Trying times for socially responsible investing

SRI mutual funds have always been insistent on saying that following your conscience does not mean compromising on returns. Full page advertisements in magazines such as Utne Reader are designed to drive home the point that screening investments based on criteria of “social impact” does not produce subpar results compared to purely economic selection strategies. (But then again proponents of the efficient-markets hypothesis would say that is because equity valuations are essentially unpredictable. Monkeys throwing darts at the board to pick stocks would do equally well according to this theory, in which case one might as well vote their values.)

An article in CNN/Money is now taking them to task for this claim:

The typical “do good” portfolio has lagged the market of late, causing investors to yank out nearly $1 billion last year, or about 3 percent of the assets in ethical funds.

2 problems are cited. The obvious one is missing out on the recent surge in energy and oil sector, industries which are traditionally very damaging to the environment. Granted not all SRIs screen for environmental friendliness. The extensive index of SRI funds at the Social Investment Forum shows that only 4 funds declared a policy of no-investment in eco-offenders, the majority have “positive screens” intended to encourage directing funds towards eco-friendly technologies and a handful have no screening criteria at all in this category. But considering that precious metals and energy will likely remain strong in spite of retreat in oil prices, the bottom line is not going to improve.

Second reason is more subtle: all that screening for corporate practices is costly and contributes to higher than average expenses. Even passive index funds boast ratios three times that of the industry standard.

What the article hints at is that screening criteria made no sense in the first place. Starbucks, not always successful but by any definition strives for social responsibility, in its employment benefits, trade relations with coffee growers and resource-efficient operations– those coffee-cup sleeves are made of recycled cardboard. But that didn’t stop Pax World Balanced fund from divesting SBUX because they lent their brand to the Starbucks liqueur; alcohol being a deal-breaker for this particular SRI fund. Others take issue with nuclear energy, even though coal-fired power plants and gas guzzler vehicles are much bigger immediate problem than proper disposal of nuclear waste.


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