N.B.: The following Q&A is based on a recent exchange between an Australian business reporter and Peter Kinder, President of KLD Research & Analytics.

Socially responsible investors believe businesses must incorporate environmental, social and governance (ESG) factors into their management strategies.

Institutional funds are major shareholders and play an important role in corporate governance. Australia, for example, has the fourth-biggest superannuation pool [money in pensions] in the world. That money could influence industries worldwide.

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Sound investment is built on information, and socially responsible investment (SRI) requires accurate reporting of every aspect of corporate activity. A traditional balance sheet doesn’t reveal a company’s environmental, social and governance (ESG) risks and opportunities, which makes reporting on these “intangibles” critically important to the SRI community.

Since 2005, KLD has studied the S&P 100’s sustainability reporting practices for the Sustainable Investment Research Analyst Network (SIRAN), a working group of the Social Investment Forum (SIF). The 2008 Sustainability Report Comparison reveals encouraging news. Of the 100 largest U.S. publicly-traded companies, 86 maintain corporate sustainability websites and 49 produced sustainability reports in 2007. These numbers represent significant progress over the past three years.

Pensions & Investments quotes KLD Senior Research Analyst Katy Chapdelaine and Research Products Managing Director Noel Friedman in an article on the SIRAN study. Friedman explains:

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The Sustainable Business 20 (SB20) highlights “20 public companies that are leading the way to a sustainable society,” according to Progressive Investor, which has produced this list for the past seven years.

SB20 companies must excel by both sustainability and financial criteria, and they include both established companies and smaller innovators, like Accsys Technologies – an English firm developing sustainable substitutes for precious hardwoods. Larger players include IBM, which aims to cut data center energy use by half by 2010, while increasing computing capacity by a factor of 10.

KLD Senior Research Analyst Andrew Brengle was one of five judges for this year’s SB20. “As tough as it is to narrow down the choices and find consensus among the judges as to which companies are the 20 best, it is nevertheless a rewarding process,” he said. “Every year I learn about several new companies that are doing great work, and every year the field of choices gets better.”

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The July 14 Christian Science Monitor asks: “Should Ethical Investors Dip into Water Stocks?” The CSM’s Laurent Belsie discusses the potential for investment in water-related businesses with KLD Research Director Eric Fernald and Chris Brown of Pax World Investments.

Observers such as the Unitarian Universalist Service Committee argue that privatization of water supplies threatens the “right to water.” Fernald and Brown acknowledge that contracting out the management of public water supplies (i.e., water utilities) or selling the right to use public water supplies (i.e., bottled water firms) is fraught with ethical risks. However, in some circumstances private companies can manage or use public water supplies in a responsible manner. Both warn that ethical investors need to be vigilant if investing in companies that engage in this aspect of the water industry.

Both experts also highlight companies that are developing promising technologies for public and private use. As Fernald explains:

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July marks the third anniversary of the KLD Global Climate 100 Index (GC100)—the first global index focused on climate change solutions. The success of the GC100, which has outperformed its benchmark (the S&P/Citigroup BMI World) for all three years, is a testament to the strength of its mission and its methodology. (Click here for GC100 performance data.)

The GC100 serves as the basis for a number of investable products, including three mutual funds sponsored by Shinko Investment Trust Management in Japan; a mutual fund from Cominvest Asset Management in Germany; a unit investment trust sponsored by Advisors Asset Management; and several other separate and institutional accounts. Click here for a list of products based on KLD Indexes.

For the GC100, KLD looks for large and small companies that produce and distribute renewable energy like solar and wind power and/or future fuels such as hydrogen and biofuels. Companies committed to developing and applying new technologies to reduce resource consumption and carbon emissions are also candidates.

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Social investors have long been interested in executive compensation. The pay packages of CEOs occasionally attract attention from the mainstream press, too, and the June 12 issue of The Economist weighs in on the issue.

Three different articles consider executive pay, and they follow different paths to the same general conclusion. Yes, the authors agree, it’s possible that companies overpay their executives – especially in the U.S. – but it’s hard to say how much compensation is too much. The first article, “Pay Attention,” includes this sweeping statement:

“It is near impossible, of course, to determine the correct absolute level of executive pay.”

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The Sustainable Endowment Institute (SEI) recently released its College Sustainability Report Card. According to its Executive Summary, the Report Card “seeks to encourage sustainability as a priority in college operations and endowment investment practices by offering independent yearly assessments of progress.”

Institutions of higher education have played a significant role in SRI at least since the South African divestment movement of the 1980s. The Report Card examines both the investment practices of these schools and the sustainability of core university operations.

SEI finds that “the level of campus sustainability initiatives far outpaces that of endowment sustainability activity.” Responsible food-service and recycling practices, for example, earned “A” grades for 29% of schools. Only 4% of colleges achieved the same grade for their “Endowment Transparency.”

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A growing number of KLD’s clients serve high-net-worth investors (HNWI), commonly defined as individuals whose investable assets exceed $1 million. Nelle Coady, Assistant Manager of Client Services at KLD, reports that “the next generation of money” is concerned with the social impact of their investments.

“Young, high net worth investors are looking to be more proactive,” Nelle explains. “Our institutional clients tell us that social responsibility is a priority for more and more of their younger investors.”

The wider investment community, in the U.S. and abroad, has recognized this trend. American Banker reports: “Major custody banks are increasingly adding socially responsible investment factors into their monitoring services.”

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One of the first socially responsible investment (SRI) screens excluded weapons suppliers from investors’ portfolios; today, however, publicly traded companies don’t just build weapons – they fight wars. Privatized Military Operations (PMO) have been integrated into American missions in Iraq, Afghanistan, and other less-visible theaters worldwide.

Researchers at the Industrial College of the Armed Forces have produced a fascinating in-depth review of PMO in modern warfare. The report, released in 2007, highlights the extent of PMO involvement in the Iraq war. For example, the ratio of private contract employees to American troops in Iraq is 1 to 1.5.

Private contractors now provide services that have traditionally been the responsibility of American soldiers. Some of these are support tasks, such as maintaining barracks and running kitchens. A more worrisome trend is PMO contractors’ performance of core combat functions: building overseas bases, maintaining weapons, and providing security details.

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The Rev. Dr. Luther Tyson, a founder of Pax World Funds, has died at 85.

In any short list of SRI’s indispensible people, Dr. Tyson’s name would appear close to the top. He was one of the founders of the Pax World Fund, the first SRI mutual fund. Pax World was also the first management company devoted solely to SRI.

His vision of a fund for investors who did not want to own companies that profited from the Vietnam War helped establish the legitimacy of using ethical values to guide investment decisions.

His obituary from the Boston Globe appears below.

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