CAN SOCIALLY RESPONSIBLE INVESTING MAKE A GREAT LEAP FORWARD?
Marjorie Kelly. E : the Environmental Magazine.
The basic premise of socially responsible investing is simple: If money makes the world go 'round, greener, more humane investments can improve the way it spins. Want sustainably managed forests? Provide loans or capital to eco-minded timber companies. Want Monsanto to get out of the genetic engineering business? Buy Monsanto stock and put forward a shareholder resolution demanding the company cease and desist. This isn't just wishful thinking; social investors can point to many positive efforts like these. And their strength is building. Yet before hailing a new era of green capitalism, it's also important to understand some of its limitations.
Socially responsible investing (SRI) is something of a curious hybrid. Part capitalist outlet, part activist tool working within constraints that are mostly oblivious to anything nonfinancial, it is often misunderstood, even by those who support it. Its not-quite-fish, not-quite-fowl status leaves some wanting it to do more and others to overestimate what it can do. And in its own way, each view prevents social investing from fulfilling its potential.
THE THREE-LEGGED STOOL
Traditionally, socially responsible investing has been described as a three-legged stool made of stock screening (avoiding the stock of bad-actor companies), shareholder activism (exercising your rights as a stockholder to make positive changes), and community investing (banking with institutions that loan money to worthwhile projects). Presumably, this stool is built to realign and hold an enlightened economy. It's an appealing metaphor, but a bit misleading.
For starters, an image of a stool suggests that each leg is of equal strength and that they all work together in some coordinated way. In fact, some legs are considerably more developed than others and each strategy works independently of the others. There can even be some tension between SRI tactics (but not the goals of its practitioners, who sometimes work on all three fronts). For example, stock screening requires avoiding or divesting yourself of companies you don't like, while shareholder activism demands investing in public corporations whose actions you're trying to change.
Another problem with the stool analogy is it implies that the three SRI pillars are strong enough to support a sustainable, truly healthy economy. Alas, this doesn't seem possible. That will require deeper, more fundamental changes and legislative action.
So is there a better analogy than a stool? We think so, but before offering an alternative metaphor and some ideas about how SRI might become even more effective, let's look more carefully at the three main tools available to social investors.
Although ethical investing can be traced back to 17th century Quakers who refused to invest in businesses selling armaments, the modern SRI movement was launched in 1971 with the Pax World Fund, essentially as a vehicle for stock screening. Started by ministers protesting the Vietnam War, Pax investors felt it was wrong to own stock in companies like napalm-maker Dow Chemical. So they created a mutual fund that screened out what they considered unsavory companies-including tobacco, alcohol, gambling and weapons makers. Over time, filters and research on corporate responsibility have grown more sophisticated to include environmental responsibility, women's and gay rights, racial equality and animal testing. Almost 20 percent of SRI mutual funds use some kind of environmental screening, either as one of many screens or as their most important one.
The gist of screening your investments is summed up with the maxim: Invest your principal with your principles. That guideline can be applied to both stocks and bonds, and take the form of positive or negative screens. Intuitively, screening seems like the best way for an investor to express disapproval or support for a public company. If, for instance, you're angry g with Procter & Gamble for testing its products on animals, you'd either avoid their stock or, if you already owned it, sell it. For a positive screen, you might consider adding Ballard Power Systems to your portfolio if you look forward to the days when automobiles are powered by fuel cells.
It's easy to see why this approach appeals to investors with a conscience. And indeed, stock screening is by far the most popular form of SRI. The question that has long dogged ethical investors is: Do stock filters hurt returns?
In 1984, when socially
conscious investing was taking shape as an industry, Social Investment Forum
It's been a while since social
investors have had to endure such teasing (though old myths die hard: in july 2003, the New York Times ran an article by investing
newsletter watchdog Mark Hulbert, who used highly selective fund comparisons
to conclude screening for social factors hurts performance). Extensive
research and history shows that investing according to social screens doesn't
harm returns and may even improve them. These findings have been clearly
borne out by the success of the Domini Social Index (DSI), which is a
screened, slightly trimmed-down cousin of the S&P 500 (a roster of 500
large companies that represents the stock market as a whole). For the 10
That message has gotten around,
making SRI the fastest-growing sector of the financial services industry.
From that $40 billion first surveyed in 1984, socially oriented portfolios
had climbed to $2.1 trillion by the end of 2002-a more than 5,000 percent
increase. You don't need a degree in economics to be impressed by $2.1
trillion, but for those made numb by such large figures, consider that it's
roughly the combined 2000 gross domestic products (GDP) of
Almost all SRI mutual funds do
negative screening (avoiding irresponsible corporate players); less do
positive screeningseeking out good-guy companies.
For eco-minded investors, there are a half-dozen funds (see sidebar) that
emphasize or focus on environmental issues. For example, Portfolio 21, run by
Progressive Investment of
What screening does is align your portfolio with your values. While this makes instinctive sense and can strengthen your convictions, there is a common misunderstanding about its ability to directly bring about social change. It's an easy mistake to make; after all, the unifying motto for the green money movement has been "vote with your dollars." As a general rule, this is a good slogan to remember when spending on most products and services: buying organic produce, taking your clothes to a nontoxic dry cleaner, or purchasing a gas-electric hybrid car not only reduces your own ecological footprint, it directly supports important new industries. Conversely, boycotting Citibank (and writing the company about it) until it stops underwriting environmentally destructive construction projects is an effective method of protest. But simply boycotting Citibank's stock or even selling your shares doesn't have the same effect.
Here's why: in most cases, putting money in the stock market isn't investing in the truest sense of the word, but actually speculating. Buying shares in Ford, for example, doesn't mean Ford gets the money and uses it to fund operations. It's more like you're buying a 1998 Taurus; the money goes to the previous owner of the car, not Ford itself. The only time companies get your money is when they issue new stock-which they do through initial or secondary public offerings. But among the Dow Jones Industrials, only a handful of corporations have sold any new stock in 30 years. More than 99 percent of stock market activity is purely speculative.
DO THEY CARE?
So the question is, does social screening-that is, refusing to buy the stock of certain companies-really make any difference to those companies? Basically, no. If a large number of Monsanto shareholders, outraged over the company's genetically modified products, dumped all their shares at the same time, the stock would drop-but only briefly. As soon as other investors realized nothing had changed about the corporation's financial condition, they would scoop Monsanto's shares right back up.
Meir Statman, chair of Santa Clara University's finance department, who has studied the effect socially responsible investors have on stock prices, explains that this is because what registers in the stock market are earnings and prospects for future earnings; the market is blind to social concerns (except as they affect earnings; for example, in the form of a lawsuit or lost sales).
Consider what would happen, for instance, if nearly all investors boycotted Wal-Mart's stock because the company sells products made from polyvinyl chloride (PVC]). Let's say, hypothetically, the stock dropped so much you could buy the whole company for $1 million or, since this is theoretical, for $10,000. As long as Wal-Mart's sales stayed strong, whoever bought it could take the company private and get the financial bargain of the century. Such investors would actually be rewarded for ignoring social concerns. Of course, Wal-Mart's stock would never even approach such amazing prices since bargain hunters would have long before stepped in and gobbled up shares. In other words, the stock market is driven by financial concerns and if an issue doesn't register financially in some way, stock prices won't be noticeably effected.
Statman's theory is borne out by the performance of tobacco stocks. Did tobacco divestment actually contribute to their declines? "Probably a little, but not a lot," says Doug Cogan, director of the tobacco information service for the Investor Responsibility Research Center (IRRC), an institutional investor information service in Washington, D.C. he estimates that at most two to five percent of tobacco shares have been sold through divestment. But to actually affect prices, he says you'd need divestment of 60 to 70 percent of shares.
Research seems to indicate that, if anything, Cogan's estimate was generous. A 1998 Social Investment Forum study on South African divestment-written by Slew Hong Tech, Ivo Welch and C. Paul Wazzan-showed that when 16 large pension funds in 1985 announced divestment from U.S. firms with large South African operations, there was no measurable negative impact on stock prices. If the goal is to hurt stock prices, "divestment is not the best tool," the researchers wrote. The bright news in this, SIF pointed out, is that it means socially concerned investors aren't penalized financially. True enough. Still, it makes one wonder what's the point?
Essentially, as already noted, the reason is to be aligned with your principles. Obviously, you can't put a price tag on moral consistency-nor should we underestimate its real-world power. It's a strength that fueled Gandhi's success against the British, Nelson Mandela's against apartheid, and Mother Teresa's ability to create an institution and inspiration with global reach. Applied in a more practical way, it allows us to make activist efforts without conflicts of interest. If, for example, much of your net worth were invested in McDonald's, you'd be unlikely to protest a new store opening in your neighborhood or be as eager for the company to use unbleached paper if it impacted earnings. The paper written by Tech, et. al. concluded that, while divestment didn't hurt stock prices, it did help "raise public moral standards and awareness of the repression of the apartheid regime." Call it public pressure, call it the buzz factor at work-but don't minimize it.
Since it works in a big picture kind of way, the impact of screening is hard to measure. "What social investors do is bring social and environmental issues into business decision-making," says Alisa Gravitz, executive director of Coop America and vice president of SIR One way SRI does this is by demonstrating that socially oriented companies are well-managed firms that can get excellent returns.
Stock screening also adds to a
more civilized business climate by creating watchdogs that monitor corporate behavior. "The whole process of screening creates a
need for social and environmental information on companies," says Simon BiIlenness of Trillium Asset Management in
SRI has also provided an
immeasurable service from the attention it has created in the culture at
large. One of the great successes of SRI has been to get people to realize
that ethical and environmental issues can be part of a corporation's mission.
This has paved the way for some of
For many companies, it has
become a regular practice to issue reports on environmental stewardship,
racial equality and diversity, and animal testing. Some Fortune 500 companies
have added whole departments to address these concerns. "You can go to
the websites of companies such as BP Amoco and Ford and see a real change in
attitude," says Tim Smith, former executive director of the Interfaith
Center on Corporate Responsibility (ICCR), a coalition of religious
organizations that has coordinated shareholder resolutions for 30 years. More
than 70 companies, including Sunoco, General Motors, Arizona Public Service
and Bank of
Companies don't necessarily change overnight after they sign CERES. GM, for instance, has come under fire from the group for failing to increase fuel efficiency. CERES board member Ariane Van Buren of ICCR says, "We want to see GM apply the same 'can-do' spirit [it used in developing new environmental technology] to increasing the fuel economy of the many cars it's putting on the road now."
Organizations like CERES are
poised to play an ever-larger role, as more and more corporations grasp that
social issues must in fact be integral to business itself. Recent evidence
for this trend comes from the Millennium Poll released by The Conference
If stock screening contributes to changing corporate behavior in an undefinable, bigger-picture way, shareholder activism offers the opportunity for what SIF's Gravitz calls a "laser-beam focus" on particular companies. This allows investors to see clear results from their efforts.
One of the best-known cases of effective shareholder activism is Rainforest Action Network and cohorts' drive to have Home Depot commit to phasing out the sale of old-growth lumber (see sidebar). But shareholder activists have had other notable successes for the environment. They've influenced General Electric to allot $150 to $250 million for cleaning up polychlorinated biphenyls (PCBs) polluting the Housatonic River in the Northeast; they've motivated Universal Health Services of Pennsylvania, the country's third-largest hospital management company, to formally request that its suppliers phase out the toxic PVC in medical products; and they have persuaded Ford, DaimlerChrysler, General Motors and Texaco to quit the Global Climate Coalition-an organization that undermined efforts to curb global warming.
Shareholder activism has been
described as the muscle in SRI. Or as Peter Kinder of KLD Research &
Analytics once noted, shareholder activism works like the two-by-four whacked
against an Ozark mule in old farmer jokes: it gets a corporation's attention.
Alisa Gravitz of Co-op
Shareholder activism works best in conjunction with other activist efforts such as consumer boycotts and letter-writing campaigns, and it is an excellent complement to these efforts because the corporation is being "attacked" from within. Since all shareholders are part owners of the company, they have limited rights to comment on corporate policies. So even if you own only one share of Microsoft (the equivalent ownership stake of Bill Gates' closet door knob), you're allowed to attend annual shareholder meetings, ask questions at that meeting and vote on any issues before shareholders (which can be done via mail or the Internet).
Up your ownership stake to $2,000 worth of stock and, if you follow the proper protocol, you can propose a non-binding corporate resolution-a shareholder referendum for a policy change. Or, as a mutual fund investor, your fund can do this for you. Recently, for example, Calvert Funds-a family of socially screened funds with excellent environmental criteria-worked with others to file a resolution with Hewlett-Packard, asking the company to prepare a report on the feasibility of a comprehensive product takeback policy. And after a Green Century Balanced Fund resolution, PepsiCo agreed to roll out a new lid that will save 25 million pounds of aluminum annually. As a shareholder in such proactive funds, you get a representative for these kinds of discussions with companies.
One of the most significant ways ethical investors could leverage their strength is to engage in more shareholder activism. "Up until recently, the ICCR has done most of the heavy lifting themselves," says Conrad MacKerron, "but within the last few years we have seen funds step up to the plate." Led largely by Domini and Calvert, socially concerned mutual funds have come to recognize the importance of shareholder activism.
But the industry hasn't made full use of its strength. According to the Social Investment Forum's 2003 survey, only 20 percent of SRI money is used in shareholder advocacy. This is actually a decrease from almost 40 percent in 2001-though there were more resolutions filed (from 261 in 2001 to 320 in 2003) and the resolutions introduced got more votes (from 8.7 percent in 2001 to 11.4 percent in 2003). It seems those practicing shareholder activism recognize its power: they're using it more and getting better at gaining support for the issues they raise. Environmental questions and ethical employment issues were the most frequently raised proposals/resolutions.
Some funds and most money managers who handle individual portfolios don't do any shareholder activism at all. "Some of these funds are what I call 'SRI Lite,'" says First Affirmative Financial Network President Steve Schueth. For instance, the Teachers Insurance and Annuity Association-College Retirement Equities Fund (TIAA-CREF), which handles roughly $291 billion in pension funds, manages more than $5.4 billion in its Social Choice account, the country's biggest socially screened portfolio. But Schueth adds, "TIAA-CREF only avoids the worst of the worst; it's not about social change. Vanguard is another one; its new social index emulates one from Calvert, but this is not a fund that will do shareholder activism or community development."
Smaller funds and many money managers contend that they can't afford it. Domini and Calvert each have a billion or more under management and can hire a staff devoted to shareholder activism, they say. "Shareholder activism is very time-consuming and expensive," says Kathy O'Connor, a fund manager at Towneley Capital. "I personally don't have time to be a shareholder activist."
There are possible solutions to address the challenges a smaller SRI money management firm faces to engage in shareholder activism. Either they could pool resources and share activist coordinators, or perhaps they could contract with an independent nonprofit to do it for them. This outside agent could coordinate efforts with other social investors and nonprofit groups that use grassroots non-financial tactics. The most obvious candidates for such a coordinator would be the Social Investment Forum, As You Sow-a nonprofit that promotes progressive social and environmental policies by representing the interests of socially concerned investors, or ICCR, which has 30 years of experience waging shareholder advocacy campaigns and orchestrating coalitions of investors.
Fund managers can also communicate with companies without using formal resolutions. Progressive Investment, which manages Portfolio 21, is relatively small with $ 148 million in assets. Yet in 2002 it wrote many letters, including to AstroPower urging that it use recycled semiconductor wafers, to senators voicing opposition to garbage burning, and to the securities and Exchange Commission (SEC) to encourage a round-table on environmental and social transparency. As an investor, your fees can help support this activity. You have the right to insist your mutual fund or management company be in active dialogue on your behalf.
Perhaps what's needed is an independent agency that certifies money management firms are making shareholder activist efforts appropriate to their size. So while a large SRI fund might have a department devoted to activism, a small operation might just donate a percentage of its management fees or client assets to support groups that do shareholder advocacy. Ironically, the SRI industry is only likely to adopt such a scenario if ethical investors create a grassroots effort to let money managers know this matters to them-and then vote with their dollars by supporting firms that are willing to move in that direction.
While stock screening and shareholder activism are directed toward large corporations, community investing is about funding worthwhile projects and supporting individuals-in some ways making this the most inspiring form of SRI.
Consider the story of David Royster, 40, who lives in
Loans on an even smaller scale
than Royster's can also have an enormous impact. In
1974, Muhammad Yunnus, an economics professor at
Professor Yunnus lent the women a few dollars to free her from that burden. Within a few months she paid the loan back and Grameen Bank was born. Since then, Grameen has loaned out billions of dollars (significant amounts used to finance small-scale appropriate technology that encourages self-reliance and improved efficiency, which is typically human powered), grown to more than 1,100 branches, and has more than two million members. Borrowers don't need collateral to get a loan, but they do need to be part of a small group that guarantees each other's loans. The repayment rate is an impressive 97 percent.
formed more than 25 years ago, many other like-minded microlending
institutions have sprouted, including dozens in the
For instance, Self-Help loaned money for buying equipment to R24 Lumber company, a minority-owned business that remanufactures discarded wood into useable wall studs. Other banks with a strong or exclusive focus on loaning money to environmentally oriented businesses or nonprofits include Shorebank Pacific in Washington, Chittenden Rank's Socially Responsible Division in Vermont, Permaculture Credit Union in New Mexico and Wainright Rank in Massachusetts.
While most community investing is done through banks and credit unions, there are also loan funds and trusts. Interest rates can be market level or below, with the choice often at the discretion of the borrower. And because risk is pooled, these tend to be safe investments. They're akin to buying a certificate of deposit, with the added benefit of knowing your money is being put to use making the world better. Ib invest in a variety of loan funds at once, the Calvert Social Investment Foundation (a nonprofit organization independent of Calvert Funds) offers professionally managed notes (debt instruments).
One of the wonderful things
about community investing is that almost anyone can participate. all you need
is a checking or savings account to put your money into deserving hands. Yet,
despite this relatively easy access, the biggest problem with community
investing is that not enough investors do it. To quote the SIF 2003 survey
again, only two-thirds of one percent-or $14 billion of the $2.1 trillion
invested by socially conscious investors-is in community investing. To boost
this important sector, SIF and Co-op
To help support this effort, SIF has developed a community investing logo (a half-circle of human figures holding hands, connected to a house) that identifies its members with at least one percent of managed assets in community investments. Consider adding this as a criterion when selecting your investments. It's another way to use your dollars to help push the SRI community to make more of a real difference.
THE NEXT STEP
While it's nice to linger over
victories, with so much work to be done it seems more important to ask: how
can SRI successes be repeated and multiplied? Is there a way to consistently
steer large corporations toward sustainability and more enlightened behavior? After all, even if dozens of big businesses
have signed on to the CERES principles, that leaves many thousands of public
corporations which have not. So while Home Depot moves toward greater
Consider Enron-not as the poster child of corporate misdeeds-but to look at the atmosphere that helped create its implosion. By looking at the forces that allowed the Enron scandal to happen, we can better understand the challenges social investors or any economic tide-turners face.
Before its collapse, Enron was
considered a model socially responsible company, and its stock was in many
SRI mutual funds when it went down. As professor Sandra Waddock
Enron fooled us. But that's not the real point here. The point is that all the things SRI has been measuring and screening for and applauding miss something fundamental going on inside companies-and that something is the unremitting pressure to get the numbers by any means possible. The biggest difficulty SRI faces is that it operates on an unspoken assumption that managers have genuine freedom to be socially responsible. But in many cases, they don't. Can Ford's CEO really stop manufacturing SUVs if those vehicles are generating huge profits? As the company's financial caretaker, that would be a breach of his fiduciary responsibilities.
From the beginning, SRI has been about separating the good guys from the bad guys. It's operated on the belief that the white hats can be spotted by their exemplary policies and programs and sustainability reports. But the lessons of Enron tell a different story.
Enron and other corporate scandals point to system-wide pressure. It's not about good companies vs. bad companies, but about the pressures that act on all public companies. The focus in SRI has been on encouraging companies to voluntarily undertake responsible moves. But the pressure to get the numbers is not voluntary. And that pressure comes from many sources.
Pressures built within the structure of companies often start from the top, with financial incentives for executives that tend to be based on increasing short-term earnings-a motivator that often works against the environment (since the initial costs of eliminating toxics generally hurt the bottom line), not to mention the long-term health of the company. Corporate boards rarely serve as an antidote to this lack of vision since corporations don't choose directorates via real elections. The result is management-selected yesmen and no employee representation (and not even a way for them to run). At bottom, there's the design of financial statements, which leaves nowhere to account for "externalities" such as environmental effects, making them invisible.
Then there are pressures from
state laws, which often say corporate directors must maximize the bottom
line-so when it comes to choosing between spending on cleaning up the
But most of all, it comes from an entrenched and antiquated system of taxation; one that derives most of its revenue from taxing profits and income (which we should be trying to encourage) instead of negatives like pollution. If carbon emissions were taxed, for instance, businesses would quickly figure out clever ways to use less oil, gas and coal. And if companies paid Uncle Sam based, at least partly, on their waste and toxic releases, no doubt they'd reduce their ecological footprint. Capitalism can work brilliantly; it just needs some tinkering.
Addressing these sorts of issues has traditionally been beyond the scope of the SRI community-and understandably so, given such issues tend to be better suited to think tanks and grassroots social change organizations, lit, if the SRI industry hopes to truly live up to its promise, in some fashion, it needs to work on the big picture, perhaps working in conjunction with nonprofit groups that can focus on system design issues.
There are even a few places where this is already happening. The Corporate Sunshine Working Group, for example, is an alliance of investors, environmental organizations, unions and public interest groups working to enforce and expand SEC corporate social and environmental disclosure requirements. The Global Reporting Initiative is a coalition of businesses, nonprofits and government agencies working to set uniform, globally applicable standards that measure environmental impact.
To support such efforts, SRI money managers could allocate a small percentage of their fees or levy a tiny "tax" on their clients' assets, earmarking those monies for nonprofits that work at a structural level, such as Redefining Progress, an economic policy and advocacy group. Just as the Social Investment Forum has a campaign to encourage investors to devote at least one percent of their assets to community investing, there could be a .5 percent or at least a very modest 1 percent campaign to support organizations working on systemic change. Even a very small percentage of SRI assets devoted to improving our tax system could make a big difference and build vital momentum. If nothing else, SRI money managers and organizations could help spread the word, letting their clients know we're facing problems larger than just where you put your money. That doesn't suggest current SRI practices should be abandoned, only that they need to be expanded and put in perspective.
A good place to begin a conceptual shift is by reconsidering SRI's three-legged stool analogy. Instead of a stool, we'd like to suggest that a more appropriate image is a three-pronged fork. At this point, not all of the prongs are the same size or strength. Shareholder activism and community investing could be larger, stronger and sharper-allowing social investors to wield a tool that works more like a pitchfork than a dinner utensil.
Using the imagery of a fork-shaped tool helps us remember that to get results, ethical investors must continue prodding away. It also helps keep the big issues in mind: it's a reminder that aspects of the economy act like an untamed beast that needs poking in the right direction. For those parts of the economy that are effective and humane, the fork can be used to keep it properly fed. And last, seeing SRI's current tactics not as a container/support, but as a tool, helps remind us that we'll need other equipment to do a big job.
It's time for the SRI community to ask itself, "Are the vehicles we've used for the last three decades, such as screening, still the best tools for making companies more responsible? Given the sophistication SRI has gained over the years, and the clout it has, are there more effective or supplemental ways to accomplish the goal of making corporations accountable?"
The SRI business now has a good opportunity. The one upside of the Enron and other corporate scandals is that they've brought public awareness to a big problem. Combine that with the fact that many SRI founders are still alive, still running companies, and still looked to for leadership, and you can see the time is ripe. It wouldn't take that many voices speaking in unison to bolster SRI's power. Social investors have accomplished a lot in their 30-plus years. And, perhaps most important, they've laid the groundwork for the possibility of fundamental, lasting economic change. It may be that their most important work is yet to come.
MARSHALL GLICKMAN is editor of Green Living, an environmental journal published from Williamsville, VT and the author of The Mindful Money Guide (Ballantine).
MARJORIE KELLY is co-founder and publisher of Minneapolis-based Business Ethics: Corporate Responsibility Report (www.business-ethics.com), and author of The Divine Right of Capital: Dethroning the Corporate Aristocracy (Berrett-Koehler Publishers).