Making Change

The debate over socially responsible investing

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So, you've decided the time has come to make some socially responsible investments. OK. How about a few shares of post-Cheney Halliburton? Or maybe a supersized helping of McDonald's? And hey, while you're at it, don't forget there's nothing like a little ExxonMobil to juice up the ol' portfolio.

Not what you had in mind? Well, according to entrepreneur Paul Hawken, if you invest in a socially responsible investment (SRI) mutual fund, these are exactly the sorts of companies you'll be doing business with.

At the end of 2003, according to a controversial report co-authored by Hawken and his Natural Capital Institute -- and published in October 2004 by a number of monthly publications owned by the alternative magazine chain Dragonfly Media -- 23 SRI funds had shares in Halliburton, the subject of multiple federal probes. The fast-food juggernaut McDonald's, which has been linked to America's obesity epidemic, was included in 41 funds. And ExxonMobil, a perennial environmental threat, was represented in the portfolios of some 40 SRI funds. These are significant numbers, given that there are only 100 SRI funds managed domestically, and some 600 worldwide.

In fact, Hawken estimates that more than 90 percent of all Fortune 500 companies are now included in SRI portfolios. 'The term socially responsible investing is so broad it is meaningless,' he writes in the report. 'If a fund doesn't own companies involved with gambling and pornography, it can be called socially responsible.'

Part of the progressive lexicon for over 30 years, socially responsible investing was initially conceived as a way to help investors subject their portfolios to a 'negative screen,' thus avoiding funds that included companies mixed up in the military-industrial complex or profiting from social vices like alcohol, gambling, and tobacco.

As SRI funds have become more commonplace, Hawken contends, the pressure for them to perform as well as traditional mutual funds has increased, leading to what he calls 'portfolio creep' -- 'porous and spurious criteria about what is a socially responsible company.' At the same time, he's troubled by companies that make false claims in their advertising and clients who are often in the dark about which investment strategies are chosen or why.

Hawken's allegations have caused quite a stir among progressives in the financial community, in part because of his reputation as an author and entrepreneur. He recently co-wrote the influential book Natural Capitalism: Creating the Next Industrial Revolution, and he co-founded the software firm Groxis and the boutique home-hardware retailer Smith and Hawken. Mainly, though, the intense reaction to the critique speaks to just how high the stakes have become in an industry that started in 1971 with a $1 billion SRI fund managed by Pax World Funds and is now a $2.2 trillion industry.

Anita Green, vice president of social research for Pax World Funds, says she was disappointed with Hawken's accusatory tone. She points out that his critique falsely asserts that Pax invested in General Motors and fails to address her industry's emphasis on advocacy -- the idea that SRI firms sometimes pick an investment in order to have a positive influence on a company's behavior. For instance, Hawken specifically calls out Pax World Funds for including a utility company with no minorities on its board of directors. This is technically true, but Green notes that her firm has also applied pressure on that company to become more sensitive to diversity issues.

In a like-minded critique of Hawken, the Social Investment Forum, an industry trade group, argues that by investing in high-profile companies with suspect reputations, SRI firms and their clients can effect change from the inside out. This sort of subtle activism, the group reports, helped convince the Gap to submit to labor audits, led to the adoption of non-discrimination policies at companies such as Wal-Mart, and further spurred forest preservation and recycling initiatives at The Home Depot and Staples.

Terry Mollner, a co-founder of the Calvert Social Investment Fund, one of just a few SRI firms that Hawken views positively, agrees that there should be stricter criteria to determine what it means to be socially responsible, perhaps through a trade group or association that adheres to agreed-upon standards. This would be especially helpful to progressives, since some 'socially responsible' investments are now made in the name of politically conservative causes (a fund might exclude companies that insure same-sex couples, for instance).

In an open letter to Hawken, Mollner expressed disappointment in the tenor and logic of the report, saying it read like a screed from Rush Limbaugh. The question, Mollner wrote, is not 'Are you for or against greed?' but rather 'Are you moving things in a mature direction as best you can where you are able to make a difference?'

Mark Thomsen, research and news director for Vermont-based SRI World Group, an SRI information and software company, also thinks that Hawken exaggerates the overall problem but still believes there's room for improvement: 'There are transparency issues,' he says -- some investors feel like some investments are not in line with their values.

To that end, Thomsen agrees that SRI firms need to do more to let customers know exactly why and how they are investing in certain companies. 'Socially responsible investing is an amorphous term,' he says. 'The main thing is that the investor can make a clear choice.'

Recognizing that few companies or businesses are 100 percent pure, Thomsen believes the industry could move 'from just looking at negative screens, where you are investing just to keep bad guys out, to best-in-class investing, where you are looking at companies that are leaders and innovators.'

Asked about the reaction to his initial report, Hawken says it's important to note that he 'never advocated for utopian portfolios': 'We just want transparency. And if my tone seemed sharp, it's only because I'm frustrated that we don't know what criteria these big SRI funds are using.' In an effort to shed more light on the issue, Hawken's Natural Capital Institute has put together a Web site (see above) that includes equity holdings and screen categories of almost every SRI fund available worldwide.

In the end, even Pax World's Green, who points out that the SRI industry is relatively young, agrees that firms could do a better job of organizing and presenting information. She's quick to point out, though, that these issues were being considered long before Hawken entered the fray. 'Has he changed what was on the agenda? No,' she says. 'Is the conversation now moving a little faster? Yes.'

TELL ME MORE The SRI industry group Social Investment Forum describes the basics of socially responsible investing, including portfolio screening, shareholder advocacy, and community investment. The information and software services SRI World Group offers what it calls the largest personal finance site devoted to socially responsible investing. Database of Paul Hawken's Natural Capital Institute.