What to Divest in 2012

Many investors don't lose sleep at night agonizing about the social responsibility of their portfolios, but perhaps more should. Holding on to positions in companies that may have damaging effects on people and the planet in 2012 is an investment anachronism that's behind the times.

Investors shouldn't think every buy and sell decision must hinge entirely on valuation and shareholder value in the numerical sense. One of the biggest pension funds in the world recently divested itself of Wal-Mart (NYSE: WMT  ) , and that decision had nothing to do with Wal-Mart's cold, hard numbers, but rather a crisis of conscience.

Don't buy, but blacklist
The Netherlands' biggest pension fund, Algemeen Burgerlijk Pensioenfonds (ABP), which controls $300 billion in assets, retooled its philosophy to corporate responsibility several years ago. The fund has recently booted Wal-Mart, citing noncompliance with the United Nations' Global Compact principles. Word on the street is that ABP had put the equivalent of $121 million into Wal-Mart as of last summer.

ABP repeatedly tried to work with Wal-Mart to improve its labor practices and environmental policies, but as of now, it's decided its efforts have been futile, so it's sold its stake.

Wal-Mart's not the only company that ABP has "blacklisted." It also ditched PetroChina (NYSE: PTR  ) from its holdings, citing operations in human rights-challenged Sudan and Burma.

There are many reasons ethical funds might pull their money out of companies that refuse to make changes for the good.

United Methodist General Board of Pension & Health Benefits, the largest faith-based pension fund in the U.S., recently divested from two of the largest for-profit prison companies, Corrections Corp. of America (NYSE: CXW  ) and GEO Group (NYSE: GEO  ) . It has also added a new screen to forbid investing in companies that generate more than 10% of revenue from managing and operating prison facilities.

The growing definition of "sin stock"
Socially responsible investing has come a long way from simply screening out guns, smokes, pornography, and booze. There are plenty of reasons a company might not be considered particularly ethical, even if it isn't a traditional "sin stock."

Some social investment funds and green funds pulled out of BP after the Deepwater Horizon disaster. Also in 2010, Chicago-based SRI fund Appleseed rethought what kind of companies it would allow in its holdings. In light of the financial crisis, it announced it would screen out "too-big-to-fail" banks like Citigroup, Goldman Sachs, and Bank of America (NYSE: BAC  ) .

These views aren't coming from the financial fringe; investing with a conscience is venturing into mainstream investment thought. A report from US SIF Foundation (affiliated with The Forum for Sustainable and Responsible Investment) recently revealed almost 16% growth in assets directed into investment funds using environmental, social, and governance criteria since the beginning of 2010. This investment area now represents more than $3 trillion in the U.S. alone.

Cleaning up portfolios in 2012
Granted, there's a reason many socially responsible funds own or owned shares of some fairly odious companies to begin with, giving them the opportunity to later divest. They're functioning as activists, trying to push for positive change by the act of share ownership. That's classic capitalism right there.

As far as we individual investors go, simply screening out the bad guys seems like a good defense to build strong portfolios. Furthermore, we're all going to have individualized viewpoints about the which companies are socially responsible or not. For example, I find for-profit prisons and megabanks more ethically challenged than alcohol and tobacco stocks, but that's my personal spin on the sphere.

Regardless, whether a company has a responsible, positive place in society is a question that's worth asking when researching new stock ideas. And how about researching old purchases? It seems to me 2012 is a good time to make like some of the funds above, clean house, and divest the black-hat stocks. At some point, doing the wrong thing often catches up with companies, one way or another; such stocks could leave investors holding the bag.

Check back at Fool.com every Wednesday and Friday for Alyce Lomax's columns on environmental, social, and governance issues.

Alyce Lomax does not own shares of any of the companies mentioned. The Motley Fool owns shares of Bank of America, Citigroup, and Wal-Mart. Motley Fool newsletter services have recommended buying shares of Corrections Corporation of America, Goldman Sachs, and Wal-Mart, as well as creating a diagonal call position in Wal-Mart. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (16) | Recommend This Article (19)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 07, 2012, at 3:26 AM, wmtworker wrote:

    I work at walmart so i get a pretty good deal buying thier stock.They give me 15 cents of stock for every dollar of stock i buy. i figure that adds up to apretty good dividend.Plus they charge no comision to buy $25 dollars worth every two weeks. i buy other stocks through sharebuilder to.

    I wouldn't buy walmart stocks through sharebuilder.

    I might as weel since i work there.

  • Report this Comment On January 07, 2012, at 3:27 AM, wmtworker wrote:

    Woops sorry about the spelling errors.

  • Report this Comment On January 07, 2012, at 3:52 AM, BBLBBD wrote:

    Nobody can figure out what you are saying, exactly...haha...but we have all had a few beers tonight.

    But, does that benefit apply to every employee ?

    So you can get about 1 share of WMT every month, no commision, and they spot you 15% ?

    Am I missing something ?

    If that is the case, then the whole "Walmart is the devil and destroys everything it comes in contact with, and it totally against liberal orthodoxy" is completely ignorant.

    That seems like a great deal to me....anyone point out the pitfalls here >

  • Report this Comment On January 07, 2012, at 6:56 AM, Tiingall wrote:

    I support the fundamental principle in this proposal, and I believe I do it already in making decisions about share purchases.

    For example, I certainly would not invest in the major banks without careful checking their business behaviour. Too many have demonstrated a total lack of accountability, and the pursuit of personal greed as a priority over responsibly managing the savings and pension funds which we entrust to them.

    And I draw the line at tobacco companies, because of the proven link with disease and human suffering; just like I would not invest in a drug cartel.

    On the other side, I believe that responsibly managed companies which are pursuing solar power alternatives, responsible waste management and other businesses that will help make the world a better place in the future, are deserving of my investment dollars.

    The financial parasites who create nothing worthwhile, but instead try to make personal fortunes - by gambling with our money they want us to entrust to them - are certainly off my list of socially responsible businesses which I'd support with my investments.

  • Report this Comment On January 07, 2012, at 1:18 PM, idanpl wrote:

    I guess he is talking about Employee Stock Purchase Plan (ESPP).

    This is done in many companies as well.

    You can buy the stock in 85-90% of its value, and sell them on the same day.

    Problem is that you can buy only in a portion of your salary (or employees will be able to get really rich in a day).

    :-)

    I totally agree with the Tiinqall, and don't invest in tobacco companies as well.

  • Report this Comment On January 07, 2012, at 5:38 PM, XMFDRadovsky wrote:

    Thanks Alyce, nice article.

    Dan

  • Report this Comment On January 07, 2012, at 6:35 PM, Sunny7039 wrote:

    What I would like to know is whether there is a clearinghouse of information about when a major pension fund or other institutional investor sells a big chunk of stock in any company, for any reason.

    You would think that this information would be easy to come by, given the SEC reporting requirements and the Internet. But I've yet to find such a clearinghouse.

    Are they subscriber-only sites? And if you want the most rapid access to information, do you have to pay a lot?

    If this is how it works, we should at least know. If there is some efficient technique for doing our own legwork (and I suspect there has to be), why not point us in that direction?

    Now that would be information we could all use. Thanks in advance.

  • Report this Comment On January 07, 2012, at 9:56 PM, neamakri wrote:

    You did not say why United Methodist divested itself of two prison firms. Are they for letting the prisoners go? Do they advocate vigilantes? Are they against public justice in all forms? Need some detail here...

    By the way, nice article, keep writing.

  • Report this Comment On January 08, 2012, at 11:26 AM, Darwood11 wrote:

    Oops. Make that 215,625 in the Post Office fleet of vehicles, per the official US Post Office Website

  • Report this Comment On January 08, 2012, at 11:36 AM, Darwood11 wrote:

    @Tiingall;

    I agree with you on the banks and the tobacco companies. I've also avoided gambling stocks.

    I have a real problem with the large banks, which seem to have forgotten their primary purpose. They take my money and store it for safe keeping (but it is the FDIC that guarantees that safety). However, instead of lending that money in a manner in which I would call "responsible" they instead do many other things, none of which it seems, contributes to the well being of this economy.

    I have a big, big problem with that.

    I am now asking my friends and associates this question: What is the value of a bank that takes our money, let's say $40,000 in a money market, and returns 0.2% annually? They aren't keeping it safe (that again is the role of the FDIC). I do admit that the banks pay for FDIC insurance. So the banks make what appears to be poor investments, or promote credit cards for the unworthy or those who might be credit junkies or simply irresponsible. This adds to the tales of woe.

    I am seriously considering putting all of my money (liquid cash assets) in local community banks and credit unions.

    Oops, sorry for the post at 11:26am! I had multiple windows open and pasted to the wrong one.

  • Report this Comment On January 09, 2012, at 2:16 AM, cattywampus wrote:

    Who says that good guys always come in last or in this case good gals. Congratulations on your top position in the Rising Stars portfolios Alyce Lomax. I'm on the west coast and it is 11:16 pm here.

  • Report this Comment On January 09, 2012, at 1:34 PM, GingerR2 wrote:

    Although it doesn't support an ethical argument, companies running prisons are heavily dependent on government spending. Despite the incompetence of Congress, it's likely that government spending will fall in future years.

    Why invest in an industry that will have pricing pressure in the future?

  • Report this Comment On January 09, 2012, at 1:53 PM, ejazz2095 wrote:

    What about Monsanto with the GMOs? Most people know smoking is bad for them, however most don't even know what GMO stands for or what it is. What is worse, a company who makes a harmful product and the users know it's harmful, or a company that makes a harmful product and doesn't disclose it?

    Also, unless it's an IPO or additional offering, you're not really investing in the company. If I by philip morris today, they don't get my money. I bought this stock from someone else, not the company. So I'm not actually giving PM my money.

  • Report this Comment On January 09, 2012, at 3:02 PM, DJDynamicNC wrote:

    I can't in good conscience profit off of human suffering, so that does rule out a fair number of stocks (tobacco, McDonald's, etc). It's good to see the markets responding to these sorts of notions.

  • Report this Comment On January 09, 2012, at 3:08 PM, DJDynamicNC wrote:

    As far as prison companies - private prison facilities only make a profit by cutting corners and sending high-expense prisoners back to state facilities. It also presents a difficult moral quandry - we have created an industry with an incentive to put more people in jail. That's why you see the industry spending millions on lobbying for more stringent laws: http://thinkprogress.org/justice/2011/06/23/251363/cca-geogr...

    You can argue the policy merits all you like, but I cannot ethically support an industry that profits off of putting people in cages.

  • Report this Comment On January 10, 2012, at 11:53 PM, Frisia wrote:

    I don't buy stock from companies that are unethical, harming public health or moral, sponsering politcal candidates and companies that I don't like.

    I find it very difficult to find any companies to buy, meeting my personal criteria!

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