Don't Give Up on Ethical Investing

Global warming, acute water shortages, the decline of biodiversity: there is an ever growing body of clear evidence that we must reduce our human footprint on the planet or perish.

As aware, caring citizens, we do what we can - eat organic, locally-grown produce, avoid big box stores in favour of neighbourhood emporiums, volunteer our time and contribute financially to social organizations. Then it comes time to invest for our retirement, and we're baffled. How do we make sure that the dollars we invest in the cold hard capital markets are working for us and working for the planet? Socially responsible investment options have burgeoned in answer to that question, increasing from US $40 billion in the United States in 1984 to more than US $2.3 trillion in 2003. In Canada, SRI investment has increased from $49.94 billion in 2000 to $65.46 billion in 2004. But despite its amazing growth, reviews have been mixed, with critics ranging from those who believe that any kind of social responsibility is the antithesis of sound business practice to those who believe that all corporations are evil and that to participate in the capital markets is to enable the evil-doers.

Lending fuel to the debate is a recent article published in The Tyee in which environmentalist and author Paul Hawken takes fair and accurate aim at some of the paradoxes and hypocrisies of the corporate social responsibility movement and some of the many socially responsible mutual funds.

What Hawken didn't say

Hawken cites a number of companies that appeared on a '100 Most Sustainable Companies in the World' list released by a Canadian Magazine [Corporate Knights] at the World Economic Forum in January; among them, Bristol-Myers Squibb (a pharmaceutical company that conspired to protect high profits on Taxol, a breast cancer treatment, after their patent expired, and was also fined $150 million by the US Securities Exchange Commission (SEC) last year for "cooking its books") and hard liquor producer Diego. He points at a number of US-based SRI funds that invest in corporations "that fight against environmental regulation; whose trade associations lobby against living wages…whose CEOs raise millions of dollars for the Bush administration's assault on human rights and the environment."

The problem with Hawken's fair criticism - and his important call for much greater transparency and disclosure from those doing the analyzing -- is that it is unlikely to make Bristol-Myers or Diego better corporate citizens, but may encourage well-intended investors to throw up their hands and invest exclusively in non-SRI funds. (How many shares of Halliburton, Exxon and Walmart could I end up owning, anyway?)

The problem is not just that the bar is sometimes set too low, but that the tent is too big. One US fund in that tent, the AB Fund, with a Southern Baptist affiliation, screens for alcohol, gambling and contraceptives but does not screen for arms or nuclear power. Some funds invest in corporate laggards like Walmart claiming their shareholder resolutions encourage better behaviour - even as the company continues to aggressively undermine worker rights and eliminate local small business.

So what's an investor to do?

Better values, higher value

Just as in the broader market, investors should demand clear and complete disclosure. If there is a company in your mutual fund portfolio you have questions about, you have every right - you may even consider it a responsibility - to call and grill the fund company. As Hawken effectively reveals, you can't assume that a value-driven manager shares your values, or that your definition of social responsibility is the same as their definition.

It is time for socially responsible mutual fund companies to be more transparent about the companies that they own and the rationale for owning them in 'your' retirement portfolio.

But there are other issues here that also deserve to be examined. When we get beyond the 'your values' and 'my values' debate, we find that good companies do better financially! The most conclusive research done on the subject (including a survey of dozens of studies recently released by Harvard) proves that socially responsible companies do better financially. That should matter to all investors, not just those who want to invest in a better world.

The rigorous analysis conducted by the best SRI firms has gone beyond measuring past performance and evolved to a risk management model that assesses a company's ability to manage future liabilities. They demand clearer, more detailed sustainability reporting - and there is a direct, positive correlation between reporting on social, environmental and governance issues and strong financial performance.

Culling the companies

There are companies that will never clean up without regulation, that believe that 'reputation risk management' is a media strategy, not a natural outcome of better business practices. We can keep them out of our portfolios. And there are imperfect but decent companies that are sensitive to the growing risks to their reputations and bottom lines -- risks faced by all companies in the information age. Through social impact investment, proactive shareholder campaigns and active dialogue with boards and executives, we can effect positive change. We have.

Because fortunately, not all companies are as incorrigible as Walmart. There are good companies that are full of smart people focused on innovation and best practice. People who understand that companies don't exist in a vacuum. Their success is dependent on their customers, employees, suppliers, communities and shareholders. Filing shareholder resolutions asking these companies to improve their social, environmental and governance practices often leads to incremental but real, measurable change.

And if being part of the social change agenda isn't your cup of tea, if you think that all corporations are evil, you can always invest in the best of the best, companies that are leading through best practice models or cutting edge technologies. Companies that contribute to and reap the benefits of social leadership.

Social impact investing is about demonstrating the financial benefits of strong social and environmental performance and good governance. Good companies make more money. The world's a better place. It's a simple equation.

Deb Abbey is President and Founder of Real Assets Investment Management. She is the Portfolio Manager of the Real Assets Social Impact Funds and the Real Assets Social Leaders Fund. Abbey co-authored the bestseller "The 50 Best Ethical Stocks for Canadians". Her most recent book "Global Profit and Global Justice - Using Your Money to Change the World" was published in January 2004. Information about Real Assets shareholder campaigns can be found at www.realassets.ca