Paul Hawken is out to turn socially responsible investing (SRI) into something he can actually get behind.
In 2004, Hawken – the CEO of OneSun LLC (an energy company focused on low-cost solar power), a bestselling author, and the founder of a research organization called the Natural Capital Institute – turned his dissatisfaction with conventional SRI’s processes and norms into Highwater Research. Hawken believes that Highwater’s methodology “raises the standards for the SRI industry as a whole, and will become the preferred method for SRI selection in the future,” as he writes on his website.
In September 2005, in conjunction with Massachusetts-based investment firm Baldwin Brothers, Hawken launched the Highwater Global Fund, which uses Highwater Research’s analytics to determine which companies to include in its portfolio. In the just over five years since inception (September 1, 2005, to date), the $63 million fund has returned a total of 45.7 percent, according to an investor in the fund. Over the same period, the S&P 500 has returned a total of 15.3 percent.
Institutional Investor reporter Katie Gilbert recently spoke with Hawken about the philosophy at the core of Highwater’s methodology and how it makes important improvements on traditional SRI.
Institutional Investor: How does Highwater Research decide which companies to approve for the Highwater Global portfolio?
Paul Hawken: Fundamentally, we start with, ‘What is this company doing?’ We’re not just taking for granted that if a company exists, it must be a good thing. We think a lot of companies are doing stuff that’s completely frivolous and unnecessary, frankly. That’s between them and the consumer, but in terms of our portfolio, that’s between them and us. Because we’re trying to invest in companies that are actually making a significant difference to people’s lives going forward. We don’t mean a difference by satisfying their base desires, but by actually improving their education, knowledge, the environment, their income, their nutrition – basically the future. That gives us a really clear focus and an easy way to reject companies.
II: Where does a company’s financial health work its way into your evaluation?
PH: That’s not our part. We divide our research very, very rigidly. That is, we research the social and environmental side; the buy/sell team does the finances.
That’s where I think a lot of people go wrong. They’ll see great financials, and then they’ll find a way to pass it. We are absolutely religious about that. It doesn’t mean the buy/sell people can’t come and say, ‘Take a look at this” – we will. But each side looks at its own criteria. And oftentimes we find things that we share with the other side – we’ll find something that affects the financials and they’ll hear something in an interview with the company that affects our side. We share that information, we’re one company, but in terms of making a decision, we don’t care if it’s the hottest stock in the world. If it doesn’t pass, it doesn’t pass.
What you often get in SRI is what I call “criteria creep.” Look at, say, Starbucks. It’s a good stock, and then they go into alcoholic beverages and SRI funds say, “Well, there’s isn’t too much alcohol.” Or you hear a fund manager saying, “Well, if no more than 5% of their income is going to killing people, then that’s okay.” Well, why? The criteria creep comes from a pressure to perform.
We keep that wall high and thick. And sometimes we’ll kill a stock. We’ll say, “You have to sell.” They have 30 or 60 days to wind out the position. And sometimes we’ll think a company is the best thing since sliced bread – we have a lot of companies like this – and they just sit in the pile and they won’t buy them at all, because they’re overpriced.
II: So the environmental and social research side has veto power.
PH: Absolutely. At the same time, it’s not like we want to be too rigid here. That’s why we have our categories: Shifters, Innovators, and Neutrally Good. To me, it’s all about calling something by its real name.
We might say, “Okay, this company has been screwing up for a long time, but look at what they’re doing now. This is rewardable activity; let’s reward.” They would be Shifters. A company that just does great things as part of their business plan – that’s what we call Neutrally Good. Then there’s Innovators, who have this great intention to begin with.
We’re just being honest and transparent, saying, “This is why we invest in this company, this is the classification, and this is how we analyze what they’re doing.” We’re not looking for perfection, but we are looking for movement, for intention, for ethics. For values that are deeply upheld. That doesn’t mean that mistakes won’t be made, or we won’t make judgments that, in hindsight, are erroneous.
II: Do you think that this attitude is one of the main things that sets your methodology apart from traditional SRI? It seems like a more pragmatic approach than what we’ve seen in the past, not so all or nothing.
PH: Original SRI came out of knockout criteria, which is, “We will not invest in companies that do the following.” It could be tobacco, alcohol, apartheid in South Africa, defense/military/weaponry/nuclear, torturing animals. The idea was that you’ve cleaned up your portfolio. But then you ended up with Kellogg’s, who advertises cereals with 30% sugar in them to kids through Saturday morning cartoons, staying in SRI portfolios. Because they’d passed all the knockouts! Apparently obesity wasn’t one of them. Occasionally you got the knockouts expanded, but there was nothing positive about them, it was just about what they didn’t do. They don’t commit crimes at night? Okay! Let’s look at it!
The difference is, we ask, “Are you actually organizing yourselves to address the salient issues of the future? Because if you’re not, why would we invest in you?” Because investing is always about the future anyway, right? Buying is about the present; investing is about the future. So if a company isn’t organized culturally, economically, and technically to address the salient issues of the future and create progress, then why would we want to invest in this company?
That’s really the difference. Because it started out as avoidance. If you avoided all those things, it was a clean portfolio. We still have an avoidance layer, but that’s just to clear away the clutter. We’re more interested in how people are imagining their role, and how they’re addressing the future, because if you’re invested in a college endowment or a pension fund, that’s where you want to be.
Read part two of Katie Gilbert’s interview with Highwater's Paul Hawken, in which he discusses what needs to happen next in the world of sustainable investment research, and how the industry could finally start to do what SRI has always aimed for – to change the way corporations operate.
