The Best Opponent: Social Investing and Its Critics

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The Best OpponentSocial Investing and Its
Critics

• Lloyd Kurtz
• Nelson Capital Management
• 24 February 2005

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• 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

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Topics

• Definitions
• Normative vs. Positive
• Normative Perspectives
• Positive Perspectives
• Conclusion The Best Opponent

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Definitions
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Definitions

• Critics argue that social responsibility is
  ill-defined
• Hawken, The Economist, and Fortune make this
  point.
• (What isnt?)
• 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.

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Definitions (contd)

• 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

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Normative vs. Positive
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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.

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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.

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Normative and Positive Commentators
Normative Positive
Supportive of SRI Natl Conf of Bishops (1986) Peter Camejo Pietra Rivoli (2003) Meir Statman (2000) Marc Orlitzky (2003) Rob Bauer (2002)
Skeptical of SRI Jon Entine Paul Hawken Mark Schwartz (2003) Chris Geczy (2003) Arthur Laffer (2004) Jeffrey Teper (1992)
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Normative Perspectives
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A Proponents 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
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Entines 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.

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Entines 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.

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Schwartzs 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 industrys screening is not transparent.
• See Rivolis (2003) response.

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The Starfish Story
Source Domini Social Investments website, 2005
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Hawkens 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.

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Dixons Critique

• Dixon (2004) believes change needs to be faster.
• Despite social investors efforts there are still
  no sustainable companies.
• SRI also doesnt 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.

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Positive Perspectives
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The LiteratureNumbers in parentheses show of
Moskowitz Prizes and Honorable Mentions.
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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.

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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.

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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
• RD
• Many studies show positive benefit
• Areas Associated with Underperformance
• Unionization
• Blachflower (1991) claimes negative financial
  effects

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Conclusion
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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

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Further Information

• Online bibliography of SRI
• http//www.sristudies.org
• My SRI blog
• http//srinotes.blogspot.com
• My e-mail
• lklyk_at_pacbell.net

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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.