Imagine an organic food trade association any company could join. Members set the standards to suit themselves.
Imagine an organic food trade association any company could join. Members set the standards to suit themselves. Thus, any store or company can label their product “organic” if they choose because there are no rules defining what organic means. If your company can label their products “organic” if they choose because there are no rules defining what organic means. If your company does anything to improve its production methods, no matter how inconsequential, it qualifies for membership and can use the word “organic” on its labels.
The association gives an annual prize to an academic paper showing that if you eliminate six of the twelve pesticides commonly used on lettuce, you still get just as much lettuce as before. Consumers who want to know about the food they buy can’t find out how it is grown or how it is certified. Instead of an independent outside agency, association members hire private-for-profit “screening” companies to determine what is organic. The screening companies compete, each has a different screening method, and none reveal how they define or determine organic. Inside this organization a small group of core producers believe organic should mean “no use of synthetic pesticide and fertilizers”. The big food companies are amused by this group’s romanticism and see them as “idealists”.
Sound ridiculous? Yes, except this trade association exists. It doesn’t sell food, it sells investments. It is the international socially responsible investing (SRI) mutual fund industry. Like the imaginary trade group, it has no standards, no definitions, and no regulations other than financial regulations. Anyone can join; anyone can call a fund an SRI fund. Over ninety percent of Fortune 500 companies are included in SRI mutual fund portfolios.
Millions of people and thousands of institutions want their investments to express social values. And that concern is growing. Public distrust of corporations has increased over the past several years. The deterioration of the environment, exposés of corporate malfeasance, publicity about illicit labour practices (e.g. child slaves producing chocolate), and the general plight of the working poor have galvanized diverse sectors of the population to invest diligently and mindfully. Investors have placed billions of dollars with SRI institutions and funds. SRI funds promise that investors’ money will avoid companies with distasteful products and track records and/or reward those companies that work toward environmental responsibility, proper governance, and social justice.
This report addresses financial management companies offering mutual funds that screen their portfolios against non financial criteria, what is called the socially responsible or the ethical investing community. It examines current portfolio practices, reveals how SRI funds are actually allocated, shows how the industry mislead investors, and recommends how the industry can reform itself in order to respond to investors who want to invest with a conscience and a purpose.
There is a lack of transparency and accountability in screening and portfolio selection
The SRI industry began as a means to communicate a higher set of values than the mere accumulation of financial return. Responding the both environment and the oppressive apartheid regime in South Africa, investors were able to hold corporations accountable for their practices, both socially and environmentally. Without question, the SRI mutual fund world exercises influence that is disproportionate to its size in the marketplace. Brand loyalty and reputation are precious to companies and represent in many cases their most valuable asset, tangible or intangible.
Against this backdrop, there are some 600 mutual funds in the world that describe themselves as socially responsible, or use language that indicates to their prospective investors that monies invested correspond to a higher set of values than conventional investing.
The problem is that investors do not have access to the methodology, the screening, the ranking criteria, or any other data that would inform them about how or why a given company is included in a portfolio. In other words, there is no transparency or accountability, either in fund prospectuses or on websites. Calvert Funds and many others owned Enron before it imploded. But investors cannot discover how these decisions were made. It is fair to say that professional money managers who do not care about corporate responsibility manage some of the SRI mutual funds. If customers want socially screened funds, there are asset managers who will create one, outsource the screening, and populate it with companies that pass the liberal screens provided. Instant social responsibility.
The ability for investors to do market basket comparisons of different funds is difficult if not impossible
Without a transparent and harmonized process for screening and evaluating companies, the customer cannot possibly judge the social and environmental aspects of one fund versus another except by reputation or by doing their own due diligence. The scrutiny that some SRI mutual funds give to corporations must now be placed on the SRI mutual fund industry itself. The NCI database of SRI mutual funds is the first database that can actually look at the SRI field and compare portfolios easily. But it cannot compare methodology or specific selection criteria because these are not available to us or anyone else.
Socially responsible investing
Published by the Natural Capital Institute, October 2004, pp 3-4-5.