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