As you scan the news — Martha, Enron, Tyco — it’s easy to wonder whether anything good has happened on Wall Street since 2000. Yes, Virginia, there is a silver lining to the boom and the bust: during the last seven tumultuous years, the amount of money invested in socially responsible stocks and funds shot up 82 percent. By 2003, $1 out of every $9 invested in stocks was prompted by a socially conscious decision. That adds up to $2.16 trillion of the $19.2 trillion professionally managed in the United States. In contrast, in 1984, there were only 40 billion dollars in socially responsible funds.
More impressively, this influx took place during a decline. “After September 11th, there was a huge outflow from equities, but $16 billion went into social equities,” says Susan Davis, founder of Capital Missions Company, a Wisconsin-based social investing firm.
If you’re imagining all of those trillions of dollars funding solar and wind energy companies or biotech firms that specialize in the clean-up of Superfund sites, think again. Socially responsible investing (SRI) most often translates as no tobacco, no oil, no gambling, and no guns. In a portfolio search of funds deemed socially responsible by Morningstar, stocks such as Microsoft, giant insurer American International Group, Cisco, and Home Depot came up frequently. Whether Procter & Gamble and Starbucks qualify as socially responsible is up to you and your pocketbook.
“It’s midnight; do you know where your money is? Do you know what it’s doing?” That’s the question Paul Hawken, the founder of Smith & Hawken, poses to the millions of Americans who invest in stocks and mutual funds, either individually or through their employers’ pension funds and 401K plans. The question cuts to the core of personal beliefs about how people use their money and what constitutes social responsibility.
“A lot of people look into their portfolio of mutual funds, and they get upset not at how much money they’re making, but how they’re making it,” says Hawken. “Enron was a big holding in a lot of SRI funds because they had a little wind-power division. The biggest holding now in SRI funds is Microsoft, which has about 3 percent of all SRI funds.” Part of the controversy surrounding socially responsible investing is that it’s an umbrella term for many different ways of investing. Chief among these are screening, community development, and shareholder advocacy. Community development, probably the least controversial, involves making loans to underfunded communities, domestically and abroad, in an effort to jump-start local enterprise and improve social conditions. Assets earmarked for community development—everything from providing startup loans to rural South African small businesses to backing affordable housing developments for low-income women recovering from substance abuse in Baltimore—rose 84 percent from 2001 to 2003, topping the $14 billion mark, according to the Community Investing Program.
Screening uses different criteria to select investments—or to avoid buying stocks in companies that are deemed irresponsible, such as those with bad environmental impacts, worker exploitation, or dubious political ties. Screening often draws the ire of activists because, they say, large corporations try to manipulate their images to be just good enough to be included in SRI portfolios. “Nike says it’s eliminating the PVCs in the toes of their shoes and everyone just goes crazy,” says Hawken. “But if you had a criminal who’d committed 20 felonies, and then he announced that he’d only committed three felonies last year, you’d still throw him in jail. If it’s a corporation, we throw a big banquet, issue a press release, and give out awards.”
Shareholder advocacy investing involves holding shares in companies with the intent of influencing them to better behavior through shareholder resolutions, bad publicity, and threats that the stocks of the worst corporate actors will suffer if socially oriented institutional funds dump their shares. “I don’t call those socially responsible investment,” says Hawken. “I call those ‘hold-your-nose-we’re-going-in’ funds. I’ll even give you money to invest in those companies to vote those proxies, but don’t call them ‘socially responsible.’ Call them ‘social activism’ funds.”
Amy Domini, founder of Domini Social Investments and the force behind one of the most well-known families of SRI funds, argues that Hawken too easily dismisses the effects of shareholder activism. Such activism recently got a big boost when new rules went into effect that require mutual fund managers to disclose how they vote their proxies.
Why was this such a big win? If you hold mutual funds, your mutual fund company periodically sends you a legal document called a proxy, which asks for your permission to let the fund’s managers vote on your behalf at shareholder meetings, based on how many shares the fund owns. Until recently, fund managers did not have to tell how they voted the proxy shares. Suppose The Very Large Mutual Fund owned 100,000 shares of Home Depot and had gotten permission from members to vote their shares by proxy. If there was a shareholder resolution not to sell old-growth redwood products, The Very Large Mutual Fund could vote against the resolution, and not say how it voted. Many activists say this meant fund investors were authorizing decisions in their name, with their money, they never would have approved.
Domini believes that to invest without a social agenda is to cede economic control entirely. “It’s like voting,” she says. “If you don’t vote, you leave the system in the hands of those who do. [Social activists] left politics in the 1980s to the right because we were so interested in our own nonprofit activities, and look what happened.”
By controlling large assets, Domini says, socially concerned people can begin to have a say in the way the world works, both economically and socially. “I once asked George Soros how much I’d have to control financially to make big changes for the better,” Domini says. “He said, ‘Probably about $1.5 trillion.’ Domini has set her sights on 10 percent of the SRI market, a more achievable goal, and one that would allow her considerable influence.
At least one myth about SRI investing has been quashed. In the old days, most of the financial community felt it was impossible to make money and still care about a company’s social and environmental record. “Today they don’t say you can’t make money,” says Domini. “They say it’s the wrong thing to do with money, that if you care about social concerns and the environment, you should just invest in charities or nonprofits. But they don’t say you can’t make money because now they know better.”
New evidence seems to indicate that social investing may sometimes outperform other strategies. The Contra Costa County Employees’ Retirement Association (CCCERA) asked research firm Innovest Strategic Value Advisors to see how sustainable and socially responsible investing would affect the financial performance of its portfolios. The company ran a number of simulations and found that the “eco-enhanced index fund” actually outperformed its S&P 500 benchmark by 15 basis points. “That’s not huge outperformance, but a lot better than underperformance,” says Innovest’s founder and CEO Matthew Kiernan.
And the more heavily Innovest took environmental concerns into account, the better the fund did. “In five out of six portfolios, it would have added performance,” says Kiernan. CCCERA put its money where its conscience is, investing $150 million of its retirement funds in SRI concerns. After its first year, that money outperformed its comparable non-SRI fund by more than 150 basis points, a clear win.
CCCERA and Innovest are not alone in their analysis, says Capital Missions’ Davis. “In my own simulations, I have data that shows that investing in the triple bottom line—what’s good for society, the environment, and the investor—outperforms other types of investing in almost all cases, and when it doesn’t, it only underperforms by a tiny amount. That means it’s prudent for the people who invest for large institutions to invest socially, because they can make money for their clients.”
Current law mandates that people who invest other people’s money must not consider factors such as how a company treats its workers or its environmental record. The law holds that a “prudent man” wouldn’t consider anything other than making as much money as possible, and anyone who breaks the rule risks being sued. It’s a rule that Davis says should be eliminated or modified to let institutional investors take social concerns into account when they decide how to manage their funds.
But Hawken believes we need to change the very language used to describe investing. “I question whether we should benchmark our returns against the S&P or any other financial index. I’m not sure what a socially responsible rate of return is. Maybe it’s not higher than Exxon; it might be lower. Maybe it’s only three percent on a community reinvestment loan fund. Think about what it means to ‘underperform.’ It sounds like someone’s head is under the water, and they’re drowning. We have to get out of the sense that we can grow our capital as fast as everyone else. I’m not saying it’s not true, I’m just saying we have to question our assumptions.”
One thing socially responsible entrepreneurs agree upon is that they’re tired of large companies arguing that people-oriented values don’t belong in business. Says Ben Cohen, founder of ice cream maker Ben and Jerry’s, “I believe in what Anita Roddick at The Body Shop calls values-led business. What leads most businesses is ‘let’s make as much money as we can.’ Values-led business says, ‘let’s see if we can use our business to improve the quality of life.’”
Hawken thinks the structure of corporations inhibits social responsibility. “I’ve yet to see a large corporation become socially just and environmentally responsible. Fortune 500 companies are badly designed.” He draws an analogy between the design of today’s companies and the “green design” movement. “It’s really hard for a product to be recyclable if it wasn’t designed from the beginning to be recyclable.” He argues that today’s large companies grew to their current size at a time when environmental and social purposes didn’t even get lip-service, and it will be difficult for them to reinvent themselves.
Small and mid-size companies are better able to adapt. Hawken cites a Danish company: “I was at a conference and a woman from Hartmann—a recycled packaging company—talked about the training in environmentalism they do for their new employees. She mentioned that the training takes longer in Brazil, so someone in the audience asked ‘because the Brazilians aren’t interested in environmental concerns?’ and she said ‘No, that isn’t the reason. The first thing we have to do in Brazil is teach them how to read.’ They actually have ongoing programs to raise up literacy so their people can lead better lives with more choices.”
Cohen agrees that it’s hard to grow a company and maintain core values. In part, he says, that’s what changed Ben & Jerry’s. “The company was growing at a very rapid rate, and we had an atypical corporate culture of this two-part bottom line. Because of this, we weren’t able to develop our management from within, so we had to hire management with expertise from outside. They had been schooled and raised in this tradition of the single bottom-line mentality, and they tended to dilute the culture of the company…[Now] it’s part of Unilever… In a way, Ben & Jerry’s doesn’t exist anymore.”
What did he learn from the experience? “The reality is that when you bring people in from the outside, they don’t usually share the same values, so we didn’t really want them,” Cohen says. “You solve both problems by growing slowly enough that you can recruit people from the inside.” But how can a company grow slowly when Wall Street analysts—and stockholders—base investing decisions on double-digit growth?
Jane Lorand, a former tax attorney and co-founder of New College’s Green MBA program, says social and green entrepreneurs need to set investors’ expectations—and their own—accordingly. For example, she says, it might take a longer time for businesses that grow responsibly to achieve a positive return on investment. “And if you’re trying to empower workers or use only organic materials, you might have to pay more, and you have to be able to explain that.”
Ray Anderson of Interface, a billion-dollar floor covering company that he founded and later reengineered to be more environmentally friendly, argues that it’s possible to be green and big, but that it demands tireless rethinking of the company’s mission and operations. For example, his company started out selling carpeting to businesses. In the 1990s, he realized that carpet should be handled as a service, not as a disposable product. Interface began leasing good-looking, durable carpet to businesses, while handling installation, maintenance, and disposal. The company was able to recycle old carpet while designing products to create less waste. Today Interface leases “carpet tiles” to businesses. When some of the squares become worn or stained, Interface can replace and recycle only the worn tiles rather than replacing the carpeting for an entire room.
The result? “Scrap to the landfill has gone down 60 to 80 percent, we’ve shut down almost 40 percent of our smokestacks and 55 percent of our effluent pipes,” he says. More importantly, he argues, the company has redesigned its business to look at the entire production cycle, finding areas where it can save money and eliminate waste. For his efforts, he’s been awarded several prestigious sustainability awards, including the Mitchell International Prize for Sustainable Development and the Sustainability Leadership Award.
Does he think that business in general will ultimately be able to change? “It has to, if it is to avoid total collapse. The tide of history and business now has to be toward sustainability.”
For many, sustainability is the key—both in answering questions about values, and about where their hard-earned money will go. These investors are becoming increasingly demanding, often asking for SRI fund choices in their 401Ks and other employee benefit programs, and they dream of a time when the importance of such funds is unquestioned.
Matthew Kiernan, CEO of Innovest Strategic Value Advisors, speaks for many of these investors when he asks, “Why on earth should one need to make a ‘business case’ for doing the right thing?”
