We worry about mucked-up sewage and global warming, cruel sweatshops and child labor. We resent executive salaries that go higher than Zimbabwe's GNP.
Yet when it's time to invest our hard-earned cash, we buy into the very corporations that outrage us the most.
It's not a deliberate choice, of course. Usually we own shares of funds that own shares of companies; by the time the paperwork arrives, the truth's several steps away. But somewhere along the line we've been told it doesn't matter; the marketplace is amoral, and the bottom line rules absolutely.
Those angered by this conventional wisdom have been trying a different route, one called "socially responsible investment" (SRI). Until recently, financial experts have treated SRI the way they treat a daffy cousin who wears only hemp products, doesn't have health insurance and chugs up to the family reunion in the old, not the new, VW Beetle.
Except this year the cousin showed up in pinstripes, driving a Volvo. She was making good money marketing that hemp. And suddenly it was a lot harder to make fun of her.
The Amazing Growth of SRI
SRI isn't new: Church groups were boycotting "sin stocks" in the early 1900s. Pioneer funds have been avoiding alcohol and tobacco stocks since the '30s. Still, the early SRI was more a quiet act of conscience than a collective dialogue with corporate power.
Then came South Africa. As American shareholders began to divest themselves of any connection to apartheid, the economic pressure built into political pressure. Activists began developing a repertoire of economic tactics, from consumer boycotts and rants at annual shareholder meetings (that's what first prodded Eastman Kodak into hiring more minorities) to community development and explicitly labeled SRI in conscientious mutual funds.
The first, Pax World, started in 1970. Dreyfus Third Century started in 1972, Calvert in 1981, followed by Working Assets, Parnassus and a host of religious, minority-owned and other customized funds. Everybody's agenda was a little bit different; "socially responsible" doesn't automatically mean progressive Pollyanna; it means integrating your own values with your investment decisions.
A consensus did emerge, though, around some basic areas to watch: environmental practices; alcohol, tobacco and gambling; employee relations and human rights; product safety, military weaponry and nuclear power; and community reinvestment.
Those were the issues Kinder, Lydenberg, Domini & Co. considered in 1990, when they developed a socially responsible index to rival the "S&P 500" (Standard & Poor's yardstick of 500 representative companies, often used as a benchmark to judge a stock's performance). To select their 400 companies, the Domini Social Index eliminated any S&P 500 company that failed to pass a series of screens. They also added 50 solid companies that hadn't made the S&P 500 but had good social records.
The Domini Social Index outperformed the S&P 500. And the ground beneath Wall Street trembled.
Meanwhile, Amy Domini had started the Domini Social Equity Fund, using the Domini Index as her "universe" of potential investments. Her fund beat the S&P 500, too.
In April, the Wall Street Journal included Domini in its annual list of the top 38 large-company mutual funds. In June, Money magazine included Domini in its list of the world's 100 best mutual funds.
The record performance of a screened fund -- and the consequent softening of Wall Street -- surprises everybody but the SRI advocates, who've been predicting it all along. Domini says social screening steers you toward high-quality growth, favoring companies with strong corporate cultures and visionary management. It also excludes a lot of heavy industrials and natural-resource companies, big oil producers, major paper manufacturers and tobacco companies avoiding many problems that drag the companies into court.
The Domini fund is not alone in its success, either. The Social Investment Forum recently reported that more than half of the SRI funds at least two years old had earned top marks from Lipper or Morningstar. SRI rose from $162 billion in 1995 to $530 billion in 1997.
When Jack Brill, a San Diego investment advisor, wrote the book Investing from the Heart in 1992, there were 12 recognized SRI funds. Now there are 46. "Even the big brokerage firms are changing," he remarks. "Merrill Lynch recently alerted its brokers not to bad-mouth SRI anymore; I saw an inside document."
In the process of looking at SRI we might need to re-examine the assumptions still held by most Americans, including religious congregations, nonprofit foundations and earnest citizens. These myths constitute the prevailing worldview. And they sure help explain environmental damage, social inequity, power imbalance, unsafe merchandise and exploitive marketing.
Myth No. 1: The marketplace is amoral
Money shapes our relationships to nature, health and illness, education, art, government, social justice, science and each other. It's our livelihood, our safety net, our passkey to the future. Yet we've quarantined it from our values and severed it from anything that touches our spirit.
Money itself is neutral, a form of energy that flows through our society with mixed results. Yet instead of integrating our attitude toward money as thoroughly as money has integrated itself into our lives, we make only a superficial calculus of strategy and return.
The system that results is impersonal and abstract. But the deepest motives of typical investors are not. Some want to make a difference; some want to ensure a decent nursing home for a relative; some want to get the kids through college. The problem is that, with professionals managing your money for you, the consequences get lost in the degrees of separation.
"As a professional, it's my responsibility to maximize return and minimize risk," explains Juli Niemann, an analyst and portfolio manager at Huntleigh Financial Services. "I am very cold about it. I do not pass judgment on companies. My primary responsibility is the investor. And what it really comes down to is: Yes, I buy Phillip Morris. That's my responsibility."
Does that mean the $5 trillion or so invested in mutual funds should be allocated without any thought to moral or social consequences? Most experts still say yes.
So if you owned shares in Dow Chemical, you wouldn't be complicit in the damage done by Agent Orange? "Well, I don't think Dow did the dumping," hedges Philip H. Dybvig, Boatmen's Bancshares Professor of Banking and Finance at Washington University in St. Louis. "Even with something like Bhopal, it's hard to know where the responsibility should be placed."
Even if you can place responsibility squarely on a CEO, Dybvig sees no reason to divest. "You're not any less responsible because you sell the stock," he points out, "and if you sell, you're ensuring that you can't do anything about it. I think what's more effective is to write and say, ‘Look, I'm a stockholder and I disapprove of this,' instead of just defining it out of your universe."
That opinion is the common coin in the money realm. But what about the curtained-off moral realm? "Let's say you know with relative certitude that the company is involved in unethical behavior," says the Rev. Theodore Vitali, an ethicist who heads the philosophy department at St. Louis University. "The only option available to you as a moral agent is to withdraw." What about making the company stop? "You are never morally obliged to do the impossible," he assures. "You have no voice; you own only a few shares. But at least you can end your complicity by getting out of it."
What bothers SRI activists is that corporations have the rights of individuals when they want them -- but as soon as the clock strikes 12, they turn into abstract, untouchable legal pumpkins. That's why SRI advocates make it a point "to talk about management teams rather than companies," says Amy Domini. "These decisions are being made by human beings."
Myth No. 2: Conscience costs too much
Niemann's been analyzing and managing investments for 30 years; "I know about SRI and what it costs you," she says, "and it does; it costs you royally." SRI stocks "tend to be somewhat defensive in nature, defensive against economic downturns. They do beautifully when the market is falling apart. But in the kind of market we've had lately, it's a big cost."
How big? It depends on how scrupulously you narrow your universe of potential investments. Some people limit themselves to the best 2 percent of companies in America. For Domini, SRI implies the best half. "We are not seeking the models of sustainable practices," she says. "We are seeking the companies that do the least harm." The approach, in other words, is more practical than pure.
As of June 30, the average total return for Domini Social Equity Fund was 32.96 percent. The S&P 500 average was 29.53 percent. If you measure from Domini's birth in 1991, the fund comes out only 0.17 beneath the S&P 500.
Skeptics are still reserving judgment. "They'd like to see what happens in a down market," acknowledges Domini. "So would I."
Domini isn't a magical exception, either. In the mid-'90s, John B. Guerard Jr., a Wall Street analyst with a doctorate in finance, associate editor of the Journal of Investing and the International Journal of Forecasting, conducted a coolly quantitative study and reached a shocking conclusion: "Returns in socially-screened and unscreened universes do not differ significantly." Guerard found that if you invested $1 in 1987, unscreened, it would be worth $2.77 by the end of 1994. If you invested your $1 in a screened universe, it would be worth $2.74.
At 3 cents, conscience comes cheap.
Still, if so many analysts dis SRI, it must mean something, right? "Just means they're too lazy to look," quips Brill, the author and investment advisor. "Commission brokers only make money when they make a sale. If they have to take an extra hour to research a portfolio ...
"There are thousands of stocks to choose from," Brill continues. "You'll run out of money long before you run out of socially responsible options."
Myth No. 3: It's impossible to screen for social responsibility
Should a health-care foundation own stock in a tobacco company? Should a church own stock in a defense manufacturer? What if the Sierra Club funded its projects with shares of Exxon? What if they traded for stock in whatever oil company rated best on environmental compliance?
Where do you start?
The Council on Economic Priorities (CEP) is a public-service research organization formed so people can "cast their economic vote as conscientiously as their political vote." One of CEP's old reports on Anheuser-Busch notes that "the company's reported release of toxic chemicals was the worst in the beverage industry in 1989" and tallies five willful violations of occupational safety and health laws. The report also notes, however, that A-B made the most environmentally sound political contributions in their industry; led the nation in using post-consumer waste for packaging; and recycled 600 million pounds of aluminum containers in 1991 -- all while animal-rights groups were boycotting A-B's Sea World for damaging marine life.
How do you even begin to sort such a mixed evaluation? "It's usually an accumulation of things, not one factor," explains CEP researcher Jonathan Hickman. He looks for patterns, compares companies in a given industry, analyzes historical trends. "There are definitely instances where `irresponsibility` is very pronounced," he adds.
Niemann sighs over these attempts at discernment; personally, she prefers shareholder activism to SRI and finds some "socially responsible" positions as blurry as a three-martini lunch. "I know organizations who will say you can invest in defensive but not offensive weapons," she says. "We are splitting hairs here. Is nerve gas defensive? You hit the silly season. And it does not make a difference."
Still, as a trustee for the Roman Catholic Archdiocese of St. Louis, she faithfully watchdogs a portfolio that includes nothing connected with abortion and no offensive weapons of war. "The F-15 is defensive," she explains, "so we are comfortable with that; we have no problem with McDonnell Douglas. Something like Agent Orange would be verboten. But Dow doesn't make it anymore, so we're fine. Tobacco companies are verboten, alcohol manufacturers are not, because alcohol in moderation is fine. The theme is detriment to humanity."
Myth No. 4: Nice idea, but you're wasting your time
Does SRI prevent detriment to humanity? "I think it's kind of a nice idea, but it doesn't really help," says Dybvig. "If a company's main-line business is something you think should be stopped, then short of buying the company and shutting it down, you are not going to do anything -- except lower the price of the shares so someone else can buy them."
Nonetheless, activists do see value in a clear, happy conscience, in moral consistency, integrity, responsiveness and a willingness to make some basic demands of those in power.
Niemann thinks individuals can make a difference, but by banding together, raising issues and voting proxies. "Bottom line, the company doesn't know that you own the stock, nor do they care. If you decide to avoid purchase of something, it doesn't even measure on the Richter scale. The market is cold."
Domini agrees the market is amoral but stresses that personal consistency is worthwhile. Beyond that, "If your goal is to effect social change, though, the question is, does SRI create social change?" It can, but indirectly and immeasurably. What Domini emphasizes is a more systemic shift. "It's a misconception that SRI is about punishing companies and making their stock price not move," she explains. "What it's about is building a structure of corporate accountability, making socially responsible investors the watchdogs of the corporations."
When the Domini Social Index compiles company profiles, it sends them to the company for a response, creating "a dialogue where they're learning something about how we look at them," she adds. Ten years ago, if Domini called a firm to ask how many women or minorities held executive positions, she would've gotten a call back asking why she wanted to know. Now companies are getting used to the questions -- and sometimes even preparing for them by changing.
Domini doesn't mention the editor's note in the September Dow Jones Investment Advisor, in which editor-in-chief Bob Clark admits his personal unease with their cover story on SRI. "Amy and her folks are mostly harmless," he writes patronizingly, "and, yes, I agree with most of what she stands for. But do we really want people pooling their investing power for the avowed purpose of achieving some specific end, other than making more money?"
His ultimate point? That SRI is undemocratic.
SRI advocates don't sense any dangers to participatory democracy; they're not fazed by the "you don't make a difference" line, either. In its promotional materials, the Domini Social Equity Fund counters 200 years of laissez-faire resignation with a simple parable: "Thousands of starfish had washed ashore. A little girl began throwing them in the water so they wouldn't die. ‘Don't bother, dear,' her mother said, ‘it won't really make any difference.' The girl stopped for a moment and looked at the starfish in her hand. ‘It will make a difference to this one.'"
The Interfaith Center on Corporate Responsibility is a coalition of religious investors working to promote responsibility through dialogue with management, consumer education, shareholder resolutions, SRI and consumer boycotts. (212) 870-2295
The Council on Economic Priorities provides information on leading U.S. and international companies, monitoring, profiling and grading their social records. (800) 729-4237
Kinder, Lydenberg, Domini & Co. maintains a database of social research on more than 1,000 publicly traded corporations. (617) 426-5270
The Coalition for Environmentally Responsible Economies encourages companies to endorse the CERES Principles, committing themselves to continuous environmental improvement and public accountability. (617) 451-0927
CANICORR rates banks for social responsibility. (415) 885-5102
Co-Op America offers a Financial Planning Handbook and a National Green Pages. (202) 872-5307
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