Investment adviser and author R. Paul Herman holds a rare belief: that investments can do good and make money at the same time. And he seems to be proving it. Gone are the days when we were forced to choose between our values or high returns. I’ve been eagerly following HIP Investor and its CEO and Founder R. Paul Herman since I tuned into the social investment scene. I’ve been delighted at the progress made, including the recent launch of Herman’s book “The HIP Investor: Make Bigger Profits by Building a Better World.” I pulled Herman aside to get the scoop on the book, the investment framework, and his motivations for changing the way you and I invest.
HIP Investor stands for human impact and profit–or the triple bottom line of social, environmental and economic impact. Approximately 11% of assets under management are classified as social investment today, according to Social Investment Forum. Herman aims to ramp that up fast by designing portfolios seeking an above-market rate return leveraging investment opportunities that also yield quantifiable social and eco benefits. He created the HIP 100 Index, which takes the S&P 100 public companies and reweights them based on HIP criteria, “making a traditional black box of investment criteria clear,” Herman explained. The criteria are:
1. How HIP are the company’s products? What quantifiable impact do they have on the customer? How do they solve a human problem? What share of revenue do those HIP products provide?
2. How is the company measuring its human, social and environmental impacts? Which are leading indicators for the business? How do those impacts drive profit and shareholder value?
3. How do existing management practices reflect a HIP approach? Do the vision and metrics support a long-term, comprehensive view of the company, customers and society? Do all systems for accountability and all processes for making decisions include criteria for bigger profits and a better world?
The HIP 100, evaluated from mid-2004 to mid-2009 retrospectively, and from mid-2009 to now as a live portfolio, has outperformed the S&P 100 by an average of 4% (after fees). So by reweighting a traditional profit-motivated index by sustainability criteria, the HIP approach has earned more over time. Sustainability is a leading indicator.
HIP companies are judged along five areas of human impact: Health, Wealth, Earth, Equality and Trust.
Health refers to both physical and mental well-being, including quality of life.
Wealth encompasses ways for people to earn more, save more or better secure their financial future.
Earth covers the water we drink, the air we breathe, and the overall ecosystem balance.
Equality seeks fair representation, whether classified by gender, ethnicity or income class.
Trust includes open transparent information and ethical and respectful behavior.
A psychologist at heart, I dug into Herman’s motivations for all his work, which are solidly altruistic. His primary goal is to change people’s minds about how they invest and what they can expect from their investments.
To top it off, Herman is making this whole methodology open source. What this means is that anyone can access the details of the framework, read the book and create their own HIP portfolio. By doing so, people can weight their portfolios based on their own priorities – so mine would be weighted for Earth and Health for example. The accessibility of the framework will hopefully accelerate adoption and therefore hasten the growth of the social capital market.
HIP investors can investigate and select new companies to add to their portfolios. Herman outlines a suggested process, which includes interviews and in person conversation with executives. “Stock prices are not accurate,” Herman said, traditional finance is too “focused on numbers and spreadsheets, with too little in-person interaction.”
Herman wants to engage even poorly ranked companies. To some investors’ dismay, Herman does not screen out tobacco and other traditionally “bad” companies. Instead he weights them lower. For example Phillip Morris is #100 in the HIP 100. This way, he can “give them a chance to improve. If we exclude them, it means they won’t improve.” So far, Herman has found that companies take their ranking seriously. “Companies in the top 10 want to become number one.”
Most importantly, Herman outlined three ways we can all be more HIP:
- Monitor personal spending. Vote with your wallet. Use resources like GoodGuide to make good choices.
- Make a difference at work. Take initiative to influence the people around you.
- Invest smartly. Ask your investment adviser – or HIP – how to build a more HIP portfolio.
What have you been doing to make your portfolio align with your values?
Ed Note: Paul Herman will be one of the many speakers at our GRI Certification course to be held this July in Berkeley. For information about the course, please click here. Feel free to pass it on to people you think may be interested!