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The sham of "socially responsible investing"

April 11, 2007

Tags Financial MarketsCapital and Interest TheoryMoney and Banking

The sham of socially responsible investing (SRI) is exposed in a recent New York Times column by Joe Nocera. This incisive article concludes that SRI "oversimplifies the world, and in so doing distorts reality."

SRI silliness is highlighted by its preference for BP over ExxonMobil. For years, BP has been SRI-favored for endorsing the theory of global warming. "But in 2005, a BP refinery in Texas had a major explosion, killing 15 workers and injuring more than 100 others. And last year, the company spilled oil in the North Slope of Alaska. The world woke up to the fact that BP had a pretty shoddy safety and maintenance record," writes Nocera. Exxon Mobil, a company detested by the greens for publicly doubting the global warming theory, has been banned from SRI portfolios (since 1990) despite having a terrific worker safety record, and no serious oil spills since 1989. SRI investors foolishly missed out on fantastic investment returns in what would become the most profitable company in the world.

The standards for social responsibility are another blotch on SRI. Two dozen researchers at Boston-based KLD Research & Analytics, decide what stocks to include or exclude from most SRI indexes, including the well-known Domini 400. Nocera discovered that KLD researchers "almost never go abroad to do on-site inspections, but rely on media reports, blogs, interactions with activist organizations and conversations with the company itself." In other words, their decisions to define a company as evil are laughably arbitrary. When Nike was judged socially evil for working conditions, "Nike was using the same factories as Reebok and other shoe manufacturers, including Timberland, a darling of the socially responsible crowd. While Reebok and Timberland stayed, only Nike was ousted from the KLD index," notes Nocera. When Nocera confronted KLD about this, it explained that "'there is an extra burden for the market leader.' In other words, Nike was being punished because it had beaten its competitors in the marketplace, not because its practices were any worse than anyone else in the industry." Though working conditions are still tough, Nike is now included in the SRI index on the basis of some favorable news clippings KLD found.

For more SRI follies, see this Free Market article.

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