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Socially Responsible Funds Look for Sustainability: TIAA-CREF, Northern Trust, Pax World Join Field

These days the concept of sustainability is a hot ticket into the world of socially responsible investing. Just last week, a trio of investment management firms announced plans to incorporate the components of sustainability investing into their product offerings.

Northern Trust of Chicago launched the first mutual fund to adopt a global sustainability focus two weeks ago. TIAA-CREF of New York is in the process of adding an international component to its Social Choice variable annuity subaccount that will be screened to include companies in developed nations with strong sustainability practices. And well-known socially responsible investment pioneer Pax World of Portsmouth, N.H., jumped into the fray, announcing it was licensing the rights to use three sustainability indexes and would be developing a suite of new products.

The idea of sustainability was first defined in 1987 by Norwegian Prime Minister Gro Harlem Bruntland, chair of the United Nations' World Commission on Environmental and Development, with the issuance of a report called Our Common Future.

Bruntland wrote that "sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs."

In the 21 years since, the concept has been broadly interpreted for the investment community to include so called do-gooders - those companies that adhere to corporate best practices of being environmentally friendly, responsive to a variety of social needs and adopters of good corporate governance practices. Those three components (known by the acronym "ESG") have become the underpinning for sustainable investing mandates.

Northern Trust Debuts First Sustainable Mutual Fund

After 25 years of investing under socially responsible mandates for clients, Northern Trust became the first mutual fund sponsor to offer a sustainable fund. The Northern Trust Global Sustainability Index Fund launched on March 5 with $20 million in assets from a variety of the bank's clients. The fund is expected to have $50 million to $100 million by its first anniversary.

This is Northern Trust's first socially responsible mutual fund and the first index fund to track to the KLD Global Sustainability Index. That index was developed by KLD Research & Analytics of Boston and debuted this past October, along with four regional sub-indexes.

The KLD Global Sustainability Index is a market-cap weighted index of large-cap and mid-cap companies across 24 developed countries. The fluid index, which will be annually reconstituted, currently includes 693 top-ranked companies, each judged by KLD as a company addressing environmental, community and societal issues, employees and the supply chain, customers and governance as well as ethics. The index is broadly diversified and is both sector-neutral and region-neutral.

"Both retail and institutional investors are interested in products that reflect these values," said Peter Kinder, president of KLD. "You are really dealing with life issues and how these decisions by corporations, individuals and governments affect life systems today and tomorrow."

For Northern Trust, the new sustainability index fund meets the needs clients have expressed over the past year, said Peter Jacobs, investment product manager for Northern Trust. "We have seen increasing demands and interest in socially responsible screens," he said. The challenge was how to meet that need, especially in a mutual fund format, since many investors want customized screens, he added.

"We think this is a good core holding for smaller to medium sized foundations and endowments," Jacobs said. "We don't expect this to be a huge fund, but more of a niche fund."

TIAA-CREF Goes Global

TIAA-CREF, the financial services organization serving the non-profit sector, will shortly be tweaking asset allocations under its CREF Social Choice variable annuity subaccount to include a new 13% international equities component.

On occasion of broadening the subaccount's investment allocations, TIAA-CREF is expanding the universe of stocks it will invest in to include those now approved under the KLD Global Sustainability Index Ex-US.

Unlike Northern Trust, the CREF Social Choice account won't replicate the sustainability index. Moreover, the account won't be passively managed at all.

"We identify the best stocks within the KLD environmental/social index and then benchmark back to mainstream (equity and fixed-income) benchmarks," explained Amy O'Brien, director, social and community investing at TIAA-CREF. The company's quantitative equity team of managers will still work to optimize sector weightings and allocations.

The $9.2 billion subaccount, which holds the investments of more than 430,000 individual investors, is managed as a socially responsible balanced portfolio of equity and fixed-income investments. The Social Choice subaccount has been offered since 1990. Eight months ago the portfolio carved out a 2% fixed-income allotment to invest in bonds that finance housing, alternative energy and economic development programs.

"We believe we are responding to a new desire," O'Brien said. The attention to climate change issues has raised awareness and heightened sensitivity to other areas such as human rights and community investing, she said. "We believe in the double bottom line - comprehensive screening and diversification plus solid performance."

Pax World Inks a Deal

Pax World Management Corp., advisor to the Pax World Funds and creator of the first socially responsible fund in 1971, has also embraced KLD's vision of sustainability. The company has inked a licensing deal with KLD under which it can develop passive and enhanced index products as well as actively managed strategies that may be wrapped into ETFs, mutual funds and/or separately managed accounts.

"Individual and institutional investors now have exciting new opportunities to invest in the world's most forward-thinking companies - those that best integrate environmental, social and governance standards into their business models," said Joe Keefe, president and CEO of Pax.

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