Responsible Investment Forum with Steve Schueth

Responsible Investment Forum with Steve Schueth

The ways we save, spend and invest can dramatically influence both the fabric and consciousness of society. Many believe that in addition to the benefits of ownership, investors bear responsibility for the impact their money has in the world. Whatever the differences in approach, socially conscious investors share an intention to make money and make a difference with their money. This shared intention keeps investors who may disagree on some important issues working collaboratively to advance causes on which they do agree and, as guest columnist Peter Kinder explains, unites values-based investors who, at a glance, may appear to have pitched tents in opposite camps.


Values-Based Investing: The Reality

Critics of responsible investing have claimed for at least 25 years that its main objectives are to punish the share value of offending companies and deny them capital.

The focus on these improbable aims misses the essential characteristic of values-based investors. For them, socially responsible investing is not in the first place about companies. Values-based investing is about the investors' views of themselves and their aspirations.

This misperception of values-based investors regularly leads to confusion about "socially responsible investing" (SRI) and "corporate social responsibility" (CSR). At a glance, SRI would seem to be one side of a coin and CSR its reverse. They are not.

CSR is about a corporation and the aspirations of its people. According to Sir Geoffrey Chandler, CSR "should represent a set of core principles which are the point of departure for any business and which condition the totality of its operations. It should encompass a spectrum from the running of a profitable business to care for its social and environmental impact."

SRI, on the other hand, describes an investor's assertion of responsibility for what s/he owns. The investor knows his/her social objectives and tries to align the available investments with them.

Corporate Accountability

One might assume -- not illogically but wrongly -- that values-based investors buy stock only in socially responsible companies. To avoid this confusion, it is best to think of SRI's social change objectives in terms of “corporate accountability.”

In 1940, the future four-term New York governor and U.S. Vice President, Nelson A. Rockefeller, made this distinction: “We must recognize the social responsibility of corporations, and the corporation must use its ownership of assets to reflect the best interests of the people. If we don't, they will take away our ownership.”

Corporate accountability then is how corporations use their “ownership of assets to reflect the best interests of” their stakeholders.

Priorities and Tolerances

Just as there is no perfect person, there is no “perfect” company. Few think a “socially responsible” company imaginable. So, investment universes limited to such companies are rare.

Values-based investors want to own securities whose issuers do not fall below the investor’s minimum standards for ethical behavior. They order their social priorities and they consider their tolerances. An investor might accept some poor performance on environmental issues but none on human rights, for example.

The values-based investor’s choices and weightings are its own.

The Orthodoxy Trap

Some criticize the SRI industry for its lack of uniform standards for what is “socially responsible” in investments. They are right that there are no such standards. They are wrong in implying there should be.

Take McDonald’s: Is it a decently-run company with forward-looking employment policies and practices and a commitment to reduce environmentally-unfriendly packaging. Or, does it force-feed junk food to an over-weight nation? Values-based investors do not agree on either answers to these questions or the issues’ relative importance.

While dozens of similar examples exist, the disagreement on McDonald’s illustrates both apparent and real incoherence in taking a socially responsible approach to investing. But in it lies real strength.

SRI criteria evolve as social investors’ understanding of the world about them changes. Even Paul Hawken, who faults SRI for its lack of an orthodoxy, recognizes that:
“What constitutes environmental social responsibility depends on the times and the common knowledge of those times. What might have been a responsible act by a company twenty years ago might be common practice but irresponsible today.”
Consider South African divestiture. A decade elapsed between apartheid becoming an issue in the U.S. (and the first efforts at corporate engagement) and divestiture’s emergence around 1980. Public awareness grew in response to the debate over engagement and divestiture. The remedy stayed controversial -- even within SRI -- until sanctions on South Africa ended in 1994 with Nelson Mandela’s election.

In 1991 in the midst of the controversy over sanctions, the Financial Times editorialized:
“To measure the effectiveness of an ethical sanction by whether it caused a country to make a U-turn makes as little sense as to describe sanctions against South Africa as futile because they have failed to destroy apartheid before now. The aim is to influence for the better. And opportunism as well as absolute values must play a part.”
No one has better summarized the aims of SRI.

In contrast, an orthodoxy would restrict our debates with corporations, government and society at large from which “the better” may emerge. An orthodoxy would drive dissenters from SRI and inhibit investors’ ability to grow in understanding -- something only debate produces. And from a practical standpoint, who would set the standards and decide when to change them?

Whatever their differences on issues, values-based investors share an intent to act responsibly with their money, to try to achieve social objectives while reaching their financial aims.

This shared intention keeps social investors who may disagree on some important issues working in partnership to advance causes on which they agree through shareholder activism. The Interfaith Center on Corporate Responsibility (ICCR) has fostered this pragmatic approach for 35 years. We should continue to follow ICCR’s example.

Peter Kinder is president of KLD Research & Analytics, Inc., in Boston which provides social research and indexes to institutional investors. This article is excerpted from his recent paper, “'Socially Responsible Investing': An Evolving Concept in a Changing World,” which can be downloaded in PDF format online.

Steven J. Schueth is president and chief marketing officer of First Affirmative Financial Network, LLC. An independent investment advisory firm registered with the SEC, First Affirmative specializes in serving socially conscious individual and institutional investors nationwide. A former director and spokesperson for the Social Investment Forum, Schueth lives in Boulder, Colo.

Mention of specific securities should not be considered a recommendation to buy or sell that security. For information regarding the suitability of any security for your portfolio please contact your financial adviser.