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It's Easy Going Green

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In the face of Wall Street's rough-and-tumble year, socially responsible investing earns newfound respect

By Jeannette Batz

WE WORRY about mucked-up sewage and global warming, cruel sweatshops and child labor. We resent executive salaries that go higher than Zimbabwe's GNP; we're tired of companies run deliberately, exclusively by old-guard white males. We know full well that some corporations make an effort to be responsible, whereas others have no qualms about damaging society to make a profit. Yet when it's time to invest our hard-earned cash, we buy into the very corporations that outrage us the most. It's not a deliberate choice, of course. Usually we own shares of funds that own shares of companies; by the time the paperwork arrives, the truth's several steps away. But somewhere along the line we've been told it doesn't matter; the marketplace is amoral, and the bottom line rules absolutely.

Those angered by this conventional wisdom have been trying a different route, one called "socially responsible investment," or SRI. Until recently, financial experts have treated SRI the way they treat a daffy cousin who wears only hemp products, doesn't have health insurance, and chugs up to the family reunion in the old, not the new, VW Beetle.

Except this year the cousin showed up in pinstripes, driving a Volvo. She was making good money marketing that hemp. And suddenly it was a lot harder to make fun of her.

Amazing Growth

SRI isn't new: Church groups were boycotting "sin stocks" in the early 1900s. Pioneer funds have been avoiding alcohol and tobacco stocks since the '30s. (Free-market types are appalled; they say, and justifiably so, that the unwritten policy should appear in each Pioneer prospectus, alerting investors who might want money in alcohol or tobacco.) Still, the early SRI was more a quiet act of conscience than a collective dialogue with corporate power.

Then came South Africa. As American shareholders began to divest themselves of any connection to apartheid, the economic pressure built into political pressure. Activists began developing a repertoire of economic tactics, from consumer boycotts and rants at annual shareholder meetings (that's what first prodded Eastman Kodak into hiring more minorities) to community development and explicitly labeled SRI in conscientious mutual funds.

The first, Pax World, started in 1970. Dreyfus Third Century started in 1972, Calvert in 1981, followed by Working Assets, Parnassus, and a host of religious, minority-owned, and other customized funds. Everybody's agenda was a little bit different; "socially responsible" doesn't automatically mean progressive Pollyanna; it simply means integrating your own values with your investment decisions.

A consensus did emerge, though, around some basic categories: environmental practices; employee relations (diversity, fair compensation); human rights (sweatshops, child labor); product (safety, quality); military weaponry; nuclear power; alcohol, tobacco, and gambling; community reinvestment.

Those were the issues Kinder, Lydenberg, Domini & Co. considered in 1990, when they developed a socially responsible index to rival the "S&P 500" (Standard & Poor's yardstick of 500 representative companies, often used as a benchmark to judge a stock's performance). To select their 400 companies, the Domini Social Index eliminated any S&P 500 company that failed to pass a series of screens. (More than 20 Superfund toxic-waste sites? Off the list. Less than 1.5 percent of pre-tax revenue given to charity? Off the list.) They also added 50 solid companies that hadn't made the S&P 500, but that had good social records. The result: The Domini Social Index outperformed the S&P 500.

And the ground beneath Wall Street trembled.

Meanwhile, Amy Domini had started the Domini Social Equity Fund, using the Domini index as her "universe" of potential investments. Her fund beat the S&P 500, too.

In April, the Wall Street Journal included Domini in its annual list of the Top 38 large-company mutual funds. In June, Money magazine included Domini in its list of the world's 100 best mutual funds. Morningstar's independent trackers gave Domini their top ranking of five stars. This month's issue of Dow Jones Investment Advisor, the industry's largest publication, featured Domini in a startlingly favorable cover story on SRI.

The record performance of a screened fund--and the consequent softening of Wall Street--surprises everybody but the SRI advocates, who've been predicting it all along. Domini says social screening steers you toward high-quality growth, favoring companies with strong corporate cultures and visionary management. It also excludes a lot of heavy industrials and natural-resource companies, big oil producers, major paper manufacturers, and tobacco companies, avoiding many problems that drag the companies into court.

The Domini fund is not alone in its success, either. The Social Investment Forum recently reported that more than half of the SRI funds at least two years old had earned top marks from Lipper or Morningstar. SRI rose from $162 billion in 1995 to $530 billion in 1997, a 227 percent surge in just two years. Bankers Trust has even launched a "Wealth with Responsibility" program to teach its richest private clients about SRI.

Talk about a reversal of fortune. "Usually in a bad market, the socially responsible stocks do worse," says Chris Irvin, an investment executive at the Sonoma office of Piper-Jaffray Inc., a San Francisco-based brokerage house that specializes in socially responsible investments. "Now SRI stocks are holding much tighter than they have in previous down markets. Over the cycle, that represents an out-performance, which answers some of the concerns of institutional investors that are pretty risk-adverse.

"Certainly, the audience and the participation in this type of investment has really broadened," adds Irvin, noting that negotiations he's having with a major union pension fund about socially responsible investment wouldn't even have been possible in previous years.

When Jack Brill, a San Diego investment adviser, wrote Investing from the Heart in 1992, there were 12 recognized SRI funds. Now there are 46. "Even the big brokerage firms are changing," he remarks. "Merrill Lynch recently alerted its brokers not to bad-mouth SRI anymore; I saw an inside document."

Intrigued, we call Merrill Lynch's office without identifying ourselves and ask whether they offer SRI advice. "That's kind of a difficult question for me to answer," the broker replies. "There is really nobody I know that specializes in anything that defined. We just get to know each client really well." And you advise them accordingly? "Oh, most certainly. It wouldn't make sense to take someone who is 96 years old and put them in something with a seven-year wrap-up."

Guess he didn't see that "inside document."

Clearly, we might need to re-examine the assumptions still held by most Americans, including religious congregations, non-profit foundations, and earnest citizens: (1) that values have no place in the market; (2) that you can't make money by investing with conscience; (3) that nobody holds the same values anyway, and corporate ethics are too subjective to measure; (4) that any steps toward social responsibility are futile because corporations don't notice.

That's the prevailing worldview. And it sure helps explains environmental damage, social inequity, power imbalance, unsafe merchandise, and exploitive marketing.

Myth No. 1: The Marketplace Is Amoral

Money shapes our relationships to nature, health and illness, education, art, government, social justice, science, and each other. It's our livelihood, our safety net, our passkey to the future. Yet we've quarantined it from our values and severed it from anything that touches our spirit. We want our money blamelessly detached from its consequences, and we want our spiritual realm "uncorrupted."

Money itself is neutral, a form of energy that flows through our society with mixed results. Yet instead of integrating our attitude toward money as thoroughly as money has integrated itself into our lives, we make only a superficial calculus of strategy and return.

The system that results is impersonal and abstract. But the deepest motives of typical investors are not. Some want to make a difference; some want to ensure a decent nursing home; some just want to get the kids through college. The problem is that, with professionals managing your money for you, the consequences get lost in the degrees of separation. Before you know it, your teenager's college tuition is being financed by profits extracted from the sweat of 9-year-olds in Burma.

And your broker's defending the high return.

"As a professional, it's my responsibility to maximize return and minimize risk," explains Juli Niemann, a St. Louis analyst and portfolio manager at Huntleigh Financial Services. "I am very cold about it. I do not pass judgment on companies. My primary responsibility is the investor. And what it really comes down to is: Yes, I buy Philip Morris. That's my responsibility."

Does that mean the $5 trillion or so now invested in mutual funds should be allocated without any thought to moral or social consequences? Most experts still say yes.

So if you owned shares in Dow Chemical, you wouldn't be complicit in the damage done by Agent Orange? "Well, I don't think Dow did the dumping," hedges Philip H. Dybvig, Boatmen's Bancshares Professor of Banking and Finance at Washington University. "Even with something like Bhopal, it's hard to know where the responsibility should be placed."

Even if you can place responsibility squarely on a CEO, Dybvig sees no reason to divest. "You're not any less responsible because you sell the stock," he points out, "and if you sell, you're ensuring that you can't do anything about it. I think what's more effective is to write and say, 'Look, I'm a stockholder and I disapprove of this,' instead of just defining it out of your universe."

That opinion is the common coin in the money realm. But what about the curtained-off moral realm? "Let's say you know with relative certitude that the company is involved in unethical behavior," says the Rev. Theodore Vitali, an ethicist who heads the philosophy department at St. Louis University. "The only option available to you as a moral agent is to withdraw."

What about making the company stop? "You are never morally obliged to do the impossible," he says gently. "You have no voice; you own only a few shares. But at least you can end your complicity by getting out of it."

Vitali admits that in many instances it's hard to know what to do; information's tough to gather and weigh, and often corporations are more responsible than they appear in lurid media accounts. Many Americans don't even bother trying to find the truth. Some have resigned themselves to a world where you picket for social change and you invest for profit and the two realms never meet. Others sincerely believe corporations should have a free hand. "I meet a fair number of Wall Street types for whom it's almost a corollary to the right of the individual," notes Domini.

What bothers SRI activists is that corporations have the rights of individuals when they want them--but as soon as the clock strikes 12, they turn into abstract, untouchable legal pumpkins. That's why SRI advocates make it a point "to talk about management teams rather than companies," says Domini. "These decisions are being made by human beings."

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SRI resources.

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Myth No. 2: Conscience Costs Too Much

Niemann's been analyzing and managing investments for 30 years; she's taught, she's offered radio commentary, she's donated her time to advise the Redemptorist Fathers in Denver, the Archdiocese of St. Louis, the Girl Scouts. "I know about SRI and what it costs you," she smiles, "and it does; it costs you royally." SRI stocks "tend to be somewhat defensive in nature, defensive against economic downturns. They do beautifully when the market is falling apart. But in the kind of market we've had lately, it's a big cost."

How big? Depends on how scrupulously you narrow your universe of potential investments. "It is in some ways a vocabulary issue," says Amy Domini, "because SRI implies for a lot of people the best 2 percent of companies in America. For those of us in the field, it implies the best half. We are not seeking the models of sustainable practices; we are seeking the companies that do the least harm." The approach, in other words, is more practical than pure. "It makes it more doable," says Domini. "And it's not either 'love them or hate them'; Ben & Jerry's is your favorite company, or they're horrible because they let you down. Those kinds of conversations are futile. They do nothing to address the structure of corporate accountability."

As of June 30, the average total return for Domini Social Equity Fund was 32.96 percent. The S&P 500 average was 29.53 percent. A fluke of mutual funds' annus mirabilis? Go back three years: Domini averaged 30.33; the S&P 500 averaged 29.82. Even if you measure from Domini's birth in 1991, the fund comes out only 0.17 beneath the S&P 500.

Skeptics are still reserving judgment. "They'd like to see what happens in a down market," acknowledges Domini. "So would I. But from July 17 [when stock prices started their erratic descent] through the bottom, Domini has fallen less than the average mutual fund and less than the S&P."

Domini isn't a magical exception, either. In the mid-'90s, John B. Guerard Jr., a Wall Street analyst with a doctorate in finance, and associate editor of the Journal of Investing and the International Journal of Forecasting, conducted a coolly quantitative study and reached a shocking conclusion: "Returns in socially screened and unscreened universes do not differ significantly." Guerard found that if you invested $1 in 1987, unscreened, it would be worth $2.77 by the end of 1994. If you invested your $1 in a screened universe, it would be worth $2.74.

At 3 cents, conscience comes cheap. And it may save society in the long run. "People say you should just invest your money where it'll make the most," says Council on Economic Priorities researcher Jonathan Hickman, "but that doesn't take into account the social and environmental costs. You're making money at the expense of the environment, and, sooner or later, somebody's going to have to pay."

Still, if so many analysts dis SRI, it must mean something, right? "Just means they're too lazy to look," quips Brill, the author and investment adviser. "Commission brokers only make money when they make a sale. If they have to take an extra hour to research a portfolio ...

"There's documented proof that you don't lose money," Brill resumes. "And between the Domini index and the Citizens index [Citizens narrowed the pool even more stringently and is still getting top results], there are thousands of stocks to choose from. You'll run out of money long before you run out of socially responsible options."

As for brokers' conventional advice--invest amorally for the highest yield and then hand the profits to your favorite charity--Brill chokes on it. "When you own a stock, you are a cheerleader for the company. You want the company to make a profit. So let's take the issue of tobacco. If you own Philip Morris, you want them to make a profit--therefore, to sell more cigarettes. Does it make any sense to take the profit from Philip Morris and give it to the American Cancer Society?"

Myth No. 3: It's Impossible to Screen for SRI

Should a health-care foundation own stock in a tobacco company? Should a church own stock in a defense manufacturer? What if the Sierra Club funded its projects with shares of Exxon? What if they traded for stock in whatever oil company rated best on environmental compliance?

Where do you start?

The Council on Economic Priorities is a public-service research organization formed so people can "cast their economic vote as conscientiously as their political vote." One of CEP's old reports on Anheuser-Busch notes that "the company's reported release of toxic chemicals was the worst in the beverage industry in 1989" and tallies five willful violations of occupational safety and health laws. The report also notes, however, that A-B made the most environmentally sound political contributions in their industry; led the nation in using post-consumer waste for packaging; and recycled 600 million pounds of aluminum containers in 1991--all while animal-rights groups were boycotting A-B's Sea World for damaging marine life.

How do you even begin to sort such a mixed evaluation? "It's usually an accumulation of things, not one factor," explains CEP researcher Jonathan Hickman. He looks for patterns, compares companies in a given industry, analyzes historical trends. "There are definitely instances where [irresponsibility] is very pronounced," he adds. "At Louisiana-Pacific, that was the case. They seemed very unconcerned about what the impact of the company was in any area. Then the former CEO was ousted, and they brought in a new one who purged most areas of management and implemented a lot of [environmental and employee relations] programs very quickly. They've made an incredible turnaround."

People criticize Domini because the fund invests 4.43 percent of its portfolio in Coca-Cola, which has a great record with minorities but makes unhealthy sugar water, and 5.51 percent--its largest single holding--in Microsoft. "We sold when Microsoft went back into South Africa, then stayed out because of antitrust issues," explains Domini, "but Microsoft's behavior became more responsible." She cites the company's stellar record on employing people with disabilities; offering health insurance to same-sex domestic partners; naming two females as top executives; and so on. In other words, it's a balancing act, and the variables are weighted. "If you have one woman on your board, it's a non-event," says Domini. "If you have none on your board or in top management, that's a very strong statement, and that puts you in the worst 17 or 18 percent."

Niemann sighs over these attempts at discernment; personally, she prefers shareholder activism to SRI, and finds some "socially responsible" positions as blurry as a three-martini lunch. "I know organizations who will say you can invest in defensive but not offensive weapons," she says. "We are splitting hairs here. Is nerve gas defensive? You hit the silly season. And it does not make a difference."

Still, as a trustee for a Roman Catholic archdiocese, she faithfully watchdogs a portfolio that includes nothing connected with abortion and no offensive weapons of war. "The F-15 is defensive," she explains, "so we are comfortable with that; we have no problem with McDonnell Douglas. Something like Agent Orange would be verboten. But Dow doesn't make it anymore, so we're fine. Tobacco companies are verboten, alcohol manufacturers are not, because alcohol in moderation is fine. The theme is detriment to humanity."

Myth No. 4: Nice Idea, but You're Wasting Your Time

Does SRI prevent detriment to humanity? "I think it's kind of a nice idea, but it doesn't really help," says Dybvig. "If a company's mainline business is something you think should be stopped, then short of buying the company and shutting it down, you are not going to do anything--except lower the price of the shares so someone else can buy them."

Mike Alderson, a professor of finance, points out that SRI is "like an embargo; it only works if everybody cooperates. And when it comes to something like tobacco, there's just too much money to be made and too big a demand for the product. The money just isn't missed." He pauses. "But it makes people feel good, and there is some value in that as well."

For Alderson, it's a throwaway comment. But activists do see value in a clear, happy conscience; in moral consistency, integrity, responsiveness, and a willingness to make some basic demands of those in power. "There are a lot of very sincere people who just don't buy the notion that giving up is an option," he concludes. "I'm probably too easily swayed by the argument that I don't count."

Niemann does think individuals can make a difference--but by banding together, raising issues, and voting proxies, not by not buying. "Bottom line, the company doesn't know that you own the stock, nor do they care. If you decide to avoid purchase of something, it doesn't even measure on the Richter scale. The market is cold."

Oddly enough, Domini agrees. "The marketplace is amoral. So you have to drop back and say, Why do this? There are two possible reasons. First, for personal or institutional consistency. If I personally have dedicated my life to environmental issues, I am more consistent by not benefiting from corporations that damage the environment. That is the end of the story; you don't need to justify it further.

"If your goal is to effect social change, though, the question is: Does SRI create social change?" It can, but indirectly and immeasurably. What Domini emphasizes is a more systemic shift. "It's a misconception that SRI is about punishing companies and making their stock price not move," she explains. "What it's about is building a structure of corporate accountability, making socially responsible investors the watchdogs of the corporations."

When the Domini Social Index compiles company profiles, it sends them to the company for a response, creating "a dialogue where they're learning something about how we look at them," Domini adds. Ten years ago, if she called a firm to ask how many women or minorities held executive positions, she would've gotten a call back asking why she wanted to know. Now companies are getting used to the questions--and sometimes even preparing for them by changing.

"Some smart person said every major realization of humankind, every new way of being, has first been subjected to ridicule, then feared, then viewed as self-evident," reflects Domini. "I think we're pretty early in that cycle. And if the next thing is to be feared, we may be starting." She rattles off examples of recent (failed) attempts to crack down on shareholder activism and global divestiture.

What she doesn't mention is the editor's note in last month's Dow Jones Investment Advisor. "What really troubles me about the Social Equity Fund is the trend it could represent," writes editor-in-chief Bob Clark, admitting his personal unease with their cover story on SRI. "Amy and her folks are mostly harmless," he continues patronizingly, "and, yes, I agree with most of what she stands for. But do we really want people pooling their investing power for the avowed purpose of achieving some specific end, other than making more money?"

Might be refreshing. But Clark throws up one straw scarecrow after another, including "a Ku Klux Klan Aggressive Equity Fund" that would discourage companies from hiring African Americans. His ultimate point? That socially responsible investment is undemocratic.

SRI advocates don't sense any dangers to participatory democracy; they're not fazed by the "you don't make a difference" line, either. In its promotional materials, the Domini Social Equity Fund counters 200 years of laissez-faire resignation with a simple parable: "Thousands of starfish had washed ashore. A little girl began throwing them in the water so they wouldn't die. 'Don't bother, dear,' her mother said, 'it won't really make any difference.' The girl stopped for a moment and looked at the starfish in her hand. 'It will make a difference to this one.' "

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From the October 29-November 4, 1998 issue of the Sonoma County Independent.

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