Archive for June, 2007

Socially Responsible Investing, or SRI, is the idea that we should be taking more than financial return into account when we invest. Benjamin Graham, mentor to Warren Buffet, has long made a distinction between investing and speculating. Likely he would argue we should always have been taking other things into account. So what’s so special about SRI?

1) Personal integrity:
SRI goes all the way to the start of US history to the Quakers saying you couldn’t be a Quaker and own slaves – basically saying it’s not acceptable to remove moral judgment from economic activity. In a continuation of saying that your money shouldn’t do anything you wouldn’t do, early financial folks (largely churches investing their funds) did screening with their investing and avoided sin investments like alcohol, tobacco and weaponry. That carried forward into investment funds like PAX World Fund and Domini. Screening grew into the movement to divest from South Africa as part of pressuring the system of Apartheid, and perhaps it was being part of that success that helped fuel enthusiasm for larger market influence.

2) Market influence:
Screening is effective for personal integrity, but because money is fungible and the capital markets so large, it’s not really effective as a market control. So some folks have raised the bar with the shareholder activism movements – pressing companies to disclose more about executive pay, about their impact on the environment, about their hiring practices. Or do things like offer better benefits to their employees. No company has actually been forced to do anything, in fact in fact several resolutions have been passed at Weyerhaeuser meetings and that’s how I found out that shareholder resolutions are non-binding anyway! ! But there’s still influence, even without passing resolutions companies have come to the negotiating table and made changes in response to filings. Often times the filing party will agree to withdraw the resolution before shareholders ever see it. As more and more investors work to figure out what this SRI thing is, more businesses have to pay attention. Key also is getting clarity on what the new rules are and what we plan to do about it. I think it’s evolving and as more money comes under the SRI umbrella there will be more ability to reward companies doing the right things. As more investor experience is developed under an SRI umbrella there will be more opportunity to know what’s really a return/reward tradeoff and what’s just old money tales. There is also a current movement to divest from Darfur because of the genocide there, and perhaps the targeted geographic scope and more isolated market will again have a more powerful effect.

Capital Markets are about scale, so it’s going to take time. What’s working? The Carbon Disclosure Project (CDP) is working at a large scale. The CDP is a grouping of institutional investors who every year sign on to a request to companies that they respond to a questionnaire about their greenhouse gas emissions, and generally the vulnerability of their business to climate change. Every year more investors sign on, more companies respond, and those responses are more thoughtful. “The CDP 5 information request was signed by more than 280 institutional investors with assets of more than $41 trillion and sent on 1st February 2007.” This is a great example of markets acting with the clarity of a simple common goal. Climate change will be one of the first things to come down to smaller businesses, though health care and employee transportation are SRI issues and are already there for small businesses.

3) Community Investing
Trillium defines this as follows: “These investments are typically directed to community loan funds, nonprofit groups, and community development banks that help provide a flow of capital to historically under-served sectors of society, both domestically and abroad.” This could mean holding funds in community banks like Shorebank Pacific. This is a good option for organizations with reserve funds that need to be FDIC managed. Shorebank and others have the ability to manage million-dollar funds and use a network of community development banks to ensure the money is spread across FDIC insured accounts. This category would include investing in low-income housing real estate projects, or supporting community development loan funds.

Community Investing can include venture capital style investing via Community Development Venture Capital (CDVC) funds. These are venture capital funds, often associated with a community development non-profit or loan fund, that have a geographic focus and support companies that can provide living-wage jobs, employee skill training and provide employee benefits. Leading examples include Pacific Community Ventures in San Francisco, Costal Enterprises Inc in Maine, Kentucky Highlands Corporation in Kentucky, and SJF in North Carolina.

4) Risk Reduction:
The most recent shift has been towards the argument that a socially and environmentally responsibly run company is inevitably a better run company and therefore a lower risk investment. Folks pursuing this strategy seem to gather under the label ESG: Environment, Social & Governance. The idea is to use how a company treats the environmental, social and governance issues as a indicator of how the company makes all the less visible decisions. ISS (institutional Shareholder Services) offers an array of “Sustainability Risk Reports” and “ESG Research and Analytics” reports.

There are other tacks for externally reading that a company is socially responsible. One fund focuses on companies track records with diversity. Another fund looks at how much a company invests in employee training.

Let’s get philosophical

Making tradeoffs is the core of doing business. Where do you focus your time, where do you allocate your dollars, what do you develop as your core competency, how do you adapt when the market changes. Business is about finding your spot in a complex envelope of financial sustainability in an n-dimensional decision space. SRI is about trying to support and encourage businesses that focus on long-term value distributed among all their stakeholders. The folks interviewed by Jill Bamburg for her book “Getting To Scale” didn’t see a tradeoff between building a company and supporting their social values.

“Mission-related impact, not wealth creation, is the central measure by which social entrepreneurs evaluate success. This is the core of what distinguishes social entrepreneurs from business entrepreneurs. For a social entrepreneur, the social mission is fundamental and cannot be reduced to creating private benefits for shareholders. Making a profit, creating wealth, or serving the desires of customers may be part of the model, but these are means to a social end, not the end in itself.” Project Impact, an organization that has revolutionized cataract surgery in India.

In management class at BGI I picked up a quote I liked: CSR – HR = PR. That’s from Adine Mees and Jaime Burnham, Canadian Business for Social Responsibility, quoted in Driving Success: Human resources and sustainable development by the World Business Council for Sustainable Development. Basically saying that corporate social responsibility that doesn’t start with how you treat your employees isn’t genuine. And how could it be? This perspective brings us back to the Quakers – don’t let your money do anything you wouldn’t want to be doing, and to Gandhi – every step we take towards justice must have justice in it.

The field evolves steadily, but now when you talk to your SRI investment manager (or when you look up one on the Social Investment Forum) you have some topics to explore.

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