The Free Market
Socially Irresponsible Investing
The Free Market 20, no. ( 2002)
Proponents of socially responsible investing, or SRI, promote it as a way to invest in stocks while having "positive social impact" at the same time. Beneath the surface, everyone knows that what SRI really promotes is old-fashioned socialist ideology employed in the name of investment. The stated objectives of SRI almost always sound like the anti-business slogans of the Green Party: "save the ecology," "stop sweatshop labor," "protect human rights."
The premise of SRI is that investing for profit is socially irresponsible by its very nature. It is just assumed that capitalists are hell bent on destroying the planet and robbing everyone in sight in order to satisfy their own greed. No further explanation is necessary.
SRI boosters seem not to have noticed that the most successful market-based economy in the world (the US) has the cleanest air and water, the longest life expectancy, and incredible prosperity. Obesity is rampant while hunger is unheard of. Though pilloried by leftists as a racist, exploitive society, in any American city minorities can be seen driving European luxury cars. Entrepreneurial telecom firms have equipped many of these exploited peoples with the latest in cell phone technology, apparently at affordable prices.
But perhaps I am being too harsh on this SRI idea. After all, if someone really dislikes corporations based on some extreme leftist ideology, promoting this agenda with their own money is the essence of, well, capitalism. Maybe SRI is a benign way for all the enviros, unionists, and feminists to advance their agenda through voluntary investment boycotts. If non-coercive investment strategies catch on in a big way, such people will no longer feel the need to impose their ideas on us all via the government.
Unfortunately, building the Liberal Utopia via SRI may be a real challenge. When one looks at the typical SRI funds available to invest in, a true left wing investment strategy can be awfully difficult to find. Once you get past the mission statement and self-congratulatory propaganda, the SRI funds' prospectuses can look a lot like a regular mutual fund's. An example of this comes from one of social investing's foremost gurus, Amy Domini. Her Domini Social Index Fund, as I discovered in Money magazine, lists run-of-the-mill corporations like Walt Disney and Wal-Mart as major holdings.
Are these supposed to be examples of corporate "good behavior?" Few people represent corporate greed and concentration of wealth better than Disney CEO Michael Eisner, with his multi-million dollar compensation and large accumulation of company stock options. As if to further highlight the division between rich and poor, his company was linked in 1996 to a sweatshop in Haiti making Pocahontas pajamas at a cost of only 7 cents a pair. Three years later, Disney closed the factory under pressure from union activists, but that didn't help any of the workers in Haiti. According to the National Labor Committee, a worker rights group, the end result was that Haitian workers were "thrown out on the street with nothing."
Wal-Mart is just as confusing. The business bashers are always complaining that it undercuts mom-and-pop grocers, that it doesn't allow labor unions, and that it sells too many guns. Kathie Lee Gifford's clothing line, denounced by labor activists for utilizing child labor in Honduras, was sold through Wal-Mart. Yet the company finds itself in the Domini index of companies that supposedly are at the forefront of the battle for human rights, the environment and diversity.
Other SRI funds also have some pretty strange names in them. The Calvert Social Index Fund owns shares in The Gap, which makes clothing in Third World nations. This fact alone invariably means that sweatshop allegations are not far behind. Also holding the Gap is Citizens Core Growth Fund, an SRI fund that invests 5% of its assets in Microsoft. As we all know, the software giant was accused of being a "monopolist" by the government's antitrust lawyers, and it is run by the filthy rich Bill Gates. It symbolizes everything about corporate power and wealth that liberals hate.
What gives? According to Ed Leibowitz, an SRI critic who interviewed Domini and other SRI fund managers for Money, few SRI funds use antitrust as a criteria to screen out the likes of Microsoft or Intel. On the contrary, many of these funds are heavily invested in the high tech growth engines of capitalism. In practice, many SRI funds keep "bad" companies in their portfolio while they gradually try to influence the company's behavior through emails, management meetings, and shareholder resolutions. In practice, this gentle persuasion can go on for years with minimal effect, offering the SRI investor no assurance that his money isn't being used for "evil" capitalist purposes during the lengthy persuasion period.
In some cases, the SRI funds are so lax with their standards that offending companies merely have to pay lip service to "social responsibility" in order to remain in the fund manager's good graces. After discovering that Saks Fifth Avenue was using fabric made by Chinese prison labor under the auspices of the People's Liberation Army, Citizens Growth Fund merely asked the retailer to adopt a list of "anti-sweatshop principles." Saks signed the document, and was retained in Citizens' "socially responsible" portfolio. This practice stands in stark contrast to Citizens' advertisements to its fund shareholders, which state that the fund only invests in "a special kind of company."
Is SRI a hoax perpetrated by cynical capitalists against the liberal do-gooders? Or are the SRI funds just wary of lagging their benchmarks and underperforming mainstream funds? According to mutual fund performance tracker Lipper, only one SRI fund out of seven was able to beat the S&P500 market index over the last decade. Had you picked one of these funds, there is an 86% chance that you would have lagged the market. Perhaps SRI funds can't make any money with an overly strict set of criteria. If so, SRI is merely a way for guilt-ridden liberals, ashamed of themselves for their inner desire to make money, to soothe their consciences. But SRI cannot be considered "socially responsible" in the strict sense of the term.
Given this reality, what is a liberal investor to do? Should he forego high returns, and focus on unique firms with a "social" mission? The epitome of such companies would seem to be Ben & Jerry's. The Vermont ice cream maker is well known for pledging to donate a share of profits to progressive causes like environmental conservation. Behind the faÃ§ade, however, the openly progressive firm has some pretty dirty laundry of its own.
In the early 1990s, it was revealed that the Rainforest Crunch product was laced with glass, rocks, cigarette butts and insects. The quality control problems were caused by an affiliated supplier, which gave the product environmental cache' by harvesting nuts from Brazil's tropical rainforest. The company kept using the "sustainably harvested" nuts even though they were known to contain coliform bacteria. As an embarrassing internal memo to Ben & Jerry's founder Ben Cohen admitted: "We are knowingly providing a food product to the public that contains coliform."
Ben & Jerry's may have put those problems behind it, since the troubled nut supplier has since gone out of business. Recently, however, Ben & Jerry's got into trouble again. Its packaging advertises that the paper is manufactured using dioxin-free methods, proclaiming that dioxin is unsafe at any exposure. But the company failed to tell consumers that the ice cream itself contains dioxin. That's not what most people think about when they are digging into their Cherry Garcia.
Another firm that advertises its earth-friendliness is BP Amoco, whose ubiquitous television commercials declare the company's new motto: "Beyond Petroleum." The company's PR campaign touts its commitment to investing in alternative fuels such as solar power. Environmental groups are still not happy with the company, though. Earth Day 2000, a collaboration of all the usual green pressure groups, listed BP Amoco on its top 10 "Don't Be Fooled Awards." The enviros accuse the company of "diverting attention to the real consequences of its fossil fuel business."
Contrary to the impression one gains from watching its television commercials, "by no means is BP Amoco planning a long-term transition to renewable resources." They add up the figures from BP Amoco's financial statements: For every $16 the company spent on solar energy, $10,000 was spent on oil exploration and development. It will spend $5 billion drilling for oil in Alaska over the next five years, and is spending big bucks to lobby the government to allow drilling in the Arctic National Wildlife Refuge. So, say the environmental activists, investing in this company is not "environmentally responsible" after all; it is just helping a bunch of clever fakers who are bent on wrecking the planet.
Ed Liebowitz exemplifies the frustration felt by many who have searched in vain for pure SRI investment opportunities. He seriously considered investing in Tupperware because its two top salespeople in Los Angeles were a transvestite and a lesbian folksinger. "What could be more progressive?" he asked. He wound up dropping Tupperware because he couldn't reconcile plastic with environmental soundness.
According to Doug Henwood, editor of the Left Business Observer and a well known socialist critic of the stock market, there is simply no way to invest responsibly. If you want to earn stock market-like returns, you must buy a regular mutual fund and "realize that what you=re doing is unethical." Social responsibility, he warns, is an exercise in futility in a capitalist system. Writing in the left-wing standard bearer Mother Jones, Henwood advises investors to measure companies not by their positive virtues, but by their lack of social malfeasance. Instead of "Doing well by doing good," he says, we should "Do well by not doing such pure bad."
Evidently, this kind of moral relativism is the strategy employed by progressive movement icon Ralph Nader. In financial disclosure forms he filed when running for president, Nader revealed that throughout his years of corporation bashing he had over $3 million invested in stocks. During his lengthy career as a self appointed "consumer advocate," he has lectured others about the evils of monopolists, corporate polluters and weapons makers. Among his recent holdings: router monopolist Cisco Systems, fossil fuel giant Occidental Petroleum, and missile manufacturer Raytheon. As he was holding press conferences to denounce high-profile corporate mergers of various stripes, he was personally invested in Exxon-Mobil, BP-Amoco, and Bristol-Myers Squibb.
Oddly, I find myself in agreement with these leftist thinkers. They are right: their ambitions are not achievable in the stock market. Capitalism is too complex to serve a narrow political ideology. Yet it is also too productive to ignore. The more scrupulous liberals may have to set aside their principles while investing, especially if they desire to earn competitive returns. Their rhetoric aside, they must come to terms with the system of market capitalism as it is B an efficient generator of wealth capable of delivering greater prosperity to all workers and savers, regardless of political preference.
James M. Sheehan is the author of Global Greens: Inside the International Environmental Establishment (Capital Research Center: Washington DC, 1998). Jsheehan2000@yahoo.com
Cite This Article
Sheehan, James M. "Socially Irresponsible Investing." The Free Market 20, no. 5 (May 2002).