|October 18, 2006|
Responsible Investment Forum with Steve Schueth
|All truth goes through three stages. First it is ridiculed. Then it is violently opposed. Finally, it is accepted as self-evident." (Arthur Schopenhauer) |
Socially and environmentally responsible investing has come a long way in the past 30 years. The Social Investment Forum's 2005 Trends Report identified over $2 trillion invested in professionally managed socially responsible investment portfolios. Today, it feels as if we may be nearing a tipping point---where the "truth" of a double bottom line approach to investing becomes apparent to all. But we are not quite there yet. The critics have taken on new form---now the tomatoes are being thrown by former friends. Below, guest columnist, Johann Klaassen, explores the thinking of a new wave of critics, and asks the practical question: do we want revolution or evolution?
What's the Next Step for Socially Responsible Investing: Revolution or Evolution?
By Johann Klaassen, PhD, AIF
I suspect that everyone has heard the classic criticisms of socially responsible investing (SRI): "SRI portfolios can't make money." "Diversified portfolios can't be built using only socially screened investments." "Even if they could make money, and even if you could put together a properly diversified portfolio, in and of itself, an SRI portfolio constitutes a breach of fiduciary duty for an institutional investor." These arguments are simply false, and I have made counter-arguments in print elsewhere.
In the last couple of years though, a new kind of criticism has arisen, and it's coming from former allies. Paul Hawken, a visionary and respected leader of the environmental business movement, has noted that "over 90 percent of Fortune 500 companies are included in SRI mutual fund portfolios." He concluded a 2004 report on the topic by stating that SRI portfolios "are odd if not totally inexplicable when it comes to any reasonable standard of social responsibility."
In "The Truth About Ethical Investing" Hawken does us all a favor by describing in detail the kind of companies he thinks an SRI portfolio should own.
There are companies throughout the world that are approaching sustainability; mostly they are small and owner-operated. They are providers and growers of organic food; retrofitters and developers of green buildings; designers of new materials that are biomimetic and compostable, health care providers relying on phyto-pharmaceuticals and natural healing...
The list goes on. One important feature common to the kinds of companies that Hawken considers to be socially responsible is that there is no way for an average investor to invest in them! We can buy food from a small, local, organic farmer; but we can't buy stock or bonds in his/her farm. Even loaning money would require the intervention of a commercial bank, which would almost certainly not meet Hawken's criteria.
Essentially, such critics argue that the SRI industry ought to be pushing for a total revolution in modern American business and economics. They seem to be advising that we must not invest in anything that has even the slightest taint of the possibility of wrongdoing.
For example, the Domini Social Equity Fund's commitment to SRI was questioned recently, because of a distant relationship to Boeing, the world's second-largest military contractor. Truth be told, the Domini Fund does not own shares of Boeing directly, but it does own a small stake in State Street Corporation, a bank and brokerage company. State Street's wholly owned subsidiary, State Street Global Advisors is the world's largest institutional asset manager, with $1.5 trillion under management for thousands of clients who collectively own about 11 percent of Boeing.
So, if I own shares of the Domini fund, which owns shares of State Street Corporation, which owns State Street Global Advisors, which manages money for clients who own a lot of Boeing shares, these critics judge that I cannot possibly be a 'real' socially responsible investor. My avoidance criteria must span at least four degrees of separation---or is it five? Of course, taking this logic to such an extreme would label anyone who drives a car or flies on an airplane as "socially irresponsible."
The 'revolutionary' approach is kind of appealing, in a way. If we could figure out how to live in perfect moral purity, many of us would choose to do so. But the world is an incredibly messy place, and even if we could all agree on what it might mean, a life of perfect moral purity is out of our reach at this point.
Instead, I believe we ought to take an incremental, progressive, 'evolutionary' approach to or economic impact on the world. Few of us can completely eliminate our carbon footprint, for example, but we can buy carbon credits and offset our environmental impacts. It may not be the ideal solution, but it's better than nothing. Similarly, while not many of us can invest in the operation of the organic farm down the valley, we can invest in the stocks of some industrial farming corporations, and use our voting rights as a shareholder to improve the environmental impact of those corporate farms.
If we can make a small, evolutionary change at a larger company, we may well be able to do more good than if we simply walk away. And if we can make one small change today, then perhaps we can make another small change tomorrow. A lot of small changes added together can make for real progress.
If every investment in a company large enough to offer common stock is fraught with moral peril (at four or five degrees of separation), then we face a clear dilemma. We can choose to disengage from the imperfect world of international capitalism in despair at our inability to escape the taint of corporate wrongdoing. Or, we can choose to engage with corporate wrongdoers and challenge them to do business in a way that will benefit everyone.
I choose to help capitalism evolve. I choose not to make perfect the enemy of the good.
Johann Klaassen, PhD, AIF, is Vice President, Managed Account Programs for First Affirmative Financial Network in Colorado Springs, Colorado. Before joining First Affirmative, he served on the faculties of the University of Central Arkansas, Webster University, Millikin University, University of Idaho and Washington University in St. Louis, including teaching courses in environmental ethics and bio-medical ethics. Dr. Klaassen's scholarly articles have appeared in such journals as Philosophy and Literature, Journal of Social Philosophy, and Journal of Value Inquiry; he has presented papers to international conferences in Helsinki, Las Vegas and Tampa, among others.
Steven J. Schueth is president of First Affirmative Financial Network, LLC. An independent investment advisory firm registered with the SEC, First Affirmative specializes in serving socially conscious individual and institutional investors nationwide. A former director and spokesperson for the Social Investment Forum, Mr. Schueth lives in Boulder, Colorado.
Mention of specific securities, funds, or companies should not be considered an offer or a recommendation to buy or sell the security, fund, or company. To determine the suitability of any particular investment, please consult with your investment adviser. Remember, past performance is no guarantee of future results.