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Sierra Magazine
Hearth and Home: Responsible Investing

Is it living up to its promise?

by Sarah Rose

Socially responsible investing has finally come of age. The old argument that do-gooder investors cheat themselves out of top performance is passť. Millions of Americans are factoring companies' social and environmental policies into their investment decisions, and funds such as Calvert and Domini Social Equity have proven that they can outperform their less choosy peers year after year. Now mainstream mutual fund families (most recently Vanguard) have gotten into "SRI," launching funds that screen out tobacco companies, weapons makers, and the worst polluters.

Even corporate America has begun to endorse this stock-picking style, with the Gap, Hewlett-Packard, and General Motors offering socially responsible company choices in their 401(k) plans. Consequently, between 1997 and 1999, assets in social portfolios and community investing ballooned by 82 percent--twice the rate of all U.S. assets--to surpass $2 trillion, some 13 percent of the $16 trillion under professional management.

Now that social investing has grown up, it's fair to consider whether it is living up to its promise. Does it merely salve the consciences of individual investors, or does it actually change the world for the better?

There are three primary measures of social investing's impact: screening, shareholder activism, and community development. At the minimum, social funds practice "avoidance screening" to eliminate gross polluters and other retrograde companies from their portfolios. Most of the established social funds go further, screening affirmatively to find the most progressive companies (relative to their own industries). For example, Bank of America's record of lending for small businesses and economic development might put it at the top of the financial-services sector. Among oil companies, BP Amoco has been recognized for its investments in solar fuel alternatives.

Such proactive funds are also more likely to participate in shareholder activism, both through dialogue with management and annual shareholder votes. Since many of the discussions take place behind closed doors, it's hard to measure their impact, although as social funds' assets have grown over the past several years, so has their clout to criticize practices and suggest alternatives. A decade ago social investors were lucky to get through to a public-relations person; today, many have the ear of the chief financial officer. "When you have a lot of money behind you, companies have to address your issues," says Elizabeth McGeveran, vice president of Friends Ivory & Sime, a London-based social-investment management firm with $60 billion in assets.

Only after discreet efforts at engagement fail will investors make their activism public by filing a shareholder resolution, essentially a public request for change. "Resolutions are the tips of the icebergs," says Peter Kinder, president of Kinder, Lydenberg, Domini, & Company, the social research firm that created the Domini 400 Social Index, SRI's answer to the Standard & Poor's 500. "There is a tremendous amount of work below." Domini filed ten shareholder resolutions in the 2000 proxy season and is in dialogue with another five companies. The resolutions are published in a company's proxy statement and voted on at the annual shareholder meeting. According to the Social Investment Forum, a nonprofit industry association, social investors filed 220 resolutions with some 150 companies in 1999. While such resolutions rarely receive a majority vote, even achieving 10 percent can send a strong message to the company.

What does this financial activism do? Last year shareholders helped get Home Depot to agree to phase out old-growth timber from its stores. After a three-year campaign, investors influenced General Electric to spend $150 to $250 million to clean up toxic PCBs in the Housatonic River in western Massachusetts. They also persuaded Ford, General Motors, DaimlerChrysler, and Texaco to drop out of the Global Climate Coalition, a group that maintains that global warming is not real.

Most recently, investors prompted Merrill Lynch and Morgan Stanley to reconsider financing the environmentally disastrous Three Gorges Dam in China. And more than 50 companies, from Coca-Cola to Niagara Mohawk Power Corporation, have now agreed to adopt a ten-point code of environmental responsibility put forward by the Coalition of Environmentally Responsible Economies (CERES), which was founded by a group of investors in 1989 in response to the Exxon Valdez disaster.

There are dozens of other examples of shareholders pushing companies to change their ways, but social investors are quick to admit that their efforts alone are usually not sufficient. In fact, the most successful campaigns (including most of those noted above), have been waged in combination with other investors, activists, and consumers. "Shareholder activism on its own doesn't work very rapidly," says Conrad MacKerron, senior director of As You Sow, a group that coordinated investors in the Home Depot campaign. "When you add the grassroots component, it's a wonderful complementary action."

In addition to weeding out bad actors and engaging in shareholder activism, social funds should ideally channel money to financial institutions engaged in community development--community banks, credit unions, and loan funds that focus on local needs like low-income housing or funding for minority entrepreneurs. Unfortunately, only a small fraction of the $2 trillion of socially responsible money goes toward community development. "I'm a little disappointed with the lack of resources on the community end," says Peter Kinder. The Social Investment Forum recommends that social investors put one percent of total managed funds into community development; if they did, the assets in that sector would more than triple.

Through their financial activism, social investors have helped bring environmental issues to many boardrooms for the first time. Today, environmental performance, racial diversity, and gender equality are mainstays of company reports; some of the biggest blue chips have created entire departments to oversee these areas. "You can go to the Web sites of companies like BP Amoco and Ford and see a real change in attitude," says Tim Smith, executive director of the Interfaith Center on Corporate Responsibility (ICCR), a coalition of religious organizations that has coordinated shareholder resolutions for decades. "Every dollar that goes into a social fund is making a very powerful statement," says Alisa Gravitz, executive director of Co-op America and vice president of the Social Investment Forum. "I have had CEOs of Fortune 500 companies tell me that, yes, they get pressure from all kinds of sources, but when the investors get involved they know the issue is not going to go away."

With pioneers like Domini and Calvert dedicating staff resources to talking with companies and filing shareholder resolutions, participation in shareholder activism does seem to be growing among the larger funds. "Up until recently, the ICCR has done most of the heavy lifting themselves," says Conrad MacKerron, "but within the last two years we have seen funds step up to the plate." Still, too many are content to sit on the sidelines. "Some of these funds are what I call 'SRI Lite,' " says Steve Schueth, president of First Affirmative Financial Network.

TIAA-CREF, for example, manages a $200 billion pension fund for teachers and runs the largest socially screened portfolio in the country, the Social Choice account, with almost $3 billion in assets. Yet, says Schueth, "TIAA-CREF only avoids the worst of the worst; it is not about social change. Vanguard is another one; its new social index emulates one from Calvert, but this is not a fund that will do shareholder activism or community development."

Some smaller funds, too, claim they don't have the resources to be proactive. "Shareholder activism is very time consuming and expensive," says Kathy O'Connor, a fund manager at Towneley Capital. "I personally don't have time to be a shareholder activist."

"A lot of the things social funds take on are more expensive," adds Catherine Hickey, an analyst at Morningstar, a mutual-fund research firm. "Certainly you do see that some social funds charge more than plain vanilla funds." Even so, the management fee for the average social fund is about 1.6 percent versus about 1.4 percent for the average domestic stock fund-not much.

Smaller funds could improve their impact by paying more attention to smaller players. Most social portfolios are skewed toward large companies, which means that small progressive companies are less likely to be rewarded for their efforts. Also, little venture capital money is earmarked exclusively for progressive startups.

A new tactic now has some social investors buying shares in companies not for future profit but for the express purpose of filing shareholder resolutions to influence corporate policy. This year, for example, 17 shareholder resolutions have been filed with companies developing or marketing genetically engineered foods, including Quaker Oats, Kroger, and Philip Morris's Kraft Foods. In exchange for the dropping of a resolution against DuPont, the company agreed to sit down and talk with critics.

The Sierra Club is taking the message to heart. This summer, its board of directors voted unanimously to establish a corporate-accountability fund with which to purchase shares in decidedly un-green companies, and to then integrate shareholder actions with the Club's priority campaigns. Just think of it as a new way to put money to work.


Sarah Rose writes for Money magazine and other publications. For more information about responsible investing, see www.shareholderaction.org, a site organized by the Social Investment Forum.


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