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.