The Best Opponent:Social Investing and Its Critics
Lloyd KurtzNelson Capital Management24 February 2005
The best athletewants his opponent at his best.
The best generalenters the mind of his enemy.
The best businessmanserves the common good.
The best leaderfollows the will of the people.
-Lao Tzu, Tao Te Ching
Topics
Definitions Normative vs. Positive
Normative Perspectives Positive Perspectives
Conclusion: The Best Opponent
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.
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
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.”
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.”
Normative and Positive Commentators
Normative Positive
Supportive of SRI
Nat’l Conf of Bishops (1986)Peter CamejoPietra Rivoli (2003)
Meir Statman (2000)Marc Orlitzky (2003)Rob Bauer (2002)
Skeptical of SRI
Jon EntinePaul HawkenMark Schwartz (2003)
Chris Geczy (2003)Arthur Laffer (2004)Jeffrey Teper (1992)
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
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.”
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.
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.
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.”
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.”
The LiteratureNumbers in parentheses show # of Moskowitz Prizes and Honorable Mentions.
Financial Academics (5)Journal of Finance
Working Papers
Financial Practitioners (2)Financial Analysts Journal
Journal of Investing
Management Researchers (4) Academy of Management Journal
Journal of Business
Independent Organizations (1)World Resource InstituteEnv. Protection Agency
EconomistsAmerican Economic Review
The Economic Journal
Research FirmsInnovest, IRRC,
Inst. Shareholder Services
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.
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.
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
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
Further Information
Online bibliography of SRI: http://www.sristudies.org
My SRI blog: http://srinotes.blogspot.com
My e-mail: [email protected]
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.