Those of us who want to change the world too often feel a certain disdain for money. Those of us whom math makes sleepy often also feel somewhat bewildered by finance and investing- you know, that abstract world of flowing capital, investment markets, shares and boards and rates and returns. Both of which are too bad, since our allies in the world of socially responsible investment (SRI) are poised to become one of the decade's strongest forces for change.
We all know the principle behind SRI: businesses need investment; therefore businesses court investors; when investors demand that businesses become more sustainable and socially just, businesses change behavior. Well, that principle has worked well. With between 12 and 20% of US investments now attached to some form of SRI standards, according to finance expert Gerald Fairtlough, businesses are beginning to scramble to prove themselves socially benign.
But something strange has happened along the way. SRI mutual funds have begun to outperform their "hard-headed" competitors. That's right, investing in doing good makes you more money. As Green Money Journal reports, 16 of the 21 funds with $100 million or more in assets "achieved the highest rankings for performance from either or both [financial analysts] Morningstar or Lipper," compared with only 32% of all mutual funds.
But here's the twist: it turns out that not only does SRI make investors more money - standards of transparency, accountability and social responsibility make corporations more money.
Some of this competitive advantage is due to the fact that environmental efficiency and good working conditions, while a hit to the short-term bottom line, often pay themselves back handsomely. Companies with the guts (and shareholder pressure) to make investments in sounder practices often do better than their short-term focused competitors at finding and implementing innovations as well.
But it's not all compact flourescent lightbulbs and childcare. Socially responsible businesses are also run better as businesses. And, it turns out, financial transparency (being honest and open with your books) and corporate democracy (allowing shareholders and even employees a strong voice in decision-making) are excellent predictors of both profitablity and shareholder return. As a recent Barron's cover story (unfortunately not available on their site) explains, corruption and the fear of corporate crime and mismanagement are driving many large institutional investors into SRI, but it's the higher performance of SRI portfolio companies that's making them stay:
"Corruption can make strange bedfellows. For years, "socially responsible" investors were derided by many Wall Streeters as muddle-headed leftists or hopeless do-gooders. But the tidal wave of disclosures about wrongdoing in Corporate America's executive suites and boardrooms has won this group important allies, including pension funds, unions and individual investors concerned about corporate governance. That's put a surprising amount of cash - and clout - in the socially responsible investment proponents' corner. Thank you, Enron, Sunbeam, Tyco and, maybe, Martha Stewart.
"The big impetus is practical, not ideological. As stock prices were obliterated by blowups, bankruptcies and scandals linked to bad behavior by greedy executives, oblivious auditors and clueless directors, many investors discovered that corporate ethics - or the lack thereof - can be important to their personal financial health. That's elevated the level of scrutiny from shareholders. 'Corporate irresponsibility did for social investing what Watergate did for politics,' says Cliff Feigenbaum....
"Social investing's reliance on 'independent' research - or at least research that doesn't bear the tarnish of Wall Street's big investment banks and their potential conflicts of interest, is in tune with the times. ...
"Jonathan Naimon... considers environmental performance a good indicator for risk - market, operational and reputational - and stock-market performance. 'Companies that meet our ecometric screening are better managed and have fewer long-term liabilities than their peers,' says Naimon. 'Environmental accounting is a proxy for a company's overall accounting.'
"A recent paper published in the Quarterly Journal of Economics reinforces an argument often made by investor Warren Buffett: Corporate governance affects shareholder value. The authors, researchers from Harvard and the Wharton School, constructed a "governance index" to gauge the level of shareholder rights at about 1,500 companies, from September 1990 to December 1999. They found that those with the strongest shareholder rights produced returns 8.5% higher than those with the weakest."
in addition to SRI in bringing a "conscience" to capitalism, i think revisioning capitalism may (ultimately) be as important and mayhaps be even more fruitful in the "longrun" :D
most interesting along these lines i've found is bernard lietaer's work on man's "real conditions of life and his relations with his kind," to quote the communist manifesto :D
really, he's opened my eyes on the underlying assumptions we have regarding exchange, transaction and currency, deconstructing, if you will, what it means to make money!
he also offers not so much alternatives, but a whole new paradigm (overused, i know!) to operate in a world, in his terms, "beyond greed and scarcity," or like in negroponte's(?) "atoms to bits."
also working along these lines is keith hart with an illuminating look at "money in an unequal world" :D
oh and lietaer just launched a new commodity-based currency, which, if adopted, could help stabilize the "global financial architecture" -- badly in need of, IMHO! (incidentally, a previous incarnation was initially proposed by keynes at bretton woods, then known as commodity buffer stocks, but, alas, it was nixed.)
unfortunately, complementary currencies and the like, as is, (i.e. what we have now or settled with is good enough) look like the "dream of a ridiculous man" and as such, as so many things, remain only a glimmer in the eye... at least, of course, until good enough isn't :D