THE ETHICAL EDGE by
Are 'Socially Responsible' Mutual Funds for You?
So you're about to get your tax refund and you've decided to bet on the
market. Which mutual funds should you choose? For an increasing
number of investors who want to exercise their social conscience, there
is the added lure of 'socially responsible' or 'ethical' investing.
For the uninitiated, SRI involves applying social screens to companies
to identify corporate good and bad guys. It caught on in the 1980's
as a way to avoid investing in companies that had a presence in apartheid
South Africa. Then came the tobacco industry boycott. SRI funds
now focus on a spectrum of social and political issues. According
to a recent survey, the top negative screens are tobacco, gambling, military
production and alcohol. The leading positive screens are abortion rights,
environmental issues, human rights and animal welfare.
Are SRI mutual funds for you?
Well here's a vote against them. It's not that I oppose the intentions
of these funds, which according to the SRI mantra is to "do well
by doing good." And it's not performance. Investment
professionals knock SRI funds assuming that screening out high-profit
oil polluters and the like drags down portfolio performance. In
fact, numerous studies have shown that our vast investment marketplace
ensures that social screens have no effect one way or another. Last
year for example, Dreyfus' Third Century, Domini Social Index and Citizens
Trust Index, all growth funds, topped the S&P 500 Index, mostly by
betting heavily on technology.
So what's my beef? In practice, SRI mutual funds are a marketing
gimmick. The sobering reality is that they may promote corporate
behavior that is neither progressive nor ethical.
On the surface, these funds offer something for everybody. Catholics
can choose the Aquinas Fund and Muslims the Islamia Fund. Concern about
the environment? There are dozens of funds. For gay and Lesbian
rights? Choose Meyers Pride Fund. Against "the homosexual lifestyle?"
Choose the Christian fundamentalist Timothy Plan. An Internet search
turns up more than 100 such funds, from military-hating Pax World, to
animal-rights protector Beacon Cruelty-Free Value, to Women's Pro-Conscious
Investors have so far poured about $100 billion into SR funds, less than
1 percent of the market.
It's an appealing investment strategy until one asks probing questions.
What constitutes 'socially responsible' behavior. The concept has
become associated with a set of static beliefs drawing on 1960's notions
of liberal propriety and correctness. For the most part, these
are not screens but social litmus tests.
For instance, many SRI funds will not invest in defense contractors. Why?
Their response is no more sophisticated than "weapons are bad."
As someone who had relatives killed during the Holocaust, and was grateful
for US military prowess during two conflicts with Iraq, screens on military
production in the name of ethics is offensive; it may even undermine the
pro-active goal of curtailing unnecessary defense expenditures.
The tougher question is: Which companies are involved in the kind
of military research or production that offers a better hope for peace?
"Getting a comprehensive, meaningful screen is next to impossible,"
says a skeptical William Martello, assistant professor of policy and environment
Loyola Marymount University. "Concerns like nuclear power and
defense spending are not issues of social responsibility but political
statements. These are idiosyncratic ideological filters, not ethical
Consider animal testing. Which companies act more responsibly:
-- Gillette and Procter & Gamble, which have extensive research laboratories,
perform expensive, FDA-required safety tests, have pioneered (at considerable
company cost) the development of alternatives to animal testing, and in
the case of Gillette, publishes for public scrutiny the rationale for
every one of its tests; or
-- Stonyfield Farm, Aveda, Tom's of Maine, and other new-age companies
which tout their "cruelty-free products," yet use animal-tested
ingredients (developed by their competitors, not them) and have spent
almost nothing to fund alternative research, all the while earning a pricey
green premium for their lofty, moral rhetoric?
Despite being caricatured by the SRI community, controversial multinationals
such as Monsanto, DuPont, or Exxon offer fair wages and benefits, have
impressive affirmative-action practices, address complicated environmental
issues, give many millions of dollars to charity, and sell competitively-priced
products and services. According to the SRI litmus tests, that
does not make them ethical or socially responsible. They have to
wear their heart on their sleeves to make the cut.
I'll choose honesty in the gray world of reality than posturing any day.
Scientists at Gillette do not go to bed at night dreaming of pouring caustic
chemicals into the eyes of fluffy white bunny rabbits. Critical
investors should react to facile sloganeering, even by "well meaning"
companies, in the same way as if Microsoft or Pepsi put "against
animal testing" on their labels.
After you get past hyperbolic claims about "changing corporate behavior,"
there is not much evidence that SRI funds do much good. "The
ethical funds movement is just fooling itself," says John Bishop
a business ethics professor. "Investors might feel good, but
capital markets are like a swimming pool. Ethical investing, even
if you assume that the screens make sense, are less than 1 percent of
the market. It's like taking a bucket of water out of the shallow
end and emptying it in the deep end."
Am I suggesting that investors should just go for high return, ethics
be damned? Not at all. Just don't deceive yourself.
Buying and selling stocks does not bring social justice. Most SRI
funds, whatever might be their proponents intentions, are little more
than a feel-good exercise, not unlike buying ice cream made with nuts
from the Amazon rainforest and convincing yourself that you're helping
the world. That's nothing more than baby boomer narcissism.