Another great issue from the Atlantic Monthly for October 2007. Subtitled “The Values Issue,” the journal contains a trio of articles on the subject of philantropy and altruism. One of these is The Conscientious Investor, by Henry Blodget, focusing on the emerging field of socially responsible investing or SRI for short. In case the name rings familiar: Blodget made his name during he dot-com era with the unlikely prediction that Amazon stock price would hit $400. It did but his resultant status as celebrity financial analyst for Merill-Lynch ended amidst revelations that he’d long been expressing doubts in private about the companies he was raving about publicy in order to drum up banking business for Merill. The irony of Blodget writing about SRI is inescapable. What is next– Britney Spears on good parenting? Luckily the author has a good sense of irony as well and acknowledge this strange twist in a parenthetical remark alluding to his own run-in with the SEC.
Blodget is no doubt very knowledgeable and in a great place to write an engaging article. It begins by comparing two hypothetical portfolios: both invest in the S&P 500 index from 1957-2003 except that one of them leaves out Philip Morris, since tobacco companies are verboten by most screening criteria used for SRI. Sadly for the second investor, it turns out that PM was in fact the equity appreciating the most during that time– a staggering 19.75% compared to a mild 10.85% for the broader stock index. The net result of leaving out just this one stock out of a group of five-hundred is 5% over the five-decade span. Even more poignantly, investing in just PM instead of the diversified portfolio would have multiplied the returns by a factor of 36.
The article is full of these hard data points. For example we learn that SRI investing accounts for almost a tenth of all professionally managed assets but most of this is institutional investors. The 200+ mutual funds make up a small fraction overall of the sum and for that matter, of all the assets invested in equity funds. The punch-line still remains the qualitative argument around the conceptual hand-waving surrounding the definition of “socially responsible.” Screening criteria used by different SRI funds is all over the map and full of internal contradictions, easy targets for picking. Not all the criteria makes sense: while shunning tobacco or coal-fired power generation is understandable, the jury is out on whether nuclear energy is good on balance for the short-term until carbon emissions are under control. Similarly, some criteria can already find expression in everyday decision without being elevated to investment strategy. Consumers have little choice about the local utility building a coal-powered plant or dumping waste into the river. In these cases, voting with the portfolio may be the only response because individuals can’t influence the outcome and the collective bargaining process through politics is inefficient. But individuals can opt out of gambling, drinking and tobacco, so it’s not clear that investment decisions need to be tweaked. Even the question of alcohol is ambiguous: PAX’s decision to divest Starbucks for lending its brand-name to a Godiva liquor is the reduction-to-absurdity of the criteria. (By all definitions, SBUX has one of the more socially responsible operations.) The article raises a more disturbing question about market response to SRI. If the approach goes mainstream, and by all indications it may be on the verge, companies will mount PR campaigns to create the appearance of satisfying SRI criteria while conducting business-as-usual. This will confuse the screening criteria further, since the model does not yet include companies trying to game the system.