The New Renaissance of Socially Responsible Investing
by Kevin Marek
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Socially Responsible Investing. How can you beat that? Make money and
do it ethically, or, at least in a way that does no harm.
The beauty of the concept is that Socially Responsible Investing (SRI)
is pretty much what it purports to be. There are no hidden meanings
or disclaimers buried in the fine print or footnotes. And it gets better.
Recent research is showing that investors don't have to give up investment
performance while maintaining a socially responsible portfolio of investments.
This point will be discussed later in more detail.
History of Socially Responsible Investing
As the literature is quick to point out, the idea of SRI dates back
to at least the 1700s, when Quakers refused to involve themselves in
the slave trade. They found the institution morally repugnant and they
had the courage and strength of conscience to act on their convictions.
The discipline as it now exists, however, really grew out of the idealism
of the 1960s social revolution. As the 60s radicals got older and started
to invest their money, different groups chose to perpetuate the moral
dimension of their protesting days. The result is that SRI, as the term
is generally defined, refuses to invest in companies that produce certain
products or that engage in certain practices.
It should be noted that there is no single, centralized organization
that oversees and sets standards for what SRI is or is not. Rather,
there are a number of groups, and each has their own specific set of
rules. There are, however, recurring themes.
SRI most commonly avoids investment in the following industries: alcohol,
gambling, tobacco, nuclear power, and defense. SRI tries to invest in
companies that produce safe and useful products. SRI looks for companies
that adhere to certain policies and ways of treating their employees.
These policies include the practice of good corporate citizenship, as
demonstrated by policies that promote diversity; good employee relations;
respect for the environment; payment of fair wages and the nonuse of
sweatshop labor, whether in the US or in overseas factories; respect
for human rights; enhancement of the local community, whether in the
US or abroad; and restrictions on animal testing.
Again, different groups may have different emphases, and may have additional
or different criteria for what is socially responsible and what is not.
To get some sense of the different groups that are involved, simply
go to google.com and search for "socially responsible investing."
One group is Kinder, Lyndenberg, and Domini Co, Inc. (KLD). Founded
by Peter Kinder, Steven Lyndenberg, and Amy Domini, KLD maintains what
they call the "Domini Social Index" (DSI). This is a list
of 400 companies that they consider to be good corporate citizens. The
DSI is more or less analogous to the S&P 500, and is the most well-recognized
of the socially responsible indexes. An "index" is a group
of companies united by one or more common characteristic. The Dow Jones
Industrial Average is the best-known index, being the 30 largest manufacturing
companies in the United States. With the Dow and the S&P, the common
trait is simply size; for the DSI, the common trait is adherence to
good corporate citizenship.
The complete list of companies on the index can be found either at
www.kld.com or www.domini.com.
To determine which companies belong in the index and which don't, KLD
uses a proprietary screen with a set of criteria. Based on these criteria,
Domini Investments offers a number of equity mutual funds that invest
in the companies that meet the socially responsible standards. The Calvert
Group is another well-known family of SRI funds.
At this point it should be noted that not everyone will agree with
the composition of the DSI 400. If you want to check out certain companies
and come to your own conclusions, you can go to http://www.coopamerica.org/
and select the link for Responsible Shopper, or go directly to ResponsibleShopper.org.
There you will be able to read about the good--and the bad--aspects
of the behavior of specific companies.
KLD recently removed Wal-Mart from DSI. Among the reasons cited for
the removal are:
- Wal-Mart's documented contracting with vendors that operate "sweatshops'"
or are based in Myanmar (the former country of Burma);
- Wal-Mart's vendor contracting policies and practices;
- Wal-Mart's unresponsiveness to shareholders on this issue;
- Wal-Mart's role as a "market leader."
For more on this, go to www/kld.com/benchmarks/walmart.html.
To add the list of transgressions, Wal-Mart was recently found guilty
in Oregon of forcing employees work unpaid overtime after their shift
had ended (Dow Jones newswire, Dec 19 2002). This occurred after Wal-Mart
had been removed from the DSI index, so it had no bearing on the decision,
but it does provide further proof that Wal-Mart is not a good corporate
citizen.
The various companies involved in SRI cooperate in a number of ways,
acting as an advocacy group for issues that affect all of us as investors.
One issue that has taken prominence lately is pressing the SEC to require
that mutual fund companies reveal how they vote at shareholder meetings.
Large mutual funds can own literally millions of shares of stock in
a given company. Each share gives its holder voting rights, and the
so-called proxy votes at the company's annual meeting can be used to
set corporate direction. If a few mutual funds each own a million shares,
these funds can have a decisive voice in policies adopted by the corporation.
As it stands, mutual funds are not required to disclose how they vote.
Are mutual funds using their votes to look after the interests of the
average shareholder? Or are they siding with upper management to protect
the interests of highly-paid executives while the average shareholder
is left holding the bag. Think about Enron, here. Or Tyco.
The Social Investment Forum maintains the website socialinvest.org
to act as a clearinghouse for issues like this. In a press release dated
December 12, 2002, SIF is calling on the SEC to enact reforms designed
to prevent further abuses and scandals like Enron from happening again.
Since it was primarily employees and small investors who were wiped
out in the company's collapse (after the CEO and others had bailed out
by selling their stocks), reforms like those suggested by SIF advocate
social responsibility by eliminating some of the advantages insiders
and corporate executives now have over the average investor. Here
is the link to the news release. For the full list of recommended
reforms and the related discussion, go to www.socialinvest.org/areas/research/other/021211_reforms.htm.
Today's SRI: Competitive, if not Rapacious
Recent
independent research has begun to corroborate that there is no significant
difference in the performance of socially responsible funds and standard
mutual funds. This year's winner of the Moskowitz prize, as explained
in the link above, did extensive statistical analysis of the performance
of SRI funds vs. standard funds and found that there was no statistical
distinction between the performance results of established SRI funds
and standard mutual funds. The entire report is available as a pdf file
through the link above. It is important to note that the parity exists
between SRI funds that have been in existence for more than five years,
while SRI funds that have been in existence for less time do not show
comparable results. The research attributes this dichotomy results to
a "learning curve" needed by new fund managers to gain the
experience necessary to perform well. One might also add that very few
standard equity funds have done well in the last three years.
Still, this is good news for the future of socially responsible investing.
Businesses like to use the excuse that eco-friendly, or employee-friendly
policies cost money and so cut into profits. However, if SRI mutual
funds perform just as well as regular funds, it appears that this argument
may not be valid.
This good news for SRI brings us to the final thread of our discussion,
the concept of sustainability, which is related to, and part of the
concept of the "Triple Bottom Line." That we're all familiar
with the term "bottom line" is an indication of how thoroughly
capitalistic our society is. But what is a "triple"?
SustainAbility.com (another
SRI firm) defines the three bottom lines as Society, Economy, and Environment.
Society rests upon the economy; we are social creatures, and some economic
cooperation is necessary to our survival. But the economy rests, ultimately,
upon the environment. For our economic growth to be sustainable, we
must take care of "the global ecosystem, whose health represents
the ultimate bottom line."
Makes you want to go hug some trees, doesn't it? But, with any thought,
you realize it has to be true. We can't completely poison our environment
and expect to prosper in the long term. Sooner or later, we will run
out of real estate and be forced to live in our industrial excrement
unless we take care of our surroundings.
But, aside from the obvious sense of "environmental," the
word also relates to the sustainability of employees in their work environment.
Anyone with an MBA can tell you that an employer should, ideally, treat
her employees well to win loyalty and ensure high productivity. This
is especially true of skilled or educated workers, where there is a
significant learning curve that makes employee turnover unproductive
and expensive.
Basically, there are two ways to motivate an employee: carrot and stick.
The carrot is the reward system: work well and be rewarded. The stick
is blunt force: work hard or get fired. For the last ten years or more,
the stick has predominated. Work hard or get downsized. Or, work hard
and get downsized anyway.
Just as there are groups advocating for socially responsible investing,
there are groups advocating that corporations adopt a sustainable business
strategy that considers the triple bottom line. The argument is that
the increased productivity of contented workers, the good press derived
from being a good corporate citizen, and taking a long-term view when
planning, will actually increase a company's long-term profitability.
The theory of good employee relations is hardly unknown, if not currently
fashionable. The classic example of how bad press can adversely impact
a company is Dow Chemical. Because of their prominent role in the military-industrial
complex that created weapons of mass destruction during the Vietnam
War-- think napalm and Agent Orange -- Dow Chemical found it difficult
to recruit talented college graduates who did not want to be stigmatized
by association with the negative image of the company. The inability
to recruit top-level candidates put Dow at a significant competitive
disadvantage.
Each year Triple Bottom Line sponsors
an international seminar to promote its ideas. One of the founding sponsors
of the conferences is Brooklyn Bridge, a consulting company based in
the Netherlands. SustainAbility
operates from the United Kingdom. These companies are primarily consulting
firms, working as advisors to major corporations to enhance awareness
of the benefits of the sustainable approach. More information on their
ideas and their approach can be found on their websites.
So, there is, perhaps, reason to hope. Socially responsible investing
can and does work. Capitalism does not have to be rapacious to be successful,
and rapacity may actually be counterproductive in the long run. If the
ideas presented by any of the groups mentioned here are valid, there
is evidence to believe that it pays to be a good corporate citizen.
Of course, the obvious problem is that many companies are fixated on
the next quarter's earnings that they don't take the necessary long-term
view. On the plus side, many of the dot.com companies were known for
their flat organizational structures and employee-friendly attitudes.
Even though many of these companies have disappeared, perhaps their
former workers will take these attitudes with them out into the old-line
corporate world. Better yet, perhaps the ideas will come to fruition
as their holders work their way into the upper echelons of corporate
management.
Q & A
We asked a few questions of leaders from two SRI organizations, one
with a more US focus, Social Investment Forum (SIF) and one with a more
international presence, Triple Bottom Line Investing (TBLI).
Todd Larsen, Social Investment Forum (SIF)
SIF is the national trade organization for the social investing field
in the United States, with over 500 members (both individual and institutional).
SIF works to promote the concept, practice and growth of Socially Responsible
Investing. SIF is located online at
www.socialinvest.org. They also have a Web site, www.communityinvest.org,
that encourages people to get involved in community investing. A third
website under SIF, www.shareholderaction.org,
encourages social investors to take part in shareholder advocacy. SIF
also publishes a Trends Report bi-annually which tracks the growth of
SRI, which is currently $2.3 trillion (one out of eight dollars under
professional management).
KM: Can you give examples of some companies who adhere admirably to
SRI principles? I would be particularly interested in companies who
are doing their share not to contribute to the war industry, environmental
pollution, inferior treatment of minorities and women, human rights
abuses, and poor community relations.
TL: You would probably be best off asking our individual member institutions
for this information, since they are the ones that screen the companies
(SIF does not do any of the screening). You might want to contact Domini
Social Investments, Calvert Funds, Citizen Funds, Portfolio 21 and Pax
World Funds to get a balance of opinions. All are available in the search
engine on www.socialinvest.org.
KM: I would be interested to hear your perspective on hedge funds,
which Brent Blackwelder (Friends of the Earth) once referred to as "hot,
short-term reckless speculation funds." Is there such a think as
an SRI hedge fund, or is this an oxymoron?
TL: There are one or two SRI hedge funds. They are not members of the
Forum (SIF). The Forum supports a diversity of investing approaches
geared towards different investor needs within the SRI universe. One
SRI hedge fund you could contact is Green Cay Asset Management.
Green Cay Asset management is a minority-owned specialist in emerging
markets and manages a socially responsive emerging market hedge fund.
Jane Siebels-Kilnes founded the firm in 1996, after a successful career
with Templeton Asset Management as an emerging markets portfolio manager
using the rigorous application of fundamental analysis designed to uncover
value.
Contact:
Jane Siebels-Kilnes
Green Cay Asset Management
P.O. Box N7776
Nassau, Bahamas
Telephone: (242) 362-6400
Fax (242) 362-6402
KM: Has Social Investment Forum ever sought to give consultation to
the automotive industry, to help move along the process of conversion
to fuel cell cars?
TL: Fund companies and portfolio managers within our industry have
certainly been active in talking to the automotive industry. Try the
list in response to question one above. In addition, try Trillium Asset
Management and Walden Asset Management, as well as the Interfaith Center
on Corporate Responsibility. All of these resources are members of SIF
and are listed in the search engine of www.socialinvest.org.
Robert Rubenstein,
Triple Bottom Line Investing (tbli.org)
Robert Rubenstein is the founder and CEO of Brooklyn Bridge, an SRI
organization based in The Netherlands which organizes an annual SRI
conference. Tbli.org has actively arranged funding for large scale sustainable
projects in the business sector, including helping to fund a solar thin
film production facility and sustainable cement production for China.
Through the organization and annual conference, tbli.org has been instrumental
in getting SRI into the mainstream of business strategy.
KM: Can you give examples of some companies who adhere admirably to
SRI principles? I would be particularly interested in companies who
are doing their share not to contribute to the war industry, environmental
pollution, inferior treatment of minorities and women, human rights
abuses, and poor community relations.
Robert Rubenstein: There are many financial companies that have SRI
investment principles. Calvert, Domini, Trillium, ASN Bank, Friends,
Ivory, ICCR members, and many more.
KM: I would be interested to hear your perspective on hedge funds,
which Brent Blackwelder (Friends of the Earth) once referred to as "hot,
short-term reckless speculation funds." Is there such a think as
an SRI hedge fund, or is this an oxymoron?
RR: I don't know of any SRI hedge fund. Most SRI funds are long term.
You might want to contact Pax World fund. Tim Grant spoke at my conference
on their high yield corporate debt financing.
KM: Friends of the Earth recently challenged the IMF, and brought about
the pullout of a goldmining project in Romania. Do you see the IMF and
World Bank growing more responsive to the international concern and
pressure to change their policies which harm Third World Nations?
RR: I have more problems with ngo's (non-governmental organizations)
who continuously point the finger at various financial institutions
when they do not invest their own money responsibly. WWF, Greenpeace,
Amnesty, ILO, most foundations, most churches. It is a disgrace and
an embarrassment.
KM: Has Triple Bottom Line Investing ever sought to give consultation
to the automotive industry, to help move along the process of conversion
to fuel cell cars? As knowledge brokers, do you wait for corporations
to contact you, or do you reach out to them?
RR: I only go where the door is partly open. If the automotive industry
was really interested in short term changes, it would happen. They haven't
felt enough pressure from the financial community to switch. Companies
like people only respond to pain. I use pain to make companies embrace
more sustainable business practices. The pain is financial, personnel
and reputation. I focus on financial by doing the conference. This raises
the consciousness of the the financial sector that it is in their interest
to embrace sustainable investment (SRI). I could do 1000 lectures at
GM, but if TIAA-CREFF (big pension fund) calls and asks the CEO for
their sustainability report that is externally verified, then you have
impact. With respect to personnel, I teach MBA students and give them
a question list to ask the recruiter. The questions relate to the companies'
values. If this happens enough, the recruiter reports to the board and
says that the MBA students we want have other interests than dying rich.
Resource Links
http://www.jgpress.com/inbusine.htm
http://www.lohasjournal.com/app/cda/nbp_cda.php
http://www.realmoney.org/
www.greenmoneyjournal.com
Copyright © 2003 Kevin Marek. All rights reserved.