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SRI: Invest With Your Heart and Soul

Portfolio managers and individual investors are wise to choose socially responsible investing (SRI), which looks to benefit the environment, corporate governance, diversity, and humane treatment of animals. Pro or con?

Pro: Wallets United

The reasons for personal and corporate philanthropic investing vary as much as the people who give and the types of organizations to which they contribute. However one overriding factor generally holds true: We want our money to do the most good.

In my years as a consultant to philanthropic organizations, I have found that too often people overlook an entire other branch of money with which to do good—their investment dollars. We divide our money into two "wallets," the funds we donate to charity and the money we invest. What we forget is that while our money may be stored in two wallets, it’s all from the same source.

An example: Person A decides to donate $2,000 to an environmental group from his charity wallet. A worthy cause, but perhaps he fails to realize that some of the money from his investment wallet is funding companies that pollute the air, the very thing he wants to decrease. It doesn’t make much sense to fight a problem with one hand and fuel it with the other.

Person B has the same amount of money, $2,000, to donate. She too wants to do her part to clean up the environment. However, in addition to her donations, she uses her investments to work for her goals. By investing in environmentally friendly companies, she ensures her investments don’t fight her philanthropy. This is what socially responsible investing (SRI) is all about.

Certainly, there is no guarantee that Person B will make more money on her investments than Person A. But there is also no guarantee that Person A will make more from his investments. The only sure thing is that Person B allocated several of her assets to do good, not just her charitable gifts.

Con: Delusional Goodwill

It’s January, 2000. You manage or are investing in a fund that has decided to "do well by doing good" by investing in "good" companies—corporations deemed by KLD, Domini, Calvert, or other social researchers as progressive on the environment (no nuclear plants; against genetically modified organisms), corporate governance (independent boards), diversity (for gay rights; promoting women), and the like.

What do the socially responsible investments experts recommend? Enron is the centerfold for having independent directors. Krispy Kreme (KKD) is very charitable. Cendant is renowned for its diversity. HealthSouth (HLS) is involved in communities.

All imploded. And almost every one of the corporations that crashed for ethical reasons in recent years—Tyco (TYCO), Adelphia, WorldCom, Rite Aid (RAD), Qwest (Q), Global Crossing (GLBC), Lucent (ALU), and Kmart—were on SRI "buy" lists.

The dark secret of SRI is that it is neither art nor science: It’s image and impulse. It reflects ideological litmus tests, not social performance. U.S. stocks have an aggregate capitalization of $16 trillion. Selling one that is perceived as bad has no more impact than scooping a thimbleful of water out of the deep end of the pool.

And SRI-screened stocks certainly did not outperform the market as advocates claimed before the market headed into the buzz saw of the 2001 meltdown. Calvert’s and Domini’s two largest stock funds have lagged the S&P benchmark and its category competitors over 3-, 5-, and 10-year periods, costing investors and pension funds billions of dollars in potential returns. A Wharton study calculated that funds with ideological screens perform worse than the general market by 31 basis points—a month.

The use of social criteria may be fine for the affluent who gamble their own money as a feel-good, vanity investment—but for those who can’t afford to take a chance, SRI is a bad bet.

Opinions and conclusions expressed in the BusinessWeek Debate Room do not necessarily reflect the views of BusinessWeek,, or The McGraw-Hill Companies.

Reader Comments


SRI is probably only effective when practiced by large institutional investors. But, all things being equal, why not invest in a good-performing company that treats its workers well rather than one that treats them like Kleenex?


Let the markets decide. Too often the good sales pitch of a politically correct, socially conscious "investment" leads to an even worse mess. Care to invest in sugarcane plantations to grow ecologically friendly biofuels? Sure, why not? They're only cutting down the Amazon forest to clear the land for this sugarcane.


Gloria Steinem said the personal is political, and I have always chosen how to spend my dollars based on her witticism--for example: Buy American, organic, local, unpackaged, pre-owned, fair trade, etc. But, when it comes to publicly traded companies in the stock market, there is a huge gap between what the executive board says a company does, what management says the company does, and what actual operations really are. So how can anyone really feel in control of what one is funding if not intimate with the company? So, I flip-flop between being a mercenary and just going for the returns the International and Value Funds in my 401k bring and being my own (SRI) manager, personally managing my own portfolio, buying individual stocks outside of the retirement realm.


So what's wrong with an ideological litmus test? When you invest in a tobacco company, you are earning money from the sale of deadly tobacco products, no different from, for instance, the CEO of Altria.


For many years I have been a student of SRI, and the biggest beef I have had with this approach to investing is that it is an ineffective way to address an individual's social goals and concerns. The companies in which you invest have already raised money in an IPO, so your decision to own them has no impact on their practices.The most effective way to create change is locally and grass roots. Invest your money and time in your own community to create the change you seek and stop fooling yourself by thinking you are doing some good by not investing in Exxon.


The tide is changing, as global icons like GE truly pursue EcoMagination, and will have $20 billion or more of revenue as certified sustainable or "green" this year. Herman Miller invests more in its product materials so the company lowers the total lifecycle costs and overall waste streams. Novo Nordisk in Europe is completely committed to eliminating diabetes, using both business and social means as tools. And now Goldman Sachs has released its GS Sustain report saying that sustainable companies outperformed the MSCI World by 23% in 22 months. A firm called HIP Investor Inc. has established a model called the HIP Scorecard, which showcases how human impact drives profit--and can be used by investors, companies, and CEOs to realize this long-held dream. (Note: I am the author of the Scorecard.)


The concept of an SRI is a fantasy. In 26 years, I have never seen an SRI when I look at the entire picture of the actions of a company. For example, there is no such thing as "going green"--aside from closing the company and turning the property into a field. And there are always the college-age crybabies criticizing large companies, but the reality is that small companies are always sleazier than large ones. I know professionals in three industries who won't even deal with nonpublic companies because of their lack of integrity and governmental scrutiny. SRI is simply a gimmick that blows with the shallowest public perceptions of the moment. For example, how much carbon energy is going to be expended recycling all of those hybrid car batteries or putting them in landfills?

Peter D. Kinder

For the record, here is how in 2000 KLD treated in its reports and its index of the companies to which Jon refers. KLD's Domini 400 Social Index (DSI) represents the universe of stocks a social investor would buy.

Adelphia - Not on DSI

Enron - On DSI, but no Corporate Governance strengths reported

Global Crossing - Not on DSI

HealthSouth - Not on DSI and no Community Strengths reported

Kmart - On the DSI

Krispy Kreme - Not on DSI or in research (IPO in 2000)

Lucent - On the DSI

Qwest - Not on the DSI

Rite Aid - Not on the DSI

Tyco - Not on the DSI

WorldCom - Not on the DSI

Jon Entine

From Jon Entine:

The issue at hand, which Peter's post sidesteps, is this: Do SRI standards and ratings--not just at KLD, which represents a fraction of the SRI research community, but across the major social researchers--adequately identify high and low ethical fliers, so clients (including philanthropies and pension funds) are protected and can get maximum yield?

The answer (which is why the question was avoided) is a resounding no.

There are well more than two dozen major organizations that "socially screen" stocks. They often come down very differently on the same companies, making it impossible to determine which slipshod rating is better or worse. Essentially, it allows the investor to pick and choose best on his/her personal ideological idiosyncrasies...exactly the opposite of what the disciplined system of financial analysis (which by definition incorporates ethical factors) obviates.

For the record, every one of the firms that Peter mentions was recommended by KLD and/or other major "socially responsible" investment firms before its ethical shenanigans came to light.

"Socially responsible" investing standards and research is ideologically tainted and often slipshod--the firms do not have the talent or the ability to process contentiously debated "social" standards. Anyone who depends primarily on SRI research to identify the ethically and financially superior or inferior companies is taking a huge risk. One can do that with one's own money. No responsible investment fund, especially philanthropies or pension funds should gamble with the money entrusted to them, however, when there are safer alternatives that have proved to be no worse, and in many cases better, at spotting firms likely to have ethical and financial problems.

For the record, here is how various "social screens" judged the stocks in question before they imploded:

Adelphia--Bonds and/or stocks held by numerous SRI funds, including Green Century Equity Fund, which claims it only invests in companies cleared on the DSI.

Enron: Represented the single largest portion of the DSI index holdings in utilities (approximately 75%). Its report identified no accounting or governance problems at all with this company. Amy Domin, in her 2002 annual report letter to investors, writes: "Both Microsoft and Enron were favored by SRI investors for various model practices in 'corporate citizenship.'" An article in 2002 in GreenMoney says: "Enron was a component of two socially screened stock indexes, the Domini 400 Social Index and the Calvert Social Index, until it collapsed."

Global Crossing--GreenMoney, in 2002, writes: "The Calvert Social Index, for example, also includes one-time telecom high flier Global Crossing Ltd., which filed for bankruptcy protection last month and is also embroiled in an accounting scandal." Note that it remained in the index even after all the facts of its ethical shenanigans were known.

HealthSouth--The Christian Science Monitor writes, in 2004: "Calvert Fund also owned HealthSouth Corp. and ImClone Corp., both devastated by ethical improprieties among executives."

Kmart--On DSI and held by Calvert and just about every other SRI fund, each of which lost bundles of its clients money.

Krispy Kreme--On the Calvert Social Index and held by many SRI funds and widely praised for its generosity (but not, eventually, to its shareholders, who took a socially responsible bath).

Lucent--Held by everyone before the crash.

Qwest--Held by the Calvert Social Index, and widely held by social investors, until after its crushing fall.

Rite Aid--Was on the DSI, but dumped for reasons unrelated to its blowup; although Calvert dumped it in 1999, it remained on many SRI-approved lists until the scandals became widely known

Tyco--Held by Calvert until Tyco was midway through its disastrous stock price collapse, and not screened out of numerous social funds

WorldCom--Held, of course, by Calvert; also held by Citizens index fund.

Enough--the point is made. There is no standard of "social investing" that provides any material protection to investors looking to avoid firms that are financially or ethically problematic. The market itself does much better than using wildly contradictory social research standards offered by dozens of competing firms.

Studies have shown that SRI research costs investors more than 30 basis points. Call it an "ideological vanity tax." You can assess it on yourself, but let's not drag down philanthropies and/or pension funds with this ideological narcissism.

Jon Entine


No. I would recommend investing your $2,000 into your already well-rounded stock and bond portfolio. As far as helping out, how about taking a Christmas off and going down to the local soup kitchen (if that’s your thing). Or just put the $2,000 in with your already bountiful stock cash.

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