Advocates dismiss report blasting social investing

(October 14, 2004) The socially responsible investment movement is a failure, misleading investors with ineffective screening and deceptive advertising, according to a controversial new report. But SRI advocates are dismissing the study, calling it a misrepresentation of the industry.

“The SRI industry needs to change,” states the report, written by Paul Hawken and the California-based Natural Capital Institute. “While SRI investors call for corporate transparency, the industry is closed, proprietary and secret.”

“I really take offence at that statement,” says Eugene Ellmen, executive director of Canada’s Social Investment Organization (SIO). “The SRI industry is a leader in terms of transparency. We brought forward issues of mutual fund transparency, such as proxy voting. And it’s the SRI funds that have extensive policies and practices listed in great detail on their Web sites.”

Hawken, who studied more than 600 retail SRI mutual funds worldwide, claims that the cumulative investment portfolio of most SRI funds is virtually no different that the combined portfolio of conventional mutual funds and that the screening methods applied by most SRI funds allow practically any publicly-held company to be included in an SRI portfolio.

The study compares the blue chip stocks in the Dow Jones Industrial Average to the list of top equity holdings of American companies in SRI mutual funds. Eighteen were the same, including Microsoft, Coca-Cola and Wal-Mart.

“Over 90% of Fortune 500 companies are included in SRI portfolios,” Hawken says. “The most widely-held corporate investment in SRI mutual funds is Microsoft, a company known for its ruthless, take-no-prisoners management tactics, a company that was indicted by the U.S. Justice Department [for violating anti-trust laws].”

The report list numerous examples of “troublesome” companies that are included in SRI portfolios, including tobacco giant Altria, defence conglomerate Halliburton, chemical firm Monsanto and fast-food leader McDonald’s.

Ellmen agrees it’s true that some contentious companies are held in many SRI portfolios in Canada and the U.S. But he says that’s because of shareholder advocacy. “There are certainly issues around governance and sweatshops at Wal-Mart, for example, and some of our members are taking the company to task on that and supporting shareholder resolutions that are trying to reform Wal-Mart.”

“So is Hawken suggesting we should always take a purer-than-pure attitude towards companies like Wal-Mart, divest from them and disengage from them, forever losing the voice of the SRI community?” asks Ellmen. “That doesn’t make sense from a sustainability or social change perspective.”

Toronto-based SRI researcher Michael Jantzi says by looking only at screening, Hawken is guilty of a serious error of omission, and therefore lacks integrity.

“He focuses on a very narrow definition of SRI,” says Jantzi. “SRI is more than just screening out companies — it’s about engagement, which he doesn’t acknowledge whatsoever. He completely ignores those issues.”

In addition, Jantzi says the report is “disingenuous at best,” since he’s been told that Hawken is coming out with his own SRI product. “So to seemingly promote his product, he’s dumping all over the industry to make himself look better. That’s completely shocking.”

But not everyone is critical of Hawken’s report. Vancouver advisor Perry Abbey, a specialist in SRI, says although he doesn’t fully support the study, he agrees the majority of sustainable or ethical funds in North America are what he would categorize as “SRI Light.”

“Not necessarily a bad thing in itself and I am sure there is a ready market for it,” he writes in the SIO’s online forum. “[It’s] just that it can be a bit misleading for those clients truly committed to change in this troubled world. These consumers are increasingly sophisticated and informed and are less and less likely to accept lightweight screening standards.”

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“If Paul’s article sparks some efforts by the broader SRI fund industry to walk their talk a little more, he has done us all a great favour,” Abbey adds. “If we choose to ignore constructive criticism and not engage these issues we are doomed to stay a tiny irrelevancy on the edge of the financial services industry.”

Filed by Doug Watt, Advisor.ca, doug.watt@advisor.rogers.com

(10/14/04)

Doug Watt