Socially Responsible Investing: Changing Corporate Behavior

Revised December 18, 2008

"On the meeting ground between your values and those of your neighbors is a core place of human decency that has been sorely lacking in our financial systems. Given the choice, we know that very few of us will choose greed and destruction of community or the environment. Rather, most of us will be excited to find ways to direct our savings to nurture life and be a part of whatever social values we hold dear. As a new century dawns, we have the opportunity to enter a new era of economic responsibility." - Hal Brill, Jack A. Brill, and Cliff Feigenbaum ["Investing With Your Values" p. 22]

The 2008 crumbling of financial institutions and stock markets occurred after this chapter was written. Very possibly this upheaval and government responses to it represent the early stages of crumbling of the whole fossil fuel supported capitalist house of cards described in the Where We Are Now chapter. The world's economic system apparently cannot be understood or predicted by anyone, and no one really seems to know what to do now to fix it. Pessimists will choose (and have chosen already) to convert stocks and bonds to cash. Optimists hope that by staying the course the system will recover. This chapter assumes a green optimist viewpoint and is essentially unchanged since late 2007.

If you try to avoid the curses of capitalism or if you simply do not have capital to invest you can skip this chapter.

Otherwise you can do a great deal both for Earth and for your own satisfaction by choosing how to save and invest your money rather than how to spend it. Americans on average now save only 1% of annual personal income (it was 8% prior to 1995) and are in debt at least up to their eyeballs. Yet the total amount of individual investment in stocks, bonds, and "cash" instruments remains huge (even at the end of 2008). About 50% of Americans own corporate stocks or stock mutual funds. This chapter is not a primer on saving or investing, but assumes basic investment knowledge about individual investing and saving for retirement. Ecoshifters should probably start with Dominguez and Robin's "Your Money or Your Life".

In 1988 Susan Meeker-Lowry wrote one of the earliest books on socially responsible investing (SRI), "Economics As If the Earth Really Mattered". If you have any money invested in stocks, bonds, banks, mutual funds, etc. and you care about how your money is being used, I recommend the latest edition of "Investing With Your Values" by Brill, Brill, and Feigenbaum. One chapter reviews individual socially-responsible mutual funds. Other chapters describe the four levels of SRI: avoidance screening, affirmative screening, community investing, and shareholder activism.

Screening

In 1928 the Pioneer Fund was formed in response to desires of some religious Christians to avoid investing in corporations that promoted the "sins" of alcohol, tobacco, firearms, and gambling. It was the first "socially-screened" mutual fund and the beginning of SRI. The environmental movement of the early 1970's publicized pollution of air, land, and water by major corporations and questioned the propriety of investing in such corporations. The Pax World Fund, founded in 1971, added environmental pollution, military weapons, and nuclear power to the sin screens. By the early 1980's there were a number of such socially-responsible mutual funds. More recently screens involving the quality of the workplace, wage levels, product safety, community involvement, and corporate governance have been added. At times, some funds avoided companies doing business in specified countries, such as South Africa and Myanmar. Other negative screens include inhumane treatment of animals, child labor and sweatshops, unsafe and toxic products, and discrimination against women and minorities.

Through the 80's and 90's SRI growth was inhibited by widespread perception that such investments produced lower returns than investments that focused only on the bottom line of shareholder profit. But by the turn of the century, this attitude had been stood on its head as both private investors and the financial world discovered that socially-responsible corporations were also very profitable corporations, and that SRI funds returned as much or more than non-SRI funds. Companies that limit their pollutants, recycle materials, reduce their energy consumption, and treat their employees and communities fairly make better profits in the long run. Currently there are 66 funds on the Green Money Journal's list of screened stock, bond, and balanced mutual funds.

Positive screens developed in an effort to reward good behavior as opposed to penalizing bad behavior. Negative screens can often be quantified, such as avoiding companies that do more than 5% of their business with the U.S. Department of Defense, or make more than 3% of their profit from selling tobacco. But positive screens tend to be more qualitative and thus more difficult to evaluate. Positive screens involve such things as:

type of goods and services (do they improve the quality of life?),
support of employees and health of the workplace (is health insurance coverage good? is childcare provided? are OSHA regulations complied with?),
status of minorities, indigenous peoples, and women (are they treated fairly? are they fairly promoted and represented in management and on the board?),
environmental practices (are they sufficiently clean? do they fix prior problems? do they produce toxic products or waste?),
corporate disclosure (do they provide verifiable public information about their environmental and social actions?), and
community relations (do they override local legal obstacles? how much do they donate to local charities?).

Although many SRI funds and fund families do their own in-house screening, others use company lists produced by the Domini and Calvert fund groups, each of which has its own internal screening criteria. The November 2007 Calvert Funds list included 647 companies out of the top 1000 companies traded on American exchanges, so the requirements do not seem particularly difficult to meet. At the same time, the top ten holdings in the Domini 400 Social Index were Microsoft, AT&T, Procter & Gamble, Cisco Systems, Johnson & Johnson, Apple, JPMorgan Chase, Intel, Coca-Cola, and Verizon. Other megacorporations often found on SRI lists include PepsiCo, MacDonalds, and, in the past, even Wal-Mart. If you do not want to support these corporate behemoths, you need to be selective about what SRI funds you choose. SRI mutual funds have been criticized (for instance by Paul Hawken) because they have no standards. Any fund can call itself socially-responsible. So it is important for a potential investor to look at both the list of principles and the list of holdings in any SRI mutual fund.

SRI index funds are designed to closely hold and follow stocks in one of the SRI screening lists. Index funds have been quite popular recently, partly because they usually have low fees, and partly because on average they out-perform managed funds. But the former SRI index funds run by Domini and Citizen's have given up the ghost in the past two years, apparently because there is little profit in relatively small index funds. Vanguard's Social Index Fund, on the other hand, has the advantage of backing by one of the largest mutual fund groups; it uses the FTSE4Good(US) Select Index. Personally I think that index funds are too lenient. Instead I choose specific funds with stricter principles and a narrower corporate selection.

For more on SRI and information on individual funds, consult the Social Investment Forum. It lists SRI Mutual Funds with their performance and social screens. The Green Money Journal, which comes as part of a Co-op America membership, contains interesting articles as well as a fund list.

I certainly do not want to get into recommending individual funds here, but I cannot avoid mentioning two funds that are interesting because they are different. The New Alternatives Fund has been around for some years, but had not done very well because it has always been about alternative energy. Its prospectus states "Alternative energy means production and conservation of energy by means which reduce pollution and harm to the environment, particularly when compared to conventional coal, oil or atomic energy." Now, with the mainstreaming of the global warming issue, the geothermal, hydro, wind, and solar power holdings of New Alternatives are in great demand. The other fund, Portfolio21, was founded in 1999 to invest only in companies that attempt to follow sustainability principles as exemplified by The Natural Step (see the Sustainability chapter).

Changes in screening criteria are in the works for many funds. The U.S. Securities and Exchange Commission requires that each mutual fund must express its "fundamental policies" in its prospectus, and further, that fundamental policies can only be defined and altered by majority vote of the shareholders. Many SRI funds had included their screening criteria in their fundamental policies. In the past several years the SRI industry has argued that the negativity of "socially-responsible investing" has become counter-productive, and that the positive term "sustainable investing" should replace it. As part of this change, funds are replacing strict principles with more loosely specified but broader ones. For example, Pax World Funds changed its weapons exclusion from companies on the "Department of Defense list of 100 largest contractors ... if 5% or more of gross sales ... are derived from" such contracts, to companies "significantly involved in the manufacture of weapons". They also changed "companies that derive revenue from the manufacture of .... gambling products" to companies "involved in gambling as a main line of business". To be fair, Pax did add mentions of "protecting the environment, advancing equality, and fostering sustainable development", "corporate responsibility", and "unethical business practices" to its fundamental principles. Fixed "thou shalt not" principles are being replaced by flexible "thou shalt" principles, but Board interpretation of these is expressed in Board-controlled "non-fundamental principles". I admit to a negativity about what I have perceived as softening, and I voted against the Pax changes, but the new principles do cover a much wider range of corporate behavior.

Will the term SRI be replaced by "sustainable investing"? I hope not, because I think the former is more aggressive and the latter more passive and softer. For more on this transition, see the article by Joe Keefe on the Pax web site. He points out that SRI is an "alternative" investment strategy using negative screening criteria, whereas sustainable investing using positive social, environmental, and governance criteria is a "transforming" strategy. He adds, "sustainable investing, by contrast, is explicitly progressive: it holds that the best companies (and the best investments) are those that act in the public interest; that serve all their stakeholders, not just shareholders; that do not externalize their costs onto society; and that pursue wealth creation strategies focused on the long term." Still, I'm reluctant to change my chapter title here because a change to "sustainable investing" seems like the same kind of moderation that happened earlier to zero population growth, to radical environmentalism, to organic foods, and to the Democratic Party. The early radicalism that I believe is needed to create change wears off and gets watered down in an attempt to appeal to a broader spectrum of people.

Shareholder Activism

SRI funds, non-profit and religious groups, and motivated individuals have all used their shareholder power to try to change corporate behavior. This is called shareholder activism. Its most visible form is the submission by a shareholder to a corporate annual meeting of a resolution to be voted on by all shareholders. Such proposals vary widely, including ceasing to do business with repressive governments, limiting financial benefits to high level officers, disclosing environmental activities and problems, and providing child-care and health insurance to employees. Although shareholder resolutions usually gain only a small percentage of the vote, a resolution can be submitted year after year and may ultimately wear down the corporate board enough that they do something about the problem. Some shareholder resolutions gain substantial publicity, which puts pressure on the Board to respond.

A second form of activism, available to organizations and SRI funds, but probably not to individuals, involves negotiation with a corporate board or officers. When a huge endowment fund, such as Harvard University, threatens to sell its holdings in XYZ Corp. because XYZ uses sweatshops in Myanmar, the corporation sits up and takes notice. Because state and business pension plans have so many dollars behind them, companies must listen to their requests for changes in corporate behavior. In spite of negativity from Paul Hawken and others, the SRI mutual fund industry has influenced divestiture from South Africa and Myanmar, adoption of pollution limitations, corporate disclosure of various activities, and adoption of the Ceres Principles (see the Sustainability chapter). Prospectuses of SRI funds increasingly describe their activism as shareholders of the companies they hold. Twenty of the 36 resolutions filed by the Calvert Funds in 2007 were withdrawn after the companies agreed to make changes.

Community Investing

The third leg of the SRI stool is community investing, which involves lending money to develop local businesses, to preserve historic buildings, or to start microbusinesses at both local and international levels. Banks that support community investing may provide low interest loans for inexpensive housing, for building renovation, and for start-up businesses, often by minorities or women. In the United States, Shore Bank of Chicago, America's fist community development bank, has been a national leader in community investing. It provides checking, savings, CDs and IRAs to individual on-line investors. Other banks, like Chittenden Bank, offer socially-responsible accounts, which use investor funds for socially valuable mortgages and other loans. On the international level the Grameen Bank in India has garnered world-wide fame and a Nobel Peace Prize for initiating the concept of micro-credit for the poor, in which a loan of only a couple of hundred dollars allows someone to start up a new business. The default rate on such loans has been negligible.

In my state, the mission of the New Hampshire Community Loan Fund reads "to serve as a catalyst, leveraging financial, human and civic resources to enable traditionally underserved people to participate more fully in New Hampshire�s economy. We do this by:

providing loans, capital and technical assistance;
complementing and extending the reach of conventional lenders and public institutions; and
bringing people and institutions together to solve problems."

Projects of NHCLF include affordable housing, community facilities, and micro-credit. This is just one example of alternatives to normal investments that provide social good. The author of "Radical Simplicity", Jim Merkel, makes all his investments as first mortgage loans to homesteaders, who are trying to live close to Earth and with a small footprint on it. In a small way, this exemplifies "social venture capital" in which risk-taking investors support startup companies with green and justice objectives.

In conclusion, whether you own mutual funds, stocks, bonds, or even just a bank account, you may be concerned about how your money is being used. Green and socially-responsible investing employs your money to support corporations, organizations, and communities that are working on sustainability and other ecological and ecojustice issues.

To the next chapter - Bioregionalism: Developing a Sense of Place

To Table of Contents

ECOSHIFT: Socially Responsible Investing - by Tony Federer