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Sustainable and Responsible Investing in the United States

Tanya Basu/MEDILL

More than one in every nine dollars of stock is currently invested in socially responsible funds - and the numbers aren't slowing down.

Chicago moves to dump gun-related investments, but does socially conscious investing work?

by Tanya Basu
Jan 16, 2013

What do tobacco, South African gold mines, and assault weapons have in common?

All were incredibly lucrative investments. And all were products that companies divested from after public outcry about their negative social impact.

Now, Mayor Rahm Emanuel has joined a movement surging across the nation for cities to responsibly invest their retirement funds. He ordered Comptroller Amer Ahmad to review the portfolio of five major city pension funds to determine which are invested in companies that manufacture or sell assault weapons.

After the review, the city plans to sell any equity holdings or bonds with connections to assault weapons. Investments in other firearms-related companies will not be targeted.

The funds in question include the Fireman’s Annuity & Benefit Fund of Chicago and the Laborers’ & Retirement Board Employees’ Annuity and Benefit Fund of Chicago, among others.

In total, $13.5 billion in assets are in question.

The mayor is continuing work he did as a senior adviser in the Clinton administration in working to pass the 1994 assault weapons ban, according to Kathleen Strand, deputy communications director for the mayor’s Office.

“In light of yet another horrific mass shooting, the mayor is advocating and pushing for reforms at every level,” she said, referring to the Newtown massacre last month. “He’s trying to set an example for cities to use all the tools they have for common sense reform.”

Will Burns, alderman of the 4th Ward, will formerly introduce a resolution at Thursday’s City Council meeting to support the audit.

Newtown sparked a spree of pension fund rethinking. Massachusetts Treasurer Steve Grossman has ordered reviews of the state’s pension funds, while retirement funds for teachers in California and New York are taking a look at their holdings for gun-related investments.

But does such divestment really lead to a change in social consciousness?

Some argue that divestment doesn’t affect product sales.

Michael Schlachter, a managing director of Wilshire Associates, an investment consulting firm based in Santa Monica, Calif., doesn’t think gun manufacturers are going to see serious dips in sales.

“These pensions are divesting because their members are saying, ‘We don’t want to make money from the company that is killing our membership,’” he said.

But he doesn’t think the firearms industry will go up in smoke, pointing to the still thriving tobacco industry, which dealt with a series of huge divestments in the 1990s.

“As long as there is demand for a product, someone will be willing to supply it,” he said. “Pension funds might pull out [of investments related to assault weapons], but there will be someone else in the market willing to buy those stocks.”

Indeed, shares of Smith & Wesson, a major firearms manufacturer, have recovered after plummeting in December. The shares rose again Wednesday despite an announcement from the White House that the president had signed executive orders for improved background checks for gun owners and expanded safety programs in schools.

However, others point to the burgeoning social investment trend.

“Sustainable and responsible investing has been around for decades and has used a variety of strategies to make a difference,” said Alya Z. Kayal, director of policy and programs at the Forum for Sustainable and Responsible Investment, a nonprofit firm that promotes socially conscious investing.

For instance, universities and endowments divested stocks in South Africa during the mid-1980s, leading to the eventual downfall of the apartheid system.

The strategy of using divestments as a tool for influencing policy has expanded from individuals to include corporate governance and, more recently, city pensions.

Kayal refers to it as a “halo effect” when investors urge money managers to sell off holdings that they deem objectionable.

That may be what happened to private equity firm Cerebus Capital Management, which recently announced it would sell the Freedom Group, which manufactures the Bushmaster semi-automatic rifle used in the Newtown massacre.