I recently spoke on a panel for Social Venture Partners about Socially Reponsible Investing. The October 2007 issue of the Atlantic Monthly covered socially responsible investing, and Henry Blodget wrote somewhat of an overview on the subject. Unfortunately as a former wall streeter he seemed to feel the need to start off with a resounding slam on the subject, perhaps to score some points with those ’streeters unable to look further than the curb. The panel organizer at SVP thought it was a fairly negative article and that someone might ask about it. No one did, so here’s my take.
He starts off with an extreme perspective, explaining that the best possible stock returns, with hindsight, were from Phillip Morris. He then compares investing solely in them against a strategy that has zero measurable social good (negative screening – simply not buying stocks of companies you don’t believe in), so of course it’s the most extreme possible example. But really, lots and lots of people would not happen to be invested in Phillip Morris anyway – certianly no-one would have invested solely in Phillip Morris- it’s only with hindsight you can see it do so well. So it’s a nonsensical comparison. I agree completely that screening can’t forcibly alter corporate behavoir, but I still consider it worthwhile and he admits later in the article that investment decisions do have some influence on corporate behavior.
Once the article gets past the first half page or so, it’s more reasonable. We agree screening can’t force companies to change a la divestment from South Africa, but having investment managers, who prioritize SRI, asking questions in quarterly calls does have an effect. It’s also true that screening criteria are very variable and which issues matter is in the eye of the beholder, so while he raises it as a complaint, it’s good message to investors to not just pick any screened fund but ask what they screen for and make sure it matches your values.
Can investors making positive screens be taken in by greenwashers? Greenwashers would be companies or funds claiming to somehow responsible but making only surface fixes and not really changing practices. That’s another concern he raises, but I don’t see how this issues is much different than regular investing – there are hundreds of potential funds and advisors and if you don’t want a dud you need to dig a little.
Henry appropriately includes shareholder advocacy as an SRI technique – the practice of holding stocks of companies with room for improvement and then agitating for improvement by filing shareholder resolutions and speaking at company shareholder meetings. The best criticism he can come up with of advocacy is that other folks free-ride on the activists. To me, that complaint is the pinnacle of the capitalist selfishness that I am absolutely out to circumvent as an SRI investor, so it doesn’t fly with me. Do I not pick up litter because everyone will benefit? Cleaning up after your own dog is more about everybody else than you, so should people stop doing it? This is about having values and living by them, the fact that other people might benefit is actually fundamental to being *socially* responsible.
He wraps up with a criticism that SRI funds have not to-date provided the highest possible return. Again, welcome to a core of being socially responsible instead of self-focused and meet the concept of “good enough”. He notes that Domini beat the S&P 500, but Vanguard had higher returns still. So what? How many traditional investors have the privilege of finding themselves in the most successful investment fund quarter after quarter anyway? Domini is good enough, AND is a meaningful voice in corporate ownership for my values. That’s a surefire win in my book.