SOCIAL TOPICS (Archive): HISTORY OF WALDEN ASSET MANAGEMENT/SRI

Published, December 1995

       The following is a two-part article authored by Randy Barber and Joan Shapiro.

Beyond ‘Feeling Good’ Investing

       by Randy Barber

       Since the late 1970’s there has been a dramatic rise in interest in “clean” investment portfolios, where one can do right and do well at the same time. Wanting to feel good morally and financially about their portfolios, many individuals have turned to a range of Socially Responsible Investments (SRI) funds and managers.

       We have reached the point where SRI funds are a recognizable market niche; over a score of registered mutual funds with billions of dollars in assets offer some type of social screen or otherwise claim to have socially directed investment strategies. In addition, many bank trust departments, insurance companies and independent money managers market their SRI capabilities to wealthy individuals, foundations and pension funds.

       For all its growth — and implied acceptance by more traditional investment professionals — SRI practice is surprisingly amorphous and ill defined. A wide variety of standards and techniques are marketed under the SRI label. Many SRI funds and managers use only fairly loose and minimally researched screens for particular issues. Others fail to apply their social standards to voting proxies because it is difficult philosophically to split the votes of their screened and non-screened accounts.

       On the other hand, some SRI managers intensely scrutinize the performance of companies, set stringent standards, and utilize sophisticated asset allocation techniques to construct their portfolios. Those managers are more likely to engage in extended dialogues with portfolio companies and actively support or initiate shareholder resolutions. A few managers participate in — or even design — targeted, long-term investments in projects ranging from affordable housing to micro enterprises to environmentally sound technologies.

       However, with those few notable exceptions, SRI funds and managers over-promise but under-deliver on the claimed social benefits of their portfolios.

       Why? First of all, most SRI portfolios are overwhelmingly invested in the securities of large public corporations. The simple screening out — or in — of such companies is highly unlikely to have any market (much less economic) impact on those firms. Only those SRI investors willing to make longer-term (and often illiquid) commitments to their values can credibly argue that their investment decisions are having a real-world impact.

       While there may (or may not) be very good reasons for maintaining a highly liquid portfolio, it is disingenuous to argue that one can do so and still affect portfolio companies just because they have been screened.

       A more fundamental problem is that even SRI portfolios that have relatively tight screens often end up being forced to pick “the best of the worst.” If a fund or manager needs to maintain a highly liquid position, there is almost no choice but to invest in a limited number of actively traded companies. Of those firms, few are able to withstand serious scrutiny of their environmental, weapons contracting, labor, equal employment, community and consumer practices. Given the fact that most SRI funds are designed to appeal to a range of constituencies and values, SRI portfolio analysts are often reduced to screening out only the most egregious firms.

       To the extent that SRI portfolios continue to be dominated by actively traded public companies, the only credible “social” benefit comes through dialogue with and pressure on companies through shareholder activism. Unfortunately, few investors systematically pursue this course.

       There is nothing wrong with people wanting to feel good about how their money is invested. But “feel-good investing” is not about changing the world; and it is hard to justify claims that it is somehow morally or socially responsible.

       An honest assessment of the state of SRI practice should lead those who are serious about effecting social change through investment strategies to redouble their efforts in several areas:

       1) The SRI industry should become much more concerned with “truth-in-labeling” and be willing to establish standards by which funds and managers can be judged.

       2) Funds that invest primarily in public companies should become much more involved with other shareholder activists (particularly union, religious groups and community organiza-tions.) And they should be willing to take the lead in sponsoring resolutions at more than a token few of their portfolio companies.

       3) SRI managers should apply their creative energies towards developing new targeted investment mechanisms and vehicles, often called “economically targeted investing” (ETI). And they should be more willing to participate in ETI ventures initiated by other investors such as public employee- and union-related pension funds.

Randy Barber is a strategic financial consultant to labor unions and other clients. He has been an advocate of alternative investment and control of pension funds for almost two decades. He is currently helping supervise the Teamster’s international officer elections.

Adam Smith Had It Right

       by Joan Shapiro

       Contrary to popularly-held opinion, the basic tenets of social investing did not originate with those we generally credit, including United States Trust Company, Interfaith Center on Corporate Responsibility, Council on Economic Priorities, Pax World Fund, Franklin Research & Development and South Shore Bank. These pioneers indisputably put a powerful notion into practice through portfolio management, research, mutual funds, shareholder activism and banking. But we were preceded a good 210 years by a moral philosopher working and teaching in Glasgow: Adam Smith.

       In a very real sense, the future of SRI in the next century depends on how effectively we understand and creatively implement Adam Smith’s ideas. We know Smith as the icon of conservative economic thought, the ultimate free-marketeer, the giver of the “Invisible Hand.” Yet, as economist Robert Heilbroner explains, “no economist’s name is more frequently invoked...and no economist’s works are less frequently read.” Serious readers of Smith know his “enormous authority resides...not in any ideology, but in his effort to see to the bottom of things—in his unflinching confrontation with the human condition.”

       Consider “The Theory of Moral Sentiments,” the foundation of his international best-seller “The Wealth of Nations.” It begins with Smith’s observation that however selfish man may seem, “there are evidently some principles in his nature, which interest him in the fortune of others” and stay the hand of pure self-interest. Whether it is conscience or faith, we are inclined to be productive, contributing members of society. A parable central to Smith’s work is the poor man’s son who, driven by ambition to escape poverty, dedicates his life to amassing a fortune. He discovers its futility at life’s end but, in the process, founds cities, improves the sciences and the arts, and converts “rude forests into fertile plains.” His accumulation of private wealth resulted in public good.

       I invoke Adam Smith because two themes which weave through his astonishing books are at the heart of social investing: 1) There is a moral and ethical as well as an economic foundation to the capacity and power of capitalism; and 2) The effective functioning of the free market system is based on a fundamental link between private motives and public outcomes. We discuss SRI’s “double bottom line” to every client we have. It is the link between self-interest and public good, however, that has to dominate our debate now and drive us into the next century.

       The social investment industry has done an excellent job identifying a market niche, turning it to good profit, and educating the public that the economy has a great deal to do with values. We need to continue to improve performance, grow, convert our natural allies in the pension and foundation worlds and get a lot of money into community-based investments. We need to do a much better job seeing opportunities where others don’t and converting them to public good.

       At Shorebank we talk about giving the Invisible Hand a helping hand. This means we use our capital and business discipline to help people, generally outside the conventional economic mainstream, to help themselves become self-sufficient—not through grants or subsidies, but through loans and long-term investments. Smith said it long ago: “With what impatience does the man of spirit and ambition, who is depressed by his situation, look round for some great opportunity to distinguish himself?”

       The combination of private interests and public good works in strange ways. We decry the 80’s debilitating legacy of greed and selfishness, echoed recently in the demise of Barings, the merchant bank established three years after Smith's first book. But as the unbridled materialism of the poor man’s son unintentionally accrued to public benefit, perhaps the excess of the last decade (not the least of which in the financial industry) was purposeful, propelling and proliferating the social responsibility, ethics and investment activities of the rest of this century and into the next. Who knows? Adam Smith, not the stern social critic or prophet of the market system, but the moral philosopher and humanist laid the foundation for right behavior, balance and responsibility as the core of business success. To insure SRI’s future, we could do far worse than follow his lead.

Joan Shapiro is Executive Vice President of South Shore Bank in Chicago, a founder of the Social Investment Forum, a director of Parnassus Income Fund, and advisor to Business Etchics Magazine.