Buy Side Safeguards Returns

Terry Flanagan

Risk management begins with corporate social responsibility, regardless of markets.

In the aftermath of 2008, investors voiced their growing concerns about risk management, transparency, and safe guarding returns. Stewardship investing, for some, may be construed as a channel of risk management. The idea has gained in popularity in recent years, according to Mark Reiger, director of stewardship investing at Praxis Mutual Funds, a mutual fund family sub-advised by Everence Capital Management.

The Indiana based firm has almost $700 million under management.

“Socially responsible funds did see increased interest following the financial crisis in 2008 and prominent risk-related disasters like the oil spill in the Gulf and Japan’s nuclear reactor crisis,” Reiger said. “These events highlighted the risks that can be ‘baked in’ to investments many have come to see as ‘normal’ when all is going well.”

For Regier, the value of stewardship investing is to consider risks “when things do not all go well.”

For investors mindful of stewardship investing, the investor concern is over the vulnerability of general populations, the environment, and disadvantaged communities who pay the price for “inattentiveness.”

Institutions have listened. To some degree, stewardship investing tracked by the growth of the U.N. Principles for Responsible Investment—which calls on investors and money managers to integrate environmental, social, and governance considerations into their investment processes, according to Reiger.

To date the U.N. PRI represents 850 investment institutions managing over $25 trillion.

Most recently, Praxis Mutual Funds has beckoned energy companies to provide additional disclosures regarding the environmental and financial risks associated with their natural gas drilling operations.

The mutual fund family is urging companies to adopt precautionary best management practices above and beyond current regulatory requirements—an idea from which stewardship investing is born.

Those who felt energy companies that deal in unscrupulous practices may champion alternative energy. Yet some investors are uncertain about the sector’s challenges and implementation.  Despite doubts, Reiger promotes alternative energy.

“While facing some conceptual and technological challenges, most alternative energy sources bring far lower levels of risk,” he said, though, acknowledging the slow-growing openness to the sector from long-term investors.

“It is merely a matter of time—and the leveling of competitive markets—before ‘safer’ energy is seen as a real investment opportunity.”

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