On October 26, Louis Proyect wrote:
>Aren't you the same Ellen Frank who had a sidebar in the Aug./Sept.
>"Dollars and Sense" in an article written by the NY manager for Camejo's
>Progressive Assets Management? I wasn't exactly sure where you stood, ...
>Louis Proyect
>
The very same Ellen Frank. That sidebar was a very truncated version of a
longer piece I wrote for Dollars and Sense a couple of years ago, written
in response to a reader query. If you're interested, I've attached the
full text, below.
Q: I put some money in socially-screened, ethically-conscious index funds,
then I discovered that the fund invests in firms in Indonesia that exploit
their workers, etc.. Is there any point to these socially responsible,
lesser-evil investments, or am I just a sucker?
Nora
Olsen
Dear Nora,
You don�t say which fund you invested in and, without doubt, some are
better than others in screening firms for ethical and socially responsible
business practices. As interest in responsible investing has grown in
recent years, there has been a proliferation of socially-responsible funds,
most offered by small investment companies that specialize in this type of
investing, a few managed as a side-line by traditional fund managers. Some
define their mission quite narrowly, promising only to avoid weapons
manufacturers, casino operators, or tobacco companies (a new fund invests
only in the shares of �gay-friendly� companies). Some do more extensive
screening, looking at labor practices, community relations, environmental
records and so forth. A very few socially screened funds take a
�contrarian� approach, investing heavily in precisely those companies most
socially conscious investors wish to avoid -- military contractors, firms
with horrendous labor practices -- hoping to use their clout as
shareholders to change corporate policy.
Of all the socially-screened funds, the index funds may have the most
difficulty reconciling principle with investment goals. These funds try to
minimize shareholder risk and mirror the returns of the S&P index. To
accomplish this, they invest in a broad range of stocks, often domestic and
international, and it�s not surprising if some of the hundreds of companies
in which they hold shares have less than spotless ethical records.
Your experience, though, raises a broader question about the very concept
of these socially-responsible funds: is socially responsible investing, as
its boosters assert, a form of principled activism, or is it merely, as
some critics claim, a ineffectual feel-good device to assuage the guilty
consciences of affluent yuppies? Is it possible, in financial markets,
to do well while doing good?
There�s no question that one can do well with socially screened funds --
in the past year, according to a survey by Business Ethics, most socially
screened funds earned returns as high as, or greater than, the average for
the mutual fund industry as a whole. But, in doing so well, are
fund-holders doing any good? Not really. Many individuals who place their
money with socially responsible funds do so in the belief -- mistaken, as
it turns out -- that they are funneling cash to the companies in which they
hold shares and are thereby rewarding good corporate behavior. In fact,
virtually all activity in the stock market entails funneling cash between
various financial investors and speculators. Buying shares, say, of Ben
and Jerry�s has no impact at all on Ben and Jerry�s bottom line. Instead
the cash goes to whatever investor held the shares before you bought them
-- maybe an insurance company or a pension fund or just a wealthy
individual. If the socially responsible investor pays more for the shares
than the original buyer paid, it has enriched the insurance company or
pension fund or wealthy individual who sold the stock. Ben and Jerry�s
will never see a dime of the money.
Some socially-screened funds do promise to engage in shareholder activism
-- using their position as shareholders to pressure corporate boards. This
is a laudable pursuit, but, given the relatively small size and limited
holdings of these funds, rarely very effective. Furthermore, if
shareholder activism is the goal, wouldn�t it make sense to invest in �bad�
companies, whose behavior needs changing, rather than �good� companies, who
already behave well? This is the strategy of a few funds, but it places
their investors in an ethical quandary. If the shareholder activism
doesn�t work and the shares do well, the investor may find herself
prospering from the capital gains and dividends payments of an arms trader
or toxic sludge manufacturer.
Socially-screened funds are a response to the impulse of many concerned
people to avoid making money off the exploitative practices of rapacious
corporations. This desire is understandable, even commendable, but there
is a vast difference between avoiding unpleasantness and actually doing
good. So what�s the socially responsible investor to do?
One possibility is to relax and forget about it. Just as holding shares
in a good company does the company no good, not holding shares in a bad
company does the company no harm. If it�s returns you�re after, place
your money in any fund you like and don�t worry. If this doesn�t satisfy,
let me suggest a better option -- an account at a bank or credit union that
specializes in community development lending. In this way, your money will
be funneled directly to low income communities, worker-owned firms or other
good works. The returns are low, but guaranteed, and your deposit is
insured by the FDIC. Your money won�t do as well, but it might do some good.
Ellen Frank
