SRI Notes

Some Useful Blogs

Here are some blogs I've found useful, some SRI-related and some not. One good way to organize your blog reading is bloglines.com, which also allows convenient access to news services like the BBC.

• I wonder when the folks at socialfunds.com are going to be recognized for their outstanding efforts over the years. Where else are you going to read about Pax World's decision on Starbucks, or Adam Seitchik's move from Deutschebank to Trillium? No RSS feed, unfortunately, so you can't use bloglines, but you can get their news e-mailed to you.
• From time to time I visit Socialedge, which is sponsored by the Skoll Foundation. The signal to noise ratio can be low, at least for me, but there are also interesting things there that I don't see anywhere else.
• For electronic privacy issues and the Microsoft/open-source battle you can't beat Slashdot, the preferred news source for nerds everywhere.
• He's not a social investor, but Andrew Tobias knows a lot about money and has a good running conversation with his readers on both financial and social topics.
• I've looked for a decent economics blog, and haven't found many - odd, since there are so many economists. I like this one from an economist at the University of Chicago, which gives strong daily commentary on the most important data.

Jeff MacDonagh Joins

Jeff MacDonagh, the third of our triumvirate of social researchers, joins the blog. Jeff is a portfolio manager for socially responsible investors at Loring Wolcott & Coolidge Office and holds the CFA designation. Like Paul Hilton and Steve Lippman, he is an organizer and member of the Social Investment Forum's Social Investment Research Analyst Network.

According to his bio, "in his former life, he invented a new energy efficient lighting technology. Jeff grew up in Midland, Michigan, home of Dow Chemical, where the acrid smell of chemical plants was celebrated as progress."

Welcome, Jeff!

My Breakfast With Steven

I had breakfast this morning with Steven Lydenberg, my boss when I worked at KLD and now the Chief Investment Officer for Domini Social Investments.

It's hard to overstate Steve's importance to social investing. He was arguably the first person to make a full career of social research on corporations. Over the years he played leadership roles in social research at the Council on Economic Priorities, Trillium, KLD, and now Domini. If you pick a moment in Steve's career and look at what he was doing, you usually see that: 1) he was one of only a few people doing it; 2) it was something everyone in SRI was doing a few years later. When Steven started work on the Domini Social Index there were no broad-based equity benchmarks for social investors. Today there are at least a dozen.

Dylan Thomas once said of Thomas Hardy's poems that people should "read all of it, the whole damn lot," and I feel the same way about Steve's writing on social research. It's all good. Go onto Amazon and pick up a used copy of his Rating America's Corporate Conscience. Read his chapter in the 1992 Social Investment Almanac. Take a look at Investing for Good, which he co-authored with Amy Domini and Peter Kinder.

But first read his new book, Corporations and the Public Interest: Guiding the Invisible Hand.

"I think Hawley and Williams are really onto something with their Universal Owner concept," Steve says as we eat. "We have to think about the broader impacts of corporate behavior. Adam Smith said poor countries have very profitable companies. He meant there's not enough competition to drive innovation. He called them 'monopolies at the expense of their countrymen.'

"There's been a secular shift in our society to corporations since at least the 1980s. The pendulum has been swinging away from government, and now governments feel maybe it's swung too far. Tony Blair has a Minister of Social Responsibility. France requires social disclosures on corporate financial statements. Uruguay has passed a constitutional amendment that forbids privatization of water. Even the Wall Street Journal editorial page says 'markets need adult supervision.'

"And that creates a dilemma - how do you do that? How do you direct corporations to the public interest? We need new vocabulary to do that, new data. And I think SRI can bring great value to universal investors. We can bring fresh perspectives to risk, intangible assets, and wealth creation.

"Social investors have a lot to say about risk, especially long-term risk, because we're used to looking at things the mainstream is resistant to examining. Asbestos, tobacco, global warming: social investors were talking about these things long before the mainstream took notice. We need to take that forward, look at risks, and try to quantify the true costs to society of these activities.

"Investment in all stakeholders creates an intangible asset, but the mainstream doesn't know how to value it. Look at the study Epstein and Schnietz did of the market impact of the WTO protests. There's value to a good corporate reputation, even if the market doesn't always reflect it.

"And social initiatives can create value. Jed Emerson's blended value concept is a really useful way to think about it.

"I think those are the things that will bring social investment more into the mainstream. The pieces are on the table, but they still have to be sorted out and assembled. That's the work we have ahead of us."

Steve Lippman Joins

Steve Lippman, the senior analyst on Trillium's Social Research and Advocacy Team, has joined. 

Like Paul Hilton, Steve is part of a new generation of social researchers who are helping take SRI to the next level.  Corporate social research for investors has historically been done by a relatively small cadre of people, and as recently as the early 90's there were no more than a dozen people who were able to make a career of it.  Today there are probably hundreds, and social research is taking on the hallmarks of a profession in its own right.

Grist magazine recently interviewed Steve - you can read it here.

Welcome Steve!

Paul Hilton Joins

Paul Hilton has joined the blog.  Paul is Portfolio Manager for Socially Responsible Investing at Dreyfus Funds, and an expert in social investment research.  He also serves on the Social Investment Forum's Advocacy and Public Policy Steering Committee.

Welcome Paul!

Nice Update on the Performance Debate

No author is credited, but there is a concise and balanced review of recent evidence on SRI performance at the website of Phillips, Hager & North, a Canadian investment firm. In addition to the more widely-known evidence, they cite several Canadian studies I hadn't seen, and reach the usual conclusion that no cost to SRI has been observed.

But the anonymous writer finishes with an important point:

"The question of whether or not SRI reduces investment returns will never be laid to rest. One reason is that this is a difficult empirical question and there will always be legitimate disputes over the quality of the data and the most appropriate methodology to use. Perhaps more importantly, this question will never be answered to everyone's satisfaction because many of the people engaged in this debate carry with them strong ideological baggage. Opponents of SRI are so against the notion of anything other than financial factors affecting the value of a security that, in their view, 'hell will freeze over' before they accept that this is not the case. Likewise, some proponents of SRI are so steeped in their own moral superiority that they cannot fathom the possibility that the integration of social and environmental factors does not have a beneficial effect on investment returns. The challenge for the rest of us is to ignore the rhetorical noise emanating from these extreme views and focus on the facts."

There's one other reason why we'll never have a final answer - the social screens themselves change over time.  When the Domini Index was first developed in the late 1980s, South Africa was a key issue.  In the early 1990s the emphasis shifted to the environment.  Later on international labor standards moved to the forefront, and then corporate governance.  So even if the ideological noise could be set entirely aside, we still would never have a final answer.

This is a familiar problem in finance.  A physicist friend once told me that physicists tend to have a hard time on Wall Street.  "Gravity has worked the same way for millions of years," he explained, but the markets are not so cooperative.

An Excellent Book

A friend recommended Marc Gunther's Faith and Fortune, and (after learning I was quoted in it) I dashed to the bookstore to have a look.  It's excellent.

Gunther is a senior writer at Fortune (he wrote the article on SRI funds mentioned below), and he writes well. This matters because many authors have trouble with this topic. Some fall into a dry academic style, others let the diversity of the topic muddle their thinking, and still others get up on the soapbox and preach. Gunther avoids all of these and his clear prose and storytelling skill set Faith and Fortune apart.

He focuses for the most part on CEOs, delivering chapters on Southwest Airlines, Timberland, and Tom's of Maine. These stories have been told, but not as thoroughly or as well as Gunther tells them. The same is true of his chapter on Amy Domini. But he also honors Barbara Waugh at Hewlett-Packard, noting that "more than anyone I know, Waugh has found a way to change corporate America from within." And he introduces us to Ricardo Levy, a man I'd never heard of, but whom everyone interested in this topic should know about.

Gunther also investigates the spiritual aspects of corporate social responsibility, and notes a broad revival of religious interest in this country:

The spiritual revival in the workplace reflects, in part, a broader religious reawakening in America, which remains one of the world's most observant nations. (Depending on how the question is asked, as many as 95% of Americans say they believe in God; in much of Western Europe, the figure is closer to 50%.) The Princeton Religious Research Index, which has tracked the strength of organized religion in America since World War II, reports a sharp increase in religious beliefs and practices since the mid-1990s. When the Gallup Poll asked Americans in 1999 if they felt a need to experience spiritual growth, 78% said yes, up from 20% in 1994; nearly half said they'd had occasion to talk about their faith in the workplace in the past 24 hours.

He might be onto something here.  Jim Collins found in his acclaimed Good to Great project that the best leaders were quite humble. He reported on the success of Kenneth Mockler of Gillette, a deeply committed Christian who sought to bring his values to the workplace. Gunther interviews Collins for the book and finds that several of the Good to Great CEOs were deeply religious.

Still, I have wonder: despite this religious revival, the last ten years will go down in history as among the most scandalous in the history of American business - what were all these people doing at the office?

Refreshingly, Gunther saves the question of whether social responsibility pays for the last chapter. And he concludes that the question is unanswered and perhaps doesn't even need to be answered. This intellectual honesty is so refreshing - I wish other books had more of it.

Faith and Fortune is carefully researched, clearly written, never boring, and often instructive.  Highly recommended.