Socially Responsible Investment
The State of SRI, 2012
By Woody Tasch (Slow Money):
'To look at some of the growth statistics provided by the Social Investment Forum, you would conclude that SRI is making substantial inroads into the capital markets. From 1995 to 2005, assets under management using one or more of the three core socially responsible investment strategies, screening, shareholder advocacy, and community investing rose from $639 billion to $2.29 trillion. During that same period, the number of socially screened mutual funds rose from 55, with assets of $12 billion, to 201, with assets of $179 billion.
Despite the dramatic increase in the number of socially screened mutual funds, however, the overall increase in the SRI assets is far less impressive when viewed against the increases that occurred in total investment assets under the processional management in the United States from 1995 to 2005- from $7 trillion to $24.4 trillion. Even if one considers SRI’s percentage of total assets, roughly 10 percent, to be impressive, and even if one takes at face value a recent study by Mercer Consulting indicating that three-quarters of all money managers think that social investing will pervade the financial sector within a decade, the imperfections inherent in SRI cannot by ignored.
Critics of SRI point out that its pursuit of competitive returns leads inevitably to watered-down screens resulting in the fact that some 90 percent of the Fortune 500 companies make it into an SRI portfolio. For instances, a fast-food company or an oil company or a mining company may be deemed “best of class” for some of their corporate governance practices, but this does not address the basic problem that Paul Hawken identifies: “If you are going the wrong way, it doesn’t matter how you get there.”
The core issue that the SRI industry is not confronting is the macro problem of economic growth, which manifests itself at the micro level of individual portfolios and individual investments as the problem of competitive returns. Professional managers are measured on their financial performance, and it is no different for those who incorporate social and environmental criteria. The result: elaborate strategic machinations and metrics designed to demonstrate that you can “do well while doing good,” which in other parlance might be called “having your cake and eating it too.”
“The industry has hooked people on the idea,” Hawken wrote in a controversial 2004 critique, “that SRI funds should do as well as or better than other mutual funds, and then they have to demonstrate it, which leads to portfolio creep- the dumbing down of criteria and the blurring of distinctions between what is or is not a socially responsible company.”
To fully consider the social and environmental responsibility of a company, qualitative distinctions and exogenous factors must be considered with respect to its business. Is a company promoting conspicuous consumption?
Is it furthering a global brand at the expense of local enterprise? Is it directly or indirectly exacerbating rural-urban migration? Is it benefiting from the utilization of natural resources at an unsustainable rate? Is it reducing cultural and biological diversity? (http://catalystsdr.com/wp-content/uploads/2012/04/Catalyst_Issue10_031412_WEB.pdf)
Alternatives for SRI: Designing for a Restorative Economy
"What is needed is a new form of financial mediation- intermediation whose ultimate goal is to empower investors, entrepreneurs, and farmers as agents of restoration and preservation in their local communities.
It will require experimentation with portfolio design: For instance, can the risks of investing in small food enterprises be mitigated by investing in farmland? What about sustainably managed timberland in the region? What are by traditional investment criteria disparate sectors become elements of an integral strategy for investing, or, what Paul Muller calls “reinvesting”- in fertility and health.
We are turning a compost pile.
The following design questions are emerging:
• Can we design ways for regional investors to invest in regional food enterprises? Could there even be Slow Money Bonds, similar to municipal bonds, but investing in local food systems?
• Can portfolios of SFEs deliver positive rates of return to investors? Is public or private subsidy required?
• What is the difference between “local” and “regional”?
• If Denmark has a single CSA that is as large as all of those in the United States combined, what does this say about the entrepreneurial opportunities to connect U.S. farmers and U.S. consumers?
It falls to us to undertake a new project of system design: the creation of new forms of intermediation that can catalyze the transition from a commerce of extraction and consumption to a commerce of preservation and restoration.
Within and beyond the world of food, there is an increasingly robust wave of entrepreneurial activity around such principles and concerns. Hundreds of mission-driven early-stage companies every year seek capital through the Investors’ Circle (www.investorscircle. net). Scores of cities are organizing chapters of the Business Alliance for Local, Living Economies (www.balle.org); BALLE is incubating the concept of local stock exchanges. B Lab is incubating legal guidelines for B corporations and formulating an entrepreneurial strategy for accelerating the growth of a B sector (www.Bcorporation.net). The Fourth Sector Network is exploring the development of “for-benefit” organizational forms and governance structures." (http://catalystsdr.com/wp-content/uploads/2012/04/Catalyst_Issue10_031412_WEB.pdf)