emissions, effluents and wastes, recycling and others.

  • Corporate philanthropy. What are the standards and procedures regarding its role as a corporate citizen? 
     
    Considerations include community engagement, community investment, corporate giving, employee volunteerism and community impact policies.

Measuring a company's actual commitment to these pillars involves a two-part review of stated policies and performance accountability.

  • Policy review. We review, benchmark and score policies, based on our analysis that good policies indicate good management and are indicators of long-term value creation.

  • Performance accountability review. Because good intentions don't always result in positive results, we assess companies by how effectively a corporation has implemented its policies. And, crucially, we consider whether it has capitalized on external incentives for good corporate behavior, and avoided costly fines and penalties.

However, it is our belief that while quantifying intent and peer-to-peer benchmarking is important, the direct tangible results of the policies must be measured in order to determine their absolute or relative success.

Monitoring and Maintaining the Portfolio

Continual attention, monitoring and adjustment are required to keep the S2I properly balanced to achieve its goals. We review changes in U.S. Trust's recommended sector allocations and periodically rebalance the portfolio. We monitor position sizes, fundamentals, egregious social violations and trends in social scoring. 

Chart of portfolio balancing process

Four Myths About Social Investing Debunked

MYTH #1:
Corporate social responsibility comes at the expense of profit.

  • S2I was designed to identify companies that address social issues as part of their strategies to be more competitive in the marketplace — in keeping with the theory of Shared Value.

  • Shared Value proposes that companies can improve their longrun position by looking for sustainable competitive advantages, including methods of engaging stakeholders on social issues.

MYTH #2:
Reliable and consistent data are not available.

  • The Socially Innovative Investing Model addresses transparency and data manipulation by relying predominantly on third-party verified data. The quality of the data and the proprietary weighting of the model form the central value proposition of the strategy.

MYTH #3:
Interpretation of social metrics is extremely subjective.

  • In our model, hundreds of independent data points divided into over 30 criteria are collected and scored, and compared with their peers, sector by sector.

  • Whenever possible, we set metrics and ranges as quantifiable targets.

  • Our model to determine each company's composite social innovation score is applied uniformly. Companies must meet a minimum rated score, regardless of their sector.

MYTH #4:
Social investing underperforms the broad market.

  • The S2I methodology was designed both to identify long-term value creators and to mitigate risk.

  • When SRI strategies underperform, usually they do so because of poor portfolio construction, not social screening. To address this shortcoming, we:

    • Utilize U.S. Trust® thought leadership for sector overweights and underweights.

    • Require positive ratings from non-SRI analysts on each eligible security.

    • Maintain a rigorous buy, sell and rebalance discipline.

Many investors seek to align their investment choices with their values on issues ranging from environmental stewardship to the ways companies treat employees and interact with their communities. Like philanthropy, socially innovative investing seeks to improve the world in some way. But invested assets must effectively advance your personal goals at the same time. 
The U.S. Trust Fixed Income Socially Innovative Investing Strategy, S2I for short, offers bond investors a broad range of options to customize a portfolio according to their income, diversification, and wealth protection plan, while conforming to their personal goals. 

Seeking to achieve all of these goals in a single, customized portfolio involves coordination among the 30 analysts, traders and portfolio managers on the U.S. Trust Fixed Income Team. We start with a universe of investments carefully selected for quality, return potential and other attributes. Our managers then eliminate any choices that may conflict with values you’ve identified. Our Fixed Income Team works closely with U.S. Trust’s S2I equity specialists and your advisor to allow your assets to work together effectively and pursue your goals. 

Whether your priorities touch a wide range of issues or focus more specifically on one or two areas, the fixed-income team can help you turn your values into financial action. We can focus on companies that advance women’s rights, for example, or develop renewable energy, or provide healthcare for underserved people. Whatever your values, our specialists are always seeking quality investments in that space. 

Even investors who share very similar social or environmental values are likely to have quite different liquidity and income needs, and different perspectives on risk. They may need bonds of shorter or longer duration, or seek higher yields than your plan requires. That’s why customization is so important. Believing in the same causes doesn’t mean that someone else’s bond portfolio is right for you. A successful portfolio must satisfy your values and align with your specific long-term objectives. 

IMPORTANT INFORMATION: 

Opinions expressed herein are those of the featured participants, U.S. Trust, and may differ from those of Bank of America Corporation and its affiliates. The information presented in this video is for discussion purposes only and is not intended to serve as a recommendation or solicitation for the purchase or sale of any type of security. This video does not constitute investment advice and is issued without regard to specific investment objectives or the financial situation of any particular recipient. 
This video is designed to provide general information about ideas and strategies. Always consult with your independent attorney, tax advisor, investment manager, and insurance agent for final recommendations and before changing or implementing any financial, tax, or estate planning strategy. 
Investing involves risk. There is always the potential of losing money when you invest in securities. All asset classes are not suitable for all investors. Each investor should select the asset classes for them based on their goals, time horizon and risk tolerance. 
Sector recommendations should be considered in the context of an individual investor’s goals, time horizon and risk tolerance. Not all recommendations will be suitable for all investors. 
Diversification does not ensure a profit or protect against loss in declining markets. 
Equity securities are subject to stock market fluctuations that occur in response to economic and business developments. 
Investing in fixed income securities may involve certain risks, including the credit quality of individual issuers, possible prepayments, market or economic developments and yields and share price fluctuations due to changes in interest rates. When interest rates go up, bond prices generally drop and vice versa.

Investment products:

Are Not FDIC Insured

Are Not Bank Guaranteed

May Lose Value


U.S. Trust operates through Bank of America, N.A., and other subsidiaries of Bank of America Corporation (“BAC”). Bank of America, N.A. and U.S. Trust Company of Delaware (collectively the “Bank”) do not serve in a fiduciary capacity with respect to all products or services. Fiduciary standards or fiduciary duties do not apply, for example, when the Bank is offering or providing credit solutions, banking, custody or brokerage products/services or referrals to other affiliates of the Bank.

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