Joe Nocera is not a fan of socially responsible investing, or SRI:
My problem is that socially responsible investing oversimplifies the world, and in so doing distorts reality. It allows investors to believe that their money is only being invested in “good companies,” and they take foolish comfort in that belief. Rare is the company, after all, that is either all good or all bad. To put it another way, socially responsible investing creates the illusion that the world is black and white, when its real color is gray.
Nocera does perform the useful service of pointing out that the main SRI screening company, KLD, has vastly insufficient resources for the job it’s trying to do:
KLD is a small firm that constructs socially responsible indexes, including the Domini 400. Its 40-member staff includes about two dozen researchers who supposedly dig into companies and decide which should be included in its indexes — and which should be excluded. Its biggest index, the KLD Broad Market Social Index, uses the Russell 3000 as its universe, which it has whittled down to 2,050 companies it deems acceptable…
Two dozen researchers are monitoring 3,000 companies — and writing in-depth reports? How is that even possible? It’s not. Mr. Kinder told me that the employees almost never go abroad to do on-site inspections, but rely on media reports, blogs, interactions with activist organizations and conversations with the company itself. That hardly seems like enough to make a decision on whether a company is good or bad.
But his conclusion goes way too far:
It would be nice if we could invest our money only in companies that had terrific human rights record, fabulous environmental values and wonderful compassionate cultures.
Too bad it’s impossible.
Let’s be very clear, here, about what KLD is doing: it’s taking the Russell 3000 as a starting point, and then removing roughly one-third of the most egregious companies. If you don’t want to invest in companies that kill people, like arms manufacturers or tobacco firms, then KLD’s index is a great place to start. But at no point is anybody at KLD or anywhere else saying that all 2,050 of the firms on their list have “terrific human rights record, fabulous environmental values and wonderful compassionate cultures.”
There are funds which seek only to invest in companies which make the world a better place, in firms which have great environmental records, and so on. Such funds have no interest in whether BP or ExxonMobil is a more ethical investment: they would never invest in either. And they also have no interest in Nocera’s other example, Nike vs Reebok, for the same reason.
It seems Nocera is judging “negative” funds — those which exclude the worst companies — by the standards of “positive” funds — those which include only the best companies. That’s unfair. There are many flavors of SRI, and investors can and should be able to choose between them. Why does Nocera seemingly believe in denying investors that choice?
More to the point, compared to investing, screening is easy, at least in the US where the business press is good and the Edgar database exists. You set up some criteria, whatever you may like, and then your researchers simply run them. It’s like chopping wood. Superfund sites over $x ==> environmental grade lowered by y, for example.
SRI investors know that they can’t make fine distinctions. You can be the company’s CEO and not be able to do so. However, they know that by paying a little money they can avoid investing in integrated oils, or in for-profit healthcare, or (if you’re a conservative religious order, say) in any company that ever gave money to Planned Parenthood.
Now, the marketing of SRI, that is another thing. I’m not going to defend that. However, the basic idea is simple and of itself utterly harmless.
FD: I worked for a small SRI shop early in my career.
We are in a hurry. The hurry is: we humans are in the process of destroying our planet. Global warming is the single most significant environmental crisis the world community has ever seen. The 2007 G8 Summit in Germany will focus on the reversal of global warming. President Bush, of course opposes this proposal. Like his strategy in the Middle East, he has a better idea, and he wants to convince the world of something they already know is untrue. This time it’s not that there are weapons of mass destruction in Iraq, but that global warming is not that dire an issue.
Our Nero-like President fiddles, but we cannot allow our Rome to go up in flames. This isn’t a city’s destruction we speak of. It is the end of all of us, of history, of every thought and feeling humankind ever produced. Our present federal government is not going to do anything about this crisis.
Our company, Connecticut Real Estate and Construction wishes to do something about it, because Connecticut needs workforce housing in significant number for very important reasons. Suburban sprawl is killing the environment. When we continually clear off two acres and more per household to put up large houses, we cut down trees which produce oxygen, we deplete the filtering system for our water, and we make houses which leave a carbon footprint which further opens a hole in the ozone. If we instead build multiple units together and build them with solar photovoltaic cell panels and with geothermal heating and cooling, we leave virtually no carbon footprint, we leave sufficient greenery to filter water run-off, and we provide our workforce with housing that allows them to stay in the state and not flee to the South and Southwest as has been the recent trend. As a result, those businesses (and their tax revenues) which require those workers need not flee with the workforce, a trend we have seen throughout the Northeast region of the country.
Additionally, we will build elderly housing. The Boomer Generation is aging. They are retiring at record rates and require specific housing that does not exist in sufficient number. We will build it. We will build commercial buildings and office space to go along with the elderly and workforce housing. We need cooperation from local governments to achieve our goals, and we need that cooperation quickly. As we move forward, we will build with town tax rolls in mind. We are aware that the workforce housing will require significant services and expenses, most notably educational expenses. This is why mixing the elderly housing with the workforce balances the ledger, for the elderly pay taxes without sending children to schools. Further, the commercial and office buildings will bring in significant tax revenues without pulling out revenues from the local municipality. This formula is referred to as “Smart Growth” and is to be part of our plans.
While proposing “caution” and “care” is never foolhardy advice, studies on these issues have already been done and “smart growth” is necessary throughout the state. We cannot wait. The cost is too dear for all of us to sit idly by and fiddle away time as the planet goes up in flames.
Sincerely,
Miles J. Shapiro, Partner
Connecticut Real Estate and Construction
VP Marketing and Commercial Real Estate
http://www.connecticutrealestateandconstruction.com