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The Best Opponent: Social Investing and Its Critics

This article discusses the definitions, perspectives, and critiques of social responsibility investing (SRI). It explores the normative and positive viewpoints, as well as examines the arguments made by critics of SRI. The article also addresses performance issues and tests conducted on SRI.

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The Best Opponent: Social Investing and Its Critics

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  1. The Best Opponent:Social Investing and Its Critics Lloyd Kurtz Nelson Capital Management 24 February 2005

  2. The best athlete wants his opponent at his best. The best general enters the mind of his enemy. The best businessman serves the common good. The best leader follows the will of the people. - Lao Tzu, Tao Te Ching

  3. Topics • Definitions • Normative vs. Positive • Normative Perspectives • Positive Perspectives • Conclusion: The Best Opponent

  4. Definitions

  5. Definitions • Critics argue that social responsibility is ill-defined • Hawken, The Economist, and Fortune make this point. • (What isn’t?) • “Socially Responsible Investing” (SRI) Can Mean • The general practice of screening portfolios • Investing w/ the “Progressive Consensus” • Other Paradigms • Catholic (Diocesan vs. Orders) • Conservative Christian • Moslem • Environmental • Community Investment, Microlending, etc.

  6. Definitions (cont’d) • “Progressive Consensus” Exclusions • ‘Sin Stocks’: alcohol, tobacco, gambling, firearms, pornography • Involvement in weapons manufacturing • Involvement in Nuclear Power • Major product safety, employee relations, or environmental issues. • Problematic Issues • Sweatshops • Antitrust • Social Screening Policies Available at: • www.calvert.com • www.domini.com • www.kld.com

  7. Normative vs. Positive

  8. Levels of the Debate • Normative – “How Things Ought to Be” • Values-Driven • Political • Ethical • Religious • “SRI is misguided.” • Positive – “How Things Work” • Fact-Driven • Financial • Economic • Demographic • “Here is evidence that SRI underperforms.”

  9. Milton Friedman Illustration • Books • Normative - Free to Choose • Positive - A Monetary History of the United States • Quotes • Normative: “The social responsibility of business is to make money.” • Positive: “In most cases [social] investing is neither helpful nor harmful.”

  10. Normative and Positive Commentators

  11. Normative Perspectives

  12. A Proponent’s View “Although all members of the Church are economic actors every day of their individual lives, they also play an economic role united together as Church. On the parish and diocesan level, through its agencies and institutions, the Church employs many people; it has investments; it has extensive properties for worship and mission. All the moral principles that govern the just operation of any economic endeavor apply to the Church and its agencies and institutions, indeed the Church should be exemplary.” - National Conference of Catholic Bishops, 1986 Pastoral Letter

  13. Entine’s Critique • Entine believes social investing as currently practiced is contradictory and hypocritical. • “Merely hypocritically, anti-alcohol screens ban liberal oenophiles from investing in California wineries.” • “More troubling, defense firms--those developing missiles to protect Tel Aviv and San Francisco from Scud missile attacks--are rejected as warmongers.” • “And while some funds screened out Enron Corp. on the principle that all energy firms are "bad," its limp commitment to renewable energy and its now infamous ethical-sounding Code of Conduct made it a favorite among the largest firms like Domini Social Investments.”

  14. Entine’s Critique (edited) • Alcohol companies will be screened out, even though many social investors drink. • Manufacturers of weapons are excluded, even though many people think weapons are ok. • Domini owned Enron.

  15. Schwartz’s Critique • Schwartz (2003) believes that the ethics of the social investment industry need scrutiny. • Calling yourself ethical imposes a higher ethical duty. • Some industry advertising is vague or misleading. • Some of the screens are not ‘ethical’ (e.g., Military). • The industry’s screening is not transparent. • See Rivoli’s (2003) response.

  16. The Starfish Story Source: Domini Social Investments website, 2005

  17. Hawken’s Critique • Hawken argues social investing as currently practiced is insufficient. • “The cumulative investment portfolio of the combined SRI mutual funds is virtually no different than the combined portfolio of conventional mutual funds.” • “The environmental screens used by portfolio managers are loose and do little to help the environment.” • “Few SRI mutual funds engage in shareholder advocacy or sponsor activist shareholder resolutions.”

  18. Dixon’s Critique • Dixon (2004) believes change needs to be faster. • Despite social investors’ efforts there are still no sustainable companies. • SRI also doesn’t do enough to address the systemic obstacles to change. • Assessments of corporate responsibility should include companies’ efforts to create systemic change, not just “incremental leaders.”

  19. Positive Perspectives

  20. The LiteratureNumbers in parentheses show # of Moskowitz Prizes and Honorable Mentions.

  21. What About Performance? • "When we here at Morningstar have conducted performance studies of socially responsible funds in the past, we've found that the offerings - as a group - perform about as well as funds that pay no attention to ethical considerations when building their portfolios.” - Hall (2004) • Bauer et al (2002) find no performance issues for mutual funds. • DiBartolomeo and Kurtz (1999) find no performance issue with the Domini Social Index.

  22. Positive Tests of SRI • Social screens might interfere with active management strategies. • Abramson (1998) finds no problem for value managers. • Kurtz (1997) finds no problem for growth managers. • Social responsibility and financial performance. • Orlitzky (2003) finds positive association. • Laffer (2004) finds no relationship or a small negative one.

  23. Claimed Alpha is Very Issue-Dependent • Areas Associated with Outperformance • Environment • Derwall et al (2004) claim positive impact • 100 Best Companies to Work For • Kurtz and Luck (2003) claim positive impact • R&D • Many studies show positive benefit • Areas Associated with Underperformance • Unionization • Blachflower (1991) claimes negative financial effects

  24. Conclusion

  25. The Best Opponent • Financially sophisticated • Principled, but not dogmatic • Unburdened by a personal agenda • Presents evidence, expects the same of you • Seeking to persuade, open to persuasion • Engagement is transformative

  26. Further Information • Online bibliography of SRI: • http://www.sristudies.org • My SRI blog: • http://srinotes.blogspot.com • My e-mail: • lklyk@pacbell.net

  27. Notes • Abramson, Lorne, and Dan Chung. "Socially Responsible Investing: Viable for Value Investors?" Journal of Investing, Fall 2000. • Bauer, Rob, Kees Koedijk, and Roger Otten. "International Evidence on Ethical Mutual Fund Performance and Investment Style." Working Paper, January 2002. • Blanchflower, David, Neil Millward, and Andrew Oswald. "Unionism and Employment Behavior." The Economic Journal, July 1991. • Derwall, Jeroen, Nadja Gunster, Rob Bauer, and Kees Koedijk. "The Eco-Efficiency Premium Puzzle." Erasmus University Working Paper, May 2004. • Dixon, Frank. “Adapting to the Age of Truth: Addressing Systemic Barriers.” SRI in the Rockies Conference, October 2004. • Economic Justice For All: A Pastoral Letter on Catholic Teaching and the U.S. Economy. National Conference of Catholic Bishops, 1986. • Geczy, Christopher C., Robert F. Stambaugh, and David Levin. "Investing in Socially Responsible Mutual Funds." Wharton School, Working Paper, May 2003. • Hall, Emily. "Evaluating Socially Responsible Funds." www.morningstar.com, July 7, 2004. • Kurtz, Lloyd and Chris Luck. "An Attribution Analysis of the 100 Best Companies to Work for in America.“ Presentation to Northfield Investment Conference, Fish Camp, California, May 5-7, 2002. • Kurtz, Lloyd. "The Impact of Social Screening on Growth-Oriented Investment Strategies," The Journal of Performance Measurement, Spring 1997. • Laffer, Arthur B., Andrew Coors, and Wayne Winegarden. "Does Corporate Social Responsibility Enhance Business Profitability?" Laffer Associates, 2004. • Orlitzky, Marc, Frank L. Schmidt, and Sara L. Rynes. "Corporate social and financial performance: A meta-analysis." Organization Studies, 24, 2003. • Rivoli, Pietra. “Making a Difference or Making a Statement? Finance Research and Socially Responsible Investment.” Business Ethics Quarterly, July 2003. • Schwartz, Mark. "The 'Ethics' of Ethical Investing." Journal of Business Ethics, March 2003. • Statman, Meir. "Socially Responsible Mutual Funds," Financial Analysts Journal, May/June 2000. • Teper, Jeffrey. "Evaluating the Cost of Socially Responsible Investing," in Kinder, Peter, Steven Lydenberg, and Amy Domini, ed., The Social Investment Almanac, New York: Henry Holt, 1992.

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