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Socially Indifferent Investing

If you are anything like me, then you missed out on the annual Socially Responsible Investors in the Rockies Conference, which commenced this past weekend. Luckily, Reuters told us all about it.

Socially Responsible Investing, as we will see shortly, has become a big business in and of itself. But what to make of this concept? You might expect me to ridicule the whole movement, but I am not going to. Libertarians believe that the “responsibilities” of a corporation boil down to maximizing shareholder value while complying with the law, but I can find a lot of common ground with the SRI crowd. The problem is that an investor who tries to incoporate SRI principles into his portfolio will be led down any number of blind alleys.

In theory, I think that SRI is a great idea. If progressive types feel the need to bathe themselves in self-congratulatory rhetoric before participating in the capitalist system, that is fine with me. We would all be better off if environmentalists and consumer advocates used their own actual money to try to make things better, rather than pester the rest of us with their demands for more burdensome regulatory restrictions. Under the right conditions, even the most avowed socialists are willing to play — as his financial disclosure for the 2000 presidential race makes clear, Ralph Nader invests heavily in corporate equities (PDF file, requires Adobe Acrobat Reader or similar). (Heh heh, OpenSecrets.org strikes again!)

Unfortunately, determining which companies are “socially responsible” quickly degenerates into a Sisyphean task. What will be the next “politically incorrect” technology or product? Fast food? Cell phones? Tanning salons? Big Chocolate? What will be the next country to face a Chomsky-approved “divestment campaign” a la Israel? I have some very recent finance textbooks that celebrate the exemplary corporate citizenship of… Enron. Another problem is that nobody seems quite sure what “responsible” corporate behavior is supposed to entail. Consider the results of this eye-opening Zogby poll from earlier this summer. When asked to prioritize a variety of ethical business practices, only 23% of college seniors (and only 43% of the business majors surveyed) placed “providing clear and accurate business statements to stockholders and creditors” at the head of a list dominated by loosely defined social and environmental goals.

To the extent that collegiate business ethics courses are sending a unified message, it seems to be: a socially responsible corporation hires and promotes women and minorities, sucks up to organized labo(u)r and keeps its products dolphin-safe. Actually telling the truth to the investment community is not part of the deal. Heck, investors and creditors deserve to be lied to — they are just a bunch of greedy fat cats anyway.

Outside of academia, one of the most ambitious efforts at identifying “socially responsible” firms has come from guru Amy Domini. Her Domini 400 Social Index provides a diverse list of 400 American corporations that meet the “SRI” profile. But after scrolling down the list — even much past the A’s and B’s — one begins to wonder what principles, if any, guided the compilation of the list.

The Domini Index seems to accept a lot of compromises. Industrial giant Cummins makes the list because of their community involvement in the towns where their factories reside, and for their progressive profit-sharing plan. But Cummins makes Diesel engines, which are anathema to environmentalists. Tupperware makes the list because they have so many females in the upper ranks of the company — but they sell stuff that is made of plastic.

The Domini Index also appears to create moral distinctions in areas where none should necessarily be drawn. Companies such as Detroit-based software giant Compuware have been recognized for their widespread distribution of stock options. Now, employee compensation can take on a huge variety of forms: straight pay, overtime, vacation benefits, subsidized optical and dental care, profit sharing, stock options, family leave, 401(k) matching, etc. Different employees have different pay preferences — as a single, 27-year old, healthy male with an advanced degree, I would prefer a larger salary and more generous 401(k) matching to “family-based” benefits, while one of my middle-aged coworkers with three kids in college might have totally different priorities. Why are some forms of compensation more “socially responsible” than others? Labor costs are labor costs, except, it seems, in the Carrollian world of SRI.

Investors who do not wish to tackle such weighty ethical issues themselves can turn to the financial sector, where a variety of SRI-based mutual funds are willing to invest your cash. However, mutual funds that specialize in socially responsible investing, such as the Calvert family of funds, do not limit themselves to the securities of firms that make the Domini Index. As James Sheehan explains in a recent Mises Institute newsletter:

SRI funds also have some pretty strange names in them. The Calvert Social Index Fund owns shares in The Gap, which makes clothing in Third World nations. Also holding the Gap is Citizens Core Growth Fund, an SRI fund that invests 5% of its assets in Microsoft.

In practice, many SRI funds keep “bad” companies in their portfolio while they gradually try to influence the company’s behavior through emails, management meetings, and shareholder resolutions. In practice, this gentle persuasion can go on for years with minimal effect, offering the SRI investor no assurance that his money isn’t being used for “evil” capitalist purposes during the lengthy persuasion period.

In some cases, the SRI funds are so lax with their standards that offending companies merely have to pay lip service to “social responsibility” in order to remain in the fund manager’s good graces.

A “hedge fund” is a sort of meta-fund that invests in other mutual funds. As this passage from Sheehan makes clear, SRI-oriented hedge fund couldn’t invest in SRI funds! Not only are funds like Calvert misleading, some of them charge their investors unusually high “loads” and other fees. How socially responsible is that?

I believe that investment is an intrinsically moral endeavor. Without saving and investment, it is not possible to have an organized industrial society. For that reason, I am glad to see anyone, even fierce critics of capitalism, saving and investing. I just don’t like it when they pretend that their investing is morally superior to mine.

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1 comment to Socially Indifferent Investing

  • These sorts of funds have always had the feeling of a con to me. It’s too easy to exploit well-meaning people, and anyone who invests in such funds is certainly that.

    I saw story a few years ago about a group of nuns who invest some of their money in corporations they feel are acting immorally. They then go to stockholder’s meetings, and pester people until the get an answer. I doubt it’s had much of an effect, but it’s a nifty idea. They donate the proceeds to charity, so it’s all in good fun.

    Progressives will probably have a lot better luck investing their money in evil companies, and using the proceeds in a PR campaign (as Nader seems to be doing), than they will in these “responsible” investment funds.