Socially Responsive Indexing

What does SRI mean at Aperio?

At Aperio, we listen to our clients and then construct a portfolio that best reflects their values, given the data that is currently available. Our process begins by gaining an understanding of a client’s values and priorities and then using a quantitative, research-based approach to build the appropriate portfolio.

What do you mean by values-based investing?

There are many different terms that are used right now in the industry; one of them is values-based investing. To us, that simply means that your investment portfolio reflects your values. Rather than thinking about your values in one bucket and your investments as completely separate and independent, we take the approach that your values and investments are intended to be mutually reinforcing.

Whose values are you using?

Each client’s values are unique, so Aperio offers both standard and completely customized solutions for clients. Our standard solutions are developed with the involvement of experts in each particular area to reflect the generally accepted guidelines for that profile. Aperio’s customized solutions reflect the values of each client with whom we are working. Because we are implementing the strategies in separately managed accounts (SMAs), we have the ability to develop solutions that reflect each client’s unique value set.

How is this different from mission-based investing?

Mission-based investing is most often discussed in relation to the work of a foundation or endowment that is pursuing a specific mission. In the past, this mission was the sole domain of the grant-giving arm of the foundation. The investment portfolio was invested exclusively to maximize returns, even if some of the investments were in direct conflict with the mission of the organization. Think of a foundation with a mission focused on clean water holding an investment portfolio that included the stock of a company that is a known water polluter. In the past, this approach was considered acceptable since the sole aim of the portfolio was to maximize returns. Today, foundations are seeking more harmony between their mission and their investments.

SRI/ESG/Impact Investing—what are all these terms?

Alphabet soup. The various terms used in this realm reflect the evolution of the industry. SRI (socially responsible investing) was the early movement focused on values alignment. This investing approach was initially developed by faith-based institutions and the early progressive investors who wanted to align investments with their world views. ESG (environmental, social, and governance) reflects a move toward thinking about these issues from a materiality standpoint with investors asking, “How will this issue affect the company and its stock?” Impact investing seeks to create a tangible change in practice or behavior through investments. Impact can take several different forms. An impact investor might make a direct investment in a financial institution that works with underbanked and low-income communities. Alternatively, an impact investor can become an activist shareholder in a public company to change corporate behavior on an important issue. Another approach might be to invest in companies that are focusing on doing “good” things, however a given investor defines “good."

What values can you incorporate?

Aperio offers a wide range of values and has data covering environmental, social and governance issues. Aperio offers negative and positive screening. Negative screening allows investors to exclude the companies/industries/countries that don’t align with their values. Positive screening allows a portfolio to tilt toward companies that have a better track record than others in areas important to a given investor. We also offer impact tilts, where the portfolio overweights companies that are building businesses that improve the environment.

How is your approach to SRI different?

First, we focus 100% on each client’s unique value set. Second, we construct portfolios to deliver market returns while aligning with the client’s values. Finally, we measure the impact of the values on portfolio performance.

How does SRI affect performance?

SRI screens are a constraint on the optimizer’s ability to perfectly track the selected benchmark. Some values sets will have a larger impact than others. Aperio provides analysis in advance so an investor knows what to expect. We have a long track record of delivering on our forecasted tracking errors.

Should I use SRI benchmarks?

We don’t recommend them because we believe that most investors are seeking to match the traditional market benchmarks. By using the optimizer, we are able to reweight the securities to track standard benchmarks. Another issue is that SRI benchmarks often have additional fees associated with them, something we try to avoid on behalf of our clients.

Do you do your own research?

We rely on a number of third-party social research vendors including MSCI, IW Financial, Bloomberg, and EIRIS. In addition, when the data a client seeks isn’t available in our data sets, we will research to try to find a reasonable proxy.

Do you vote proxies?
Do you offer shareholder engagement?
How do you reconcile working with different clients with vastly different values?

It is our business. Our mission is to help advisors help their clients align their investment portfolio with their values and/or mission in a risk-controlled, low-fee, tax-efficient manner. When we can help a client achieve their investment goals in concert with their values, this is our success.

What is your approach for investors interested in a "carbon free" portfolio?

The definition of “carbon free” is an important issue when working in the area of divestment. We take the position that there are many ways to address these issues, depending on the values of a given investor. Unless a client makes a specific customization request, we default to eliminating companies in the oil, gas, and consumable fuels industries. Divesting from oil, gas, and consumable fuels is a simple approach, with the advantages of relatively low tracking error and an easily understood set of exclusions. That approach presumes that such a trade-off satisfies the investor’s utility function, defined as “expressive utility” by Professor Meir Statman of Santa Clara University. It is also reasonable to consider broadening industry exclusions to eliminate carbon-heavy users as well. The question can be recast as whether investors who want to incorporate their environmental values into their portfolios might want a more comprehensive approach than simply excluding the companies that pull hydrocarbons out of the ground. Additional exclusions will increase tracking error, so the challenge lies in defining and measuring the expressive-utility component. The extent of the tracking error is entirely dependent on how far an investor wants to extend the carbon issue through the economy. If you exclude firms based on electricity consumption, for example, then you could end up with such severe restrictions that you are not indexing any longer, but merely investing in a concentrated portfolio of a very small number of more environmentally sound firms. We try to remain conscious of the level of tracking error and evaluate if the portfolio no longer qualifies as a broadly diversified index solution. Aperio has implemented a wide range of fossil-free definitions to help investors best match their risk budget with their values.

How does Aperio approach divestment?

In short, we don’t take a position on whether divestment is appropriate. Instead, we help clients who are interested in divestment understand the implications of the divestment on risk. We’ve found in the debate on divestment, be it fossil fuels or companies with no women on the board, that there are two schools of thought on incorporating values into portfolios of public equities. One approach, ours, emphasizes the risk impact as measured by a traditional multi-factor model like Barra’s, while the other school focuses on the inherent and poorly understood economic risk. In the case of fossil fuel divestment the economic risk is that of stranded assets, i.e., the market is mispricing the risk of future legislation of market-driven forces that will penalize or prohibit current sources of profit for entire industries like oil. We hear the second approach frequently among advocates of divestment. As indexers, our stance is not that such risks are or are not properly priced by the market, but rather that we don’t believe anyone is capable of consistently outsmarting the market in pricing such specific risk issues. The distinction arises frequently in discussions of the risks and expressive utility benefits of carbon-free or carbon-reduced investing and ends up coloring different approaches to incorporating environmental screens.

All investments involve risk, including loss of principal invested. Past performance does not guarantee future performance. Individual client accounts may vary. The strategies and/or investments referenced may not be suitable for all investors as the appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives. Please refer to the "Disclosure" link below for additional information.