How responsible is socially responsible investing?

Paul Hawken stirs debate with a probing critique of ethical investment funds

Jurriaan Kamp | March 2005 issue

Ten years ago—when sustainable business and socially responsible investing were as yet unknown terms—I was at a conference listening to a lecture by the chairman of Britain’s Cooperative Bank. He asked the audience a penetrating question: do you know what your bank does with your money?

I’d never thought about it. My experience was more or less as follows: “My” money was deposited into “my” account and it stayed there until I decided what to do with it. The banker’s burning argument made it clear that this was not the case. Banks continually use their customers’ money to make more money and in this process they do things that their customers—if they were asked—would never sanction. For example, my bank may invest “my” money in a weapons manufacturer that supplies arms to a regime that oppresses its country’s citizens or in a plant that makes chemical products I expressly choose not to have in my house. The inspired British banker made it clear to me that “my” money is not my money at all. He then proceeded to explain how his bank had created a series of ethical rules offering accountholders guarantees on the way their money was managed.

Such socially responsible banks are still few and far between, but over the past 10 years hundreds of ethical and sustainable investment funds have been launched worldwide. These funds offer us the opportunity of investing our savings according to certain ethical and/or sustainable criteria. Most of these funds assess companies based on a combination of “negative” criteria, which exclude companies if they are involved in specific activities (the production of alcohol or cigarettes, testing on animals and whole economic sectors such as the weapons industry, nuclear power and genetic engineering firms), and “positive” criteria, which give them an edge for certain valued activities (environmental policy, energy use, social policy and labor relations).

The criteria of these socially responsible investments vary, making it difficult to draw comparisons between them. Moreover, assessments are usually relative. Companies are compared to competitors in the same industry on the criteria selected. According to this “best of class” approach, a company is chosen if it “behaves” better than the others. In practice, this can mean that sustainable funds include companies like Shell and BP in their selection but not ExxonMobil, because the policies of Shell and BP appear to show more involvement in efforts toward creating a sustainable world economy. The problem is that all three companies earn their money in a classically non-sustainable activity: the oil business. This gives rise to the question of how a sustainable investment fund can include an oil company.

This question is the main point in a fierce attack Paul Hawken, a leading advocate of sustainable business in the U.S. and author of Natural Capitalism, among other books, is waging on the socially responsible investment industry that currently manages some $US 2 trillion. In the San Francisco publication Common Ground (October 2004) Hawken derides the lack of regulation of sustainable funds. He points out that 90 percent of Fortune 500 companies are included in such funds. “The term ‘socially responsible investing’ (SRI) is so broad, it is meaningless,” Hawken writes. He considers it indefensible that companies like the American weapons manufacturer Halliburton, pesticide and biotech producer Monsanto and McDonald’s, which spends $US 2 billion on advertising each year to entice young people to consume food that contributes to obesity, can qualify as leaders of a sustainable economy. Hawken believes that people are being misled by the many investment funds that bill themselves as sustainable and ethical.

Hawken feels the root of the problem is these companies’ zealous drive for profit. Sustainable funds often advertise that their returns are the same or better than those of “regular” investment funds. Not so surprising, Hawken writes, given that they are investing in the same companies. And that won’t change as long as the top priority of these companies is realizing maximum profit for shareholders. According to Hawken, this goal consistently leads to “externalization” of costs to workers, people, the environment and the future.

Hawken’s attack unleashed a great deal of indignation in progressive circles of the business community. On her website economist and longtime sustainable business advocate Hazel Henderson challenged Hawken’s conculsions. She believes the issues Hawken raises are only one aspect of a much larger problem: can capitalism’s current model continue without radical reform? By specifically directing his criticism towards the emerging sustainable investment sector, Hawken is focusing on the established capitalist powers and their resistance to any type of change, Henderson says. “This is unfortunate, since we know from past experience how often perfectionism can drive out the good, just as the theoretical best can drive out the better. Incremental reforms such as SRI [socially responsible investment] need the time and space to experiment. New norms and ethical criteria need to gain a foothold in these markets, as well as society and most important, in mass media,” she writes.

Another response comes from Joe Keefe of the Calvert Group, an ethical investor that Hawken cites as a setting a good example. On Keefe writes that various strategies used by sustainable and ethical funds share the common “intention” and “hope” of positively influencing the business community’s behavior. Keefe says, “That process doesn’t create perfect companies any more than voting creates perfect candidates. But it is still worth doing. Over time, it can have an impact on companies, markets and society as a whole.”

Keefe points out that it would not be practical if ethical and sustainable funds excluded all Fortune 500 companies. This approach would reduce the potential universe for investments to such a degree that only a very limited number of small companies would remain investment candidates. That confined approach would make sustainable investing too risky, according to Keefe. “The alternative to SRI isn’t perfection, it is funds with no social or environmental agenda,” he writes.

His conclusion is that the current form of responsible investment will not change the world in one day, but the emergence of increasing numbers of ethical and sustainable investment funds does contribute to increased consciousness in the business community about the damaging effects of modern capitalism. As Ben Kingham writes in another reply to Hawken in Greenmoney Journal (autumn 2004): “SRI is a ‘movement’ for social change: it does not consist of one static or perfect position.”

Nonetheless, it is clear that this movement requires more structure and regulation in order to avoid strange anomalies such as designating the notorious Halliburton corporation as “sustainable”. In that respect, Paul Hawken’s critical attack deserves to be widely heard.

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