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Social Investment, Social Capital and Social Action
Gil Friend, 2 Oct 05

srilogo.gifMore than 500 "socially responsible investment" professionals gathered in Snowbird Utah last week for the 16th annual SRI in the Rockies conference. I joined them -- just doing my duty, at 8000 feet in mountain beauty -- and offer these observations on social investment and social action.

The SRI movement has grown substantially, with -- according to some -- about 10% of US investment dollars under some sort of SRI management.

"Some sort" covers, it turns out, a wide range of investment vehicles, strategies and philosophies. The origins of the movement are in negative screens -- mutual funds that exclude companies that engage in undesired activities, such as production of alcohol, armaments, tobacco or union busting -- which often tolerated a lower rate of financial return in consideration of their ethical focus. Then funds developed that focused more affirmatively on companies demonstrating desired behaviors, such as positive environmental profiles. The original impetus may have been ethical, but the financial merits of these strategies is increasingly emphasized, even as the pool of offerings broadens beyond mutual funds to include indexes, exchange traded funds (ETFs), and community based investment.

In fact, the conference awards the annual Moskowitz Prize (named after Milton Moskowitz, author of The 100 Best Companies to Work for in America, and one of the first investigators to publish comparisons of the financial performance of screened and unscreened portfolios), which honors the best quantitative analysis of socially responsible investing. This year's winner -- The Economic Value of Corporate Eco-Efficiency, by Nadja Guenster and colleagues from the Rotterdam School of Management at Erasmus University -- found that "company managers do not face a tradeoff between eco-efficiency and financial performance, and that investors can use environmental information for investment decisions."

There was some debate in the room over whether, and why, companies care about their SRI rankings. Some maintained that companies could care less; others noted that many public traded companies respond to extensive questionnaires (at 100 hours a pop) from multiple SRI analysts (sometimes dozens) -- the reason OneReport was developed -- while some approach the analysts and rating services (like the DowJones Sustainability Index, FTSE4Good, KLD, Innovest, and others) for advice on what they need to do to move onto the good list. That seems like an indicator of perceived value to me. As does the presence of a former Goldman Sachs CEO at the helm of Al Gore's new firm, Generation Investment Management LLP.

Perception is key to the investment game, of course. The profit opportunity lives in the value gradients between how different people evaluate risk and opportunity, and hence the value of securities. If I think global warming, toxic products and human rights are likely to be big deals, and you don't, we're going to place very different financial bets. Because SRI is a movement as well as an industry, the investors want to move markets -- like LEED has done in the building industry -- as well as profit from them.

The SRI industry faces challenges, and these were on the agenda as well. One session considered the fiduciary duty of investment advisors, and whether they can ethically (and legally) consider "non-financial" environmental and social factors in investment decisions. Peter Kinder, CEO of KLD Research and Analytics, expects that trustees will consider the liabilities of climate change, for example, but will do it on explicitly financial grounds, while denying any moral or ethical basis -- even if their morality and ethics guides their financial assessments. (How odd that the law does not allow for morality & ethics. In fact, 33 states -- including California -- don't even permit corporate directors to consider "non-financial" factors in management decisions, though recent legislation has proposed broadening the boundaries of acceptability. On the other hand, directors and executives may have plenty of exposure to consider, even if they focus narrowly on the financial implications of environmental and social factors. )

Mercer Investment Consulting's global head of SRI, Jane Ambachtsheer, who confesses to a "more aggressive stance than many," sees an evolution of "ESG factors" -- environmental, social and governance -- from ethical to material concerns, based on impact on stock price. The most striking research finding she reported was the regional differentiation of perceived value gradients: the US investment industry is way behind its European counterparts, with 65% of US professionals surveyed saying ESG will "never" be mainstream, while 65% of European managers say that it will, within ten years.

Another challenge on the agenda -- the growing attacks on SRI. Even as 35 state treasurers attended a UN Summit on Climate Change, state pension funds are increasingly under attack. In the guise of "giving workers more control over their retirement investments" by devolving state pension funds into 401(k) plans, opponents are actually challenging the pooled social power of progressive states and labor associations -- like the CalPERS and CalSTRS Green Wave initiative -- to invest both in support of their values and their interpretations of prudent investment strategies.

Gar Alperovitz, University of Maryland professor and author of the recently published America Beyond Capitalism, put a fine point on this and underlying concerns in his opening keynote, which is worth summarizing in some detail. "The hopeful assumption, during dark political times, that ultimately the pendulum will swing back -- that's complacency." Believing that the best we can do, in the face of overwhelming trends against us, is help make things a bit less bad -- "I don't believe that either," he said.

We're not facing a political, economic or even environmental crisis, according to Alperovitz: "We're facing, in this generation, a systemic crisis." He offered several examples to support his point:

Thirty five years ago, corporate power in US was balanced partly by significant organizations allied, above all, with a significant labor movement. Organized labor, which has been at the heart of progressive movements worldwide, has now declined in the US from peak of 35.3% to 7.2% in private sector & declining. One of the fundamental balance wheels in the system that kept things balanced, sort of, is disappearing before your eyes.

The US is the only advanced industrial system in the world that is fundamentally divided on racial grounds.

Globalization has undermined the capacity of communities & organized constituencies to fight back.

In the face of this systemic change, Alperovitz suggests, with power relations shifted in such fundamental terms, "either there is no way forward, or only in a very different form." Yet, "as an historian, I'm a long run optimist," even though he expects things to get worse before they get better.

"In the face of McCarthyism in the early 50s, people felt this will never change -- but what came next was the 60s." While Earth Day founder Gaylord Nelson (for whom Alperovitz was Policy Director) was a "conservation governor," national environmental initiatives "seemed ridiculous" and out of nowhere came a very powerful environmental movement." It was clear, in 1940s Mississippi, that "nothing could change; their difficulties were far worse than anything we face today; idea you could change it was insane." And yet the civil rights movement emerged.

With those reminders that even the most seemingly entrenched systems do change, Alperovitz turned his focus to the immediate concerns of the SRI conference -- money and the social weal -- and the question of "what's our role in achieving that change?" He began by chastising the industry: "Current income and wealth trends aren't being challenged: the top one percent in the US have more income than bottom 100 million, and control about half of all investment capital, while five percent owns 70 percent; it's a medieval distribution of wealth. With those assets go power."

His challenge: the possibility of slowly developing alternative paradigm that's beyond capitalism in its traditional form: significantly broadening ownership of capital -- "not socialism or capitalism, but a new form."

"Just possibly," he suggested, "we're living at time when the beginning ground work for something very different, very positive, might begin to transcend traditional models."

Many SRI professional are encouraging their clients to invest one percent of assets in community investment -- a step in that direction. Others were wearing buttons saying "1% is not enough." Gar raised the bar: "What if the goal was to become central players in development of new paradigm to shift the most central structure in this society -- who owns wealth?"

The punch line for me -- and for the WorldChanging "a better world is here" meme -- is that there's much more activity in development of institutions to develop community wealth than commonly known: more than 11,000 companies with significantly or increasing employee ownership, employing 11 million people -- more than in the labor movement -- plus some 4,000-6,000 community and neighborhood corporations (12,000 if you count non-profit housing developers), not to mention land trust. Those aren't huge numbers, but they're bigger than I would have thought, and present what Alperovitz called "a systemic possibility, rather than merely and investment vehicle." And then there are those public pension funds.

How do we get there? Alperovitz the historian again looked backward to look forward, considering other times when people committed themselves to "get beyond doing good things, to become historic actors" -- and built transformative movements that "came out of nowhere."

Except, of course, they didn't come out of nowhere. They came out of slow, patient, local, face-to-face work. "This is the history of most movements for transformative power; it's always a national challenge, but it was the programs developed at local level that became the new deal -- social security, the eight hour day, workers compensation -- that became the preliminary paradigms for the big changes to come."

How would we plan if we allowed ourselves to think we faced a systemic crisis and wanted to alter it, rather than just do good things? What would such a plan look like? Who would even ask those questions?

What we would do to inform ourselves? Political power doesn't come out of the barrel of a gun, as Mao claimed, but from 5-6 women sitting in a living room reading, talking to each other, then supporting each other in action."

In the end, these are essentially existential questions. What is the life you want to live, the risks you're willing to take, what you're personally willing to do to move the ball? Are we personally willing to accept the challenge of what it would mean to take our own power seriously? Leadership comes from the person sitting in your seat.

His heroes: "the people in Mississippi in the 1930s and 40s who pushed forward for civil rights no matter what -- when raising those issues could get you killed."

"And I respect, though I disagree with, the intelligent group of conservatives in the 1940s-50s -- more marginal than most US liberals today -- who said, well before Goldwater in 1964, that they were going to stick to their principles, roll up their sleeves, meet in small groups, help each other -- and who now dominate the ideas and power of the most powerful system in the world. People can do that. It's as common as grass in world history."

This speech was a pointed challenge to an industry, and a movement, that's grappling with successes, and debating its next moves. Alperovitz again:

This is a dangerous time for an organization that wants to be serious -- with the kind of success that allows you to think you should quiet down, pull in your horns, and not rock the boat. I'm suggesting that now is the time you have to rock the boat. Shrewdly.

We're trending wrong on almost every major indicator. This needs to be challenged and directly faced, because there's great difference between slowing down rate of increase of something getting worse -- which most of what we all do -- and actually turning a systemic trend the other way, reverse where we're going.

David Brower called it the "great ecological u-turn." Bill McDonough is fond of pointing out that if you're in the US in a car headed north to Canada, you can't get to Mexico by slowing down; you have to turn around.

The question for each of us -- for the person sitting in your seat -- is, as my mentor Bucky Fuller would ask, "If the success or failure of this planet, and of human beings, depended on how I am and what I do, how would I be? What would I do?"

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I didn't know there were World Changing folk at SRI in the Rockies! I wish I would have known, I would have loved to chat.

Check out my post SRI in the Rockies post at

Posted by: Shea Gunther on 2 Oct 05

We're everywhere, apparently:-)

Posted by: Gil Friend on 2 Oct 05


Yesterday I watched Jeffrey Sachs in a documentary about his way of approaching development and social responsability on a global scale.

He said that the number one problem in today's world consists of U.S. corporations lobbying the wrong way. He was furious to see that the U.S. is the least generous of all developed nations and that it stubbornly refuses to stick to its committments (e.g. of giving 0.7% of GNP to aid). It even threatened to blow up the MDG's, because they're bad for business.
Of course, the U.S. also didn't ratify Kyoto, because it's bad for business.

So as long as U.S. corporations keep rogue American governments in power, none of those corporations can really claim to be socially responsible, not even if they apply good rules at home.

And even if they do not support the rogue government directly, they should at least do their utmost to prevent others from supporting it. If they don't, they are never practising SRI (even if they practise it at home).

Companies and corporations do not operate in a vacuum (as the notion of 'SRI' implies). They in fact operate in a global economy, and hence their responsabilities are global, even when they're not multinationals but small companies.

The problem is that very few of those U.S. companies support politicians or policies that are multilateralist and defend global social and environmental rules (like those of the ILO or of Kyoto). Instead, they use SRI as a marketing instrument. Thank God, most people see through it.

The situation is not much better in Europe, but there are big differences. When European corporations want to do business outside of Europe, they must sign a social memorandum (which includes respect for the five basic labor rules set out by the ILO). Else, they are forbidden to go abroad. In the U.S. this is unthinkable (bad for business).
Likewise, European corporations have to stick to Kyoto. If they don't, they are illegal. This is unthinkable in the USA (again, of course, bad for business).

In short, no matter how nice U.S. corporations act at home, their responsability is much wider, and they don't take it up.

Posted by: Lorenzo on 3 Oct 05

You might find this interesting:

A new-ish analysis of how to approach environmental improvement from a capital management perspective: notionally "green capital" is wealth which can be stored without environmental degradation, and "black capital" is wealth which produced environmental degradation by it's mere existence.

I think this points to a much more powerful set of levers than simply taxing consumption and production of bad things: the possibility of taxing *captial* rather than profit, in the same way capital gains tax operates. Think of environmental impact statements at a Mutual Fund level, for instance...

Posted by: Vinay on 3 Oct 05

A very interesting article -- thank you. I have been thinking about the issues around SRI recently as well -- myself and a group of friends are planning to pool funds for investment, so we have been discussing the merits of different approaches to conscientious investing. It seems to me that there are no simple answers where SRI is concerned.

Significantly, most investments in established publicly held companies do not directly support the company in question. Unless the shares being purchased are part of a new stock offering (such as Google recently did), the money invested does not go to the company whose stock you are purchasing -- it simply goes to some other investor who has decided to sell his holdings.

Investing in a company does support the price of their stock, which is a primary indicator for most CEOs and directors (and often impacts their personal fortunes). Thus, in theory, SRI can influence business activity by driving demand away from rapacious companies and towards socially conscious companies. However, the nature of the stock market makes me wonder if this is effective in practice. So long as a significant fraction of investors make decisions based on anticipated return, it seems that the intended impact of SRI -- driving down the value of "bad" companies -- simply creates an opportunity for fiscally motivated bargain hunters. These investors will notice that the "bad" company is undervalued according to traditional metrics, and will act on the opportunity to pick up the stock cheaply, thus driving the price back towards the "normal" valuation that it would have had in the absence of SRI. Furthermore, it seems that this effect would pertain if even a minority (say ~30%) of investors were motivated primarily by non-SRI factors. Thus SRI could have the desired impact if it was the primary criteria for almost all investors, but it seems unlikely to attain that level of acceptance in the foreseeable future. In the meantime, it encourages opportunism on the part of investors with more money than conscience, and serves to cancel out its own impact.

I have other concerns with SRI. One is the idea of "protest investing": intentionally purchasing stock in the worst, most irresponsible companies, in order to attend shareholder meetings and speak directly to the board about the need to improve the company's impact on society. If the protest investors are sufficiently vocal, this approach seems likely to create more change with a smaller number of conscious investors than one could achieve with the standard negative filter approach.

It’s hard for me to see how “traditional” SRI can bring us the results that we want in the long term. There are things that must be changed, but the investment strategies of mom-and-pop investors does not seem like the most effective angle of attack.

One place where real change must occur is in the legally defined expectations of corporate management. So long as CEOs are legally proscribed from considering non financial factors in their management decisions, “visible numbers only” management will continue to predominate.

Another point of focus is to change the equation (both real and perceived) between social consciousness and profitability, so that the two motivations are mutually reinforcing rather than conflicting. This is where companies like Natural Logic come into play.

Finally, we must change the philosophy of the investment community, but more at the VC level than at the mutual fund level. VCs and “angel” investors actually do directly support the companies whose stock they purchase, and this support frequently makes the difference between an actual product or service offering, and a good idea that remains just that. Unfortunately, VCs seem to be even more purely fiscally motivated than the average investor, so changing this aspect of the culture will be challenging at best.

Posted by: Brent Eubanks on 3 Oct 05

Vinay points to a very interesting article with an extremely interesting distinction: "Black Capital" versus "Green Capital." The former depletes biotic wealth; the latter preserves or enhances it. Wow - if only our accounting rules took this into account! Carbon taxes, "tailpipe" taxes and other levies would be one way to adjust rates of return to account for the so-called "external" costs of "black capital". Meanwhile, this suggests a powerful screen for SRI's. I think that social aspects are included in this as well, since preserving the biosphere and promoting social justice are two facets of the same effort.

PS: I fear that the term "Black Capital" may be offensive to certain folks. Is there a better choice?

Posted by: David Foley on 3 Oct 05

Actually, when I chose the term Black Capital I was thinking specifically of Oil and Coal and similar things, all of which have that distinctively hydrocarbon color...

But I'm open to better terminology!

I'm fairly sure that, in it's current form SRI has about the same kind of role in the world's problems as individual purchase of Hybrid cars. It will certainly help, a little, and is a fairly reasonable choice for many people. Not a global solution, but a positive action.

That is not to say that it might not become a lot more powerful and useful with supportive legislation, of course.

I, personally, am really excited by the idea of taxing *capital* rather than profits: profits are an indirect way of requiring capital to move from undesirable to desirable forms by reducing return on investment, but that adds an entire level of indirection to the problem.

If one could simply assess capital gains taxes at a sliding scale based on environmental and social impact...

A pipe dream, of course, but...

Posted by: Vinay on 3 Oct 05

When I was in the Netherlands in 1996, I read an article stating that earnings from certain socially and environmentally responsible Dutch mutual funds were taxed at a lower rate. Does anyone know if that's still the case?

Posted by: David Foley on 3 Oct 05

Brent makes a point that those of us in the SRI community hear quite often, namely, that SRI investing doesn't change corporate behavior because the stock is almost always purchased in the secondary market. Here are a few things to consider in this regard.

First, while it is true that, in the short run, stock prices are not likely to be affected by the existence of SRI portfolios (and indices) allows for comparison of the financial performance of SRI and non-SRI investments. Much of the talk at SRI in the Rockies centered on the financial logic of being a good corporate citizen. To the extent that this proves to be correct over the long term, companies that recognize this will benefit from higher stock prices as a result of their improved profitability. This is the process by which SRI could eventuially become part of mainstream analysis.

Second, SRI money managers, if they are truly deserving of that designation, engage in aggressive shareholder activism. Yes, they may not be influencing the dirtiest firms because they are screeened out of their portfolios, but they do have an impact on the companies they hold (and these companies are more likely to respond to their challenges). The classic case of this was divestiture from apartheid South Africa, a process in which the SRI community was quite influential. Some recent successes include increasing the number of women represented on boards and in executive positions and the adoption of policies prohibiting discrimination based on s**ual orientation at most major US companies.

Thirdly, many SRI investors simply do not want to make money from activies they find objectionable, whether their decision changes anything or not. Perhaps that of less interest to this group, but it certainly matters to our clients.

Brent also suggested that VC investing could have a greater social impact. He should be happy to know that this area is indeed growing as well. At the conference, we heard a presentation on venture funds that focus on "clean technology," of which there are a half dozen or so. Both their numbers and the percentage of VC capital they represent are growing. There is also a group of angel investors dedicated to sustainable VC called the Investor's Circle. The problem with these areas from an individual perspective is, of course, that the investment minimums are quite high.

Overall, Brent's point is still well taken--to the extent that market signals (as corrupted by corporate control of government) do not account for the true cost of business (including social and ethical issues as well as economic externalities) and a short-term mentality coninues to dominate Wall Street and the Board Room, it may be too much to expect that things will improve just because a group of people invest according to their consciences. But by pooling our money together, we are supporting an industry (the SRI industry, that is) that can, as Gar Alperowitz suggested in the talk that Gil summarized so well, help to form the foundation for the systemic changes that are necessary if we are to have any chance of turning things around.

Posted by: Ben Roberts on 4 Oct 05


Thank you for the thoughtful reply. Your point about the activism of SRI fund managers is a good one. Given the recent surge of interest in SRI, it seems to be in danger of becoming like bamboo flooring: a product that is assumed, by the uninformed consumer, to automatically be superior to the conventional alternatives. And, like bamboo products, this is often but not always the case.

Has anyone reputable undertaken to rate and review the existing SRI funds, particularly with respect to the activism undertaken by the fund managers?

Posted by: Brent Eubanks on 4 Oct 05


The Social Investment Forum, the trade group for the SRI industry and co-sponsor of the SRI in the Rockies conference, has information on its website, as to whether or not various funds vote their proxies in accordance with their social policies, as well as a comprehensive breakdown of their social screens. They also have a section highlighting activist victories through 2003 ( But they do not identify which funds are truly active in engaging the companies they hold, either by introducing shareholder resolutions or by engaging in dialogue with management.

You're absolutely right that there is a good deal of variation among the funds that are nominally termed SRI. Many of them, including such prominant offerings as the Vanguard Calvert Social Index do not engage in any form of activism at all. Others, such as the TIAA-CREF Social Equity Fund (thanks to some recent lobbying efforts by the SRI community), vote their proxies in accordance with the recommendations of the Investor Responsibility Research Center (IRRC), but draw the line at more aggressive measures.

Not surprisingly, the oldest names in the industry (Pax World, Calvert, Domini, Walden, etc.) are some of your best bets in terms of activism. I don't believe, however, that there is a systematic review of the SRI fund universe that addresses this issue, but I will make an inquiry to be sure.


Posted by: Ben Roberts on 6 Oct 05

Probably more effective methods for corporate change are to do things in addition to shareholder activism and verification of corporate practices, like work collaboratively to educate and expose to the public that the behavior of a company is "bad" or bad for the environment or helps promote bad things like terrorism and dependence on foreign oil, etc, because companies do not like being percieved as being a "bad" citizen. It tarnishes their image, reputation and brand, and that is paramount to the perception of thier products and primary to their bottom line.

Posted by: allan moskowitz on 6 Oct 05

One of the reasons that shareholder activism has worked well is that companies want to avoid the bad publicity these activities can engender. Thus many firms, when threatened with a shareholder resolution requiring more board diversity, for example, will simply agree to the resolution's terms rather than see it put to a vote. Certainly when dialogue fails and the company is recalcitrant, other measures are necessary. But sometimes the softer approach works best.

Posted by: Ben Roberts on 7 Oct 05



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