Socially responsible investing, often called SRI by industry insiders, encompasses a lot of different approaches. The easy call is to cull out companies that blatantly do undesirable things, like making firearms or cigarettes. After that, however, it can get a little more complicated depending on what your actual social goals are.
That said, here's a collection of companies you should get to know if you are inclined toward doing good while doing your investing: Nucor, Weyerhaeuser, Brookfield Renewable Partners LP, and IBM.
A five-dollar phrase
The term "socially responsible" is a catch-all. For example, some different flavors of SRI include a focus on companies with small carbon footprints, those that support gender diversity, and companies that are just all-around good citizens. There's even an S&P 500 Index clone that removes companies involved with fossil fuels. If you are looking to be a socially responsible investor, the first question to ask is, "What do I care about?"
Once you've answered that question, you can start to look at companies you might want to own. However, the world is an imperfect place. Often a company will do some things exceptionally well and other things less well. Take, for example, the troubles at Uber. Although this is a private company, its high profile missteps offer an interesting glimpse into the hard choices SRI investors face.
On the surface, the ridesharing company is using the power of the internet to increase the utilization of automobiles. That means less need for people to buy cars and promoting the sharing economy. And it gives jobs to people who might otherwise not be employed, with work that's tailored to their schedules. If that were the full story of Uber, it would be a slam-dunk socially responsible investment -- when it goes public.
But there's more going on here. For example, management is working to rectify a corporate culture that has struggled with claims of sexual harassment and discrimination. And Uber faced a federal investigation last year over developing a program specifically to help it evade laws that would impinge on the company's business. Those things sound a lot less socially responsible
The point here is to highlight that there are very few easy answers when it comes to being an SRI investor. If you want to go down this road, you will need to take a deep dive into the stocks you own so you understand the businesses. And even then, you'll probably have to make some trade-offs. With that in mind, here are four names you should be looking at, some of which might, at first, sound surprising.
1. Steel's top dog
If you're like most people, the word "steel" doesn't sound very environmentally friendly. But don't judge Nucor by that. For starters, the world has yet to find a viable and cost-effective alternative to steel. In other words, we need the stuff. Second, Nucor's business is driven by what are known as electric arc mini-mills. These are more efficient than the older blast furnaces that most people associate with steel.
|Brookfield Renewable Partners LP||(NYSE:BEP)||$6 billion||6%|
But the really interesting thing about Nucor is its claim to being the largest recycler in North America. Mini-mills use scrap metal as a primary input. To help control costs, Nucor bought David J. Joseph Co., effectively a collection of scrap yards that supply scrap metal to Nucor's mills and to its competitors. So Nucor is supplying a necessary material in an environmentally friendly way, by reusing discarded steel. If you didn't bother to dig a little deeper, you'd have skipped over Nucor and missed a chance to own what is easily one of the best-run steel companies in the world.
To put some numbers on that last statement, over the past decade Nucor bled red ink in just one year. The decade included a deep industry downturn that pushed competitors AK Steel and U.S. Steel, which both use blast furnaces, into negative earnings territory in eight and seven years, respectively. Nucor's margins, meanwhile, have historically trended at the high end of the industry. Nucor is a little expensive right now, but steel is a cyclical industry. Put this SRI stock on your watch list for the next downdraft.
2. Cutting down trees
Weyerhaeuser, a real estate investment trust, is one of the largest timberland owners in the world, with some 13 million acres spread across the United States. Of course, that means it makes money by cutting down trees, which definitely doesn't sound very socially responsible. At least until you think through what that really means.
It isn't slashing and burning its way to profits. Trees are a renewable resource that can be like an annuity that keeps paying dividends year in and year out -- if you manage your timberland responsibly. Which is why Weyerhaeuser plants new trees as it's cutting older trees down and carefully maintains its timberland to ensure its trees have the best opportunity to grow big and tall. Doing anything else would be economic suicide. And just think of all the carbon dioxide that its vibrant forests soak up!
That said, trees are a commodity, so Weyerhaeuser's business results will fluctuate with the price it gets for its timber and the wood products it manufactures. Housing is a key end market, so that industry's ups and downs will have a big impact on Weyerhaeuser's top and bottom lines. Right now, housing looks like it's strengthening, so Weyerhaeuser is worth a deep dive despite the fact that its trading near all-time highs. And even if you find it a bit too pricey today, you'll want to keep it on your SRI watch list for the next downturn.
3. Clean power, easy call
Brookfield Renewable Partners LP is one of the largest independent renewable power operators in the world. Its portfolio consists of more than 800 facilities that include the currently hot spaces of wind, solar, and power storage. However, roughly 80% of the power it generates comes from hydroelectric power plants -- one of the first widely available renewable power options. This is a rare easy pick in the SRI space.
The partnership has largely grown via acquisition, fueling top- and bottom-line growth by buying established renewable power businesses across the entire globe (it has exposure to China, India, and key South American markets). That's a level of diversification that's well worth keeping in mind, since power demand in emerging markets is still growing, while demand in mature markets, like the United States, is likely to be incremental, at best.
Brookfield Renewable's future looks promising, too, despite the fact that its shares are trading near all-time highs. Note that it's been public for less than a decade, spending most of this time focused on growth acquisitions. Key goals include maintaining a strong balance sheet, buying out-of-favor assets, and operational excellence so it can keep costs low. If clean energy is your thing, then Brookfield should be on your list today.
4. Women leading the way
The last company on the list is IBM, an iconic technology giant being led through a difficult industry transition by a female CEO. That doesn't mean much if the CEO is the only woman in a leadership role, but that's not the case at IBM -- roughly a quarter of all IBM managers are women. In fact, IBM is known for supporting diversity within its global workforce. If diversity is your SRI focus, then you'll want to do a deep dive into IBM.
Here's the bad news: IBM has been struggling to shift gears in a fast-changing tech world. It has exited low-margin operations like making computers to focus on in-demand and higher-margin markets like cloud computing, security, blockchain technology, and artificial intelligence. It hasn't been a smooth ride, with revenues falling for years as the drop-off in older business outstripped growth in its new businesses, which it was still building up. However, it looks like the tech giant has finally gotten close to turning the corner, with year-over-year revenue growing in the fourth quarter of 2017 for the first time in roughly five years.
Unlike the other three names above, IBM looks relatively cheap. It's 3.8% yield is toward the high end of its historical range, and the stock price is still 25% or so off the highs reached in 2014. In other words, there is still time to get a decent deal on this tech giant that's pushing gender equality and employee diversity throughout its business.
Do your SRI homework
These are just four companies out of thousands you could possibly invest in. However, each offers a unique SRI angle. And they all show that you need to dig below the surface to truly understand what's going on in the SRI space. If you are a socially responsible investor, at least one of the above names should interest you.
Nucor is a little expensive today, but this giant recycler is worth watching for the next cyclical downturn in steel. Timber giant Weyerhaeuser's forests are an asset that keeps on giving, and if housing remains strong, the giving could be financially rewarding in the near term. Brookfield's hydroelectric portfolio is helping it build a global energy business, a great way to keep the environment clean and serve the energy needs of countries moving up the socioeconomic ladder. IBM's turnaround, meanwhile, is not being led by a single woman, but by thousands of women throughout its ranks. There's still time to get a decent SRI deal here as IBM's turnaround starts to gain traction.