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Socially Responsible Investing, Sound Good, Smells Good, How does it taste?
Chapman, Spira & Carson - Disscusion

From: Chapman Spira and Carson
Date: 4/24/99
Time: 10:29:19 AM
Remote User:


Socially Responsible Investing is a catch phrase for carrying morality into the investing arena. A companies that make products that can hurt people, socially responsible? Literally, a case can be made that every product probably causes some dislocation to someone.

The easier examples of being socially irresponsible were companies that manufactured cigarettes or companies that set up shop and lands that tend to practice discrimination. Thus, in the case of the later, business that were residing in South Africa when they were practicing apartheid.

But that is the simple answer, what about good old American companies that set up shot in forecing countries where they have child labor? What about in those countries that have dictatorships? What about ones that don't pay subsistance wages? What about countries that don't respect the rights of women, minorities, or various religious group?

I think that you will find that no company that deals in the international arena is exempt. What about those that fire American workers when they close plants to relocate overseas? When they buy their raw materials, are they coming from a country that is pure as we are? And on and on ad nauseum.

The answer is that a case can be made that all companies of any great size are not socially responsible, thus we should picket them and not buy their products or their stocks. If we were to do that, we would not eat, drink or survive. I think that being social responsible is a matter of degree and beyond that, it is shaded by the color of your skin and it is colored by the church you go to and that land that you live in.

How pompous we are to unilaterally set standards for others who come from totally different environments and accept or even enjoy their lot, as foolish as it may be.

We think that this subject is a matter of conscience and must be practised by the individual as he see fit, not en masse as some believe it should.

Having gotten off our soap box we are including a rather interesting description by David B. Lewis of what the elements really are with the hopes that you will come to your own judgement. Chapman

Putting Your Money Where Your Mouth Is by David B. Lewis

Money is an important but very private issue with many of us--we don't discuss our salaries, our expenses, or our financial decisions with others, and often barely with ourselves. Some people partition their financial activities from the rest of their lives. For those of us who do so, it's enough to invest money in a mutual fund or a stock that performs well, using the return on investment as the sole criterion in determining where to deposit savings or retirement money. For others, though, the act of putting money in a par-ticular place has a power aside from that of the money itself, and investment choices are guid-ed by additional criteria.

At its core, "socially responsible investing" is about applying the principles by which we live our lives to our financial activities. The ethical considerations that guide our interactions with others and help determine what we feel is important about particular issues can be appropriately applied to our investment choices. For the same reasons that we choose to patronize a locally owned hardware store or to buy organic produce we can choose to purchase shares of a particular company or mutual fund.

Socially responsible investing has become popular over the past few years, in part because of heightened awareness of environmental and social issues and in part because of a perceived success in repealing apartheid in South Africa (by stockholders in many companies voting to withdraw funds invested in that country under the former regime). A number of mutual funds have sprung up to offer investors stock portfolios based on particular "screens." Some portfolios are free of com-panies engaged in arms produc-tion or the manufacture of tobacco, for example. Others are composed specifically of companies whose labor practices are better than the norm or whose products are environmentally beneficial. Still other funds are available that are guided by various religious principles and avoid companies that produce products the investors abhor.

Amy Domini and Peter Kinder, pioneers in the field, describe three basic approaches to socially responsible investing in their book, "Ethical Investing: How to Make Profitable Investments Without Sacrificing Your Principles" (Addison-Wesley, 1984). The two are now partners in a firm that manages the investments in the Domini Social Equity Fund, where these approaches are put to work.

The Avoidance Approach

Simply don't have anything to do with companies whose products or practices you dislike. As an individual investor, you can't do much here, but mutual funds can pool many people's antipathies toward a particular company and perhaps change its practices by lowering demand for its stock, thus depressing the price. The Domini Social Equity Fund, for example, avoids companies with any revenue from tobacco, alcohol, nuclear power plants, or gambling operations.

The Positive-Choice Approach

By investing in companies that, for example, make "safe and useful products" and are "good corporate citizens," you presumably encourage that behavior in other companies seeking your investment dollar. In doing so, you make those companies more aware of their community responsibilities and the impact of their actions. Occasionally, there are tough choices. Do you invest in a new company that is producing great products but hasn't gotten around to providing good benefits to its employees? Do you reward a company with a bad environmental record because it now is cleaning up its act? In the Spring 1995 Amicus Journal, Richard Sandoval covers such a case in his discussion of one green fund's investment in Browning Ferris Industries, the waste-disposal company with a spotty past.

The Activist Approach

When you invest in a company, you become a part-owner of that company and can use your ownership privileges to effect the changes you want to see. Again, pooling investors' money gives mutual funds and investors a great deal of clout. The State of Massachusetts is going this route right now. At the same time that its anti-smoking campaign is heating up, its pension funds are partially invested in companies producing cigarettes. The state is seeking to make changes from within through stockholder actions.

Can the average investor make money and invest responsibly at the same time, without feeling that a nagging conscience is being subsidized? The Domini Social Index, a selection of companies on which the Equity Fund is based, was ahead of the industry-mark S&P 500 for 1995 when the figures were last compiled at the end of last September. The companies in the Index were also ahead of the S&P 500 since the index was formed in May of 1990. Peter Kinder, quoted in the November/December 1995 Business Ethics, points out that the Index wasn't created to beat the market but simply to provide "an appropriate benchmark for broad-screened socially responsible portfolios."

Several other socially-responsible funds did very well over the past year, in some cases because their screens coincidentally selected the high-technology stocks that did so well in 1995, and omitted entire industries that lagged (such as petrochemical firms). The Pax World and the Parnassus funds have long been standouts. And Citizens Trust E-fund money market returns the highest money-market yield available today by investing in healthy companies with "the potential ... to create a world we will want to live in tomorrow," according to the prospectus.

And does socially responsible investing enrich the world in addition to one's own bank account? Domini and Kinder devote a chapter in their book to the many successes of shareholder activism. Pension funds, in particular, are seeking changes in how companies do business in attempts to improve their investment. However, Randy Barber, writing in December's USTC, points out that investments must be held in the long term in order to be effective inducements for companies, so merely screening companies isn't enough to have an impact--and the framework in which mutual funds must operate often leads to their investments in very large public corporations, which are popular with investors anyway.

Barber concludes that the managers of socially responsible funds should work at creating new mechanisms for investment. Alternative ways in which we can invest are welcome, particularly ones targeted at particular goals. It may be in such unusual investments as affordable housing projects or micro enterprises that socially responsible investing will have its greatest personal and societal impacts.



Compare socially respon-sible funds against other funds that try to achieve the same goals--safety of principal, for example, balanced with growth.

Be aware that the rush to stamp everything "green" has resulted in some funds with very limited screening prac-tices.

Be aware that some funds are effectively "sector" funds investing in a particular industry--so all your eggs may be in the environmental basket.

As for any investment decision, obtain and read the prospectus carefully.

Last changed: March 17, 2000