Values-Based Investing:
Who – Not What – is "Socially Responsible"?¹

The objective of those who advocate social investing is to make corporations behave in a socially responsible way by denying them capital if they do not. Therefore, if the debate over the social responsibility of the corporation is resolved in the negative, the social-investing issue is resolved as well.
- John H. Langbein & Richard A. Posner (1980)²

         SRI’s critics have long claimed that its primary objective is to deny capital to offending companies or to punish their share value. Leaving aside the improbability – indeed, impossibility – of such aims, the critics miss the essential characteristic of values-based investors. For them, SRI is not about companies; it is about them and their view of themselves.

“Corporate Social Responsibility”

         This mis-perception of values-based investors regularly leads to confusion about “socially responsible investing” (SRI) and “corporate social responsibility” (CSR). SRI would seem to be the one side of a coin with CSR on its reverse. In fact, they are so very different that they could be unrelated. Their differences clarify much about SRI.

         CSR is about a corporation and the aspirations of its people. Sir Geoffrey Chandler recently contrasted what CSR is with what it ought to be:

         SRI describes an assertion of personal or institutional responsibility by an investor for what s/he owns. The investor knows his/her social objectives and tries to align the available investments with them.⁴

“Corporate Accountability”

         The two phrases – SRI and CSR – lead to confusion because one might assume – not illogically but wrongly – that socially responsible investors buy stock only in socially responsible companies. To avoid this confusion, it is best to think of SRI’s social change objectives in terms of “corporate accountability”.⁵

         Historically, that approach is consistent with SRI’s modern origins and continuing evolution. In 1940 (in a different context) the future four-term New York governor and US Vice President, Nelson A. Rockefeller, made this distinction: “We must recognize the social responsibility of corporations, and the corporation must use its ownership of assets to reflect the best interests of the people. If we don't, they will take away our ownership.”⁶

         In all its approaches SRI is about corporate accountability: how corporations use their “ownership of assets to reflect the best interests of” their stakeholders.

Priorities & Tolerances

         Values-based investors tend to take a clear-eyed view of securities issuers. They see that, just as there is no perfect person, there is no such thing as a “perfect” company. Few think a “socially responsible” company is even conceivable. So, investment universes limited to “socially responsible” companies are quite rare.

         Most individual and mission-based institutional social investors want to own stocks, bonds, mutual fund shares, certificates of deposit, etc. whose issuers do not fall below the investor’s minimum standards for ethical behavior. Investors’ decisions on minimum standards for companies are personal, individual, institutional. What is an appropriate investment for someone who cares deeply about nuclear proliferation may not be for someone for whom labor rights is the central issue.

         At the same time that they order their social priorities, social investors also consider their tolerances. Tolerances, too, are matters of individual weighting. An investor might accept some poor performance on environmental issues but none on human rights.

The Orthodoxy Trap

         Some have criticized SRI for its lack of uniform standards for what is “socially responsible” in investments.⁷ They are right that there are no such standards; they are wrong in implying there should be.⁸

         Take McDonald’s. Is it a decently-run company with forward-looking employment policies and practices and a commitment to reduce environmentally- unfriendly packaging? Or, does it force-feed junk food to an over-weight nation? Social investors disagree on these questions. They even differ on what “yes” might imply to either.

         Comparing opposing views on issues such as those McDonald’s poses – dozens of other company examples exist – highlights SRI’s apparent and real incoherence. But in this jumble lies a strength: SRI’s criteria evolve as social investors’ understanding of the world about them changes. Even Paul Hawken, who faults SRI for its lack of an orthodoxy, recognizes that:

         Consider South African divestiture. A decade elapsed between apartheid becoming a domestic issue and divestiture’s emergence as a viable objective in the late 1970's. And, it was controversial for another decade and a half until sanctions ended in 1994. In no small part, public awareness grew in response to the debate over engagement and then divestiture. In 1991 in the midst of the controversy over sanctions, the Financial Times editorialized:

No one has ever better summarized SRI’s means and objectives.

         An orthodoxy would restrict the debate with corporations, government and society at large from which progress may emerge. An orthodoxy would drive dissenters from the field and inhibit socially responsible investors’ ability to grow in understanding. Hence, it is futile to try to enforce a single set of standards for what is “socially responsible” on the evolving ethical standards of diverse investors.

The Centrality of Intention.

         Whatever their differences in their approaches to SRI, social investors share an intent to act responsibly with their money, to try to achieve social objectives while reaching their financial aims.

         This shared intention keeps social investors who may disagree on some important issues working in partnership to advance causes on which they agree through shareholder activism. The Interfaith Center on Corporate Responsibility (ICCR) has fostered this pragmatic approach for 35 years on issues ranging from apartheid to strip mining.

         Providers of mutual funds – the securities of choice for most individual investors today – deal with a quite similar problem. Domini, MMA Praxis, Parnassus, Pax, TIAA-CREF – their task is to determine the composition and bounds of social investors’ objectives and tolerances and to offer a vehicle that corresponds to them. They – and their research providers – receive continuous criticism on their decisions.

         Trading today’s relatively free-form, active intentionality for the imposed coherence of an orthodoxy is a deal few values-based social investors – whether individuals or mission-based groups – would make. I would argue an orthodoxy, despite its simplifying appeal, would ill-serve value-seeking and value-enhancing investors as well. It would defeat their purpose: to take responsibility for what they must own – securities in their savings and pensions accounts.

         The need to make this purpose – this intention – reality informs the new framework for understanding “socially responsible investing”. For it is the foundation on which SRI stands.

¹ This article is excerpted from my earlier paper, “Socially Responsible Investing: An Evolving Concept in a Changing World”. The paper is available at: http://www.kld.com/resources/papers/SRIevolving050901.pdf.

² John H. Langbein & Richard A. Posner, "Social Investing and the Law of Trusts", 79 Mich. L. Rev. 72, 74 (1980) (hereafter “Langbein & Posner”).

³ Sir Geoffrey Chandler, "Corporate Social Responsibility: The International Aspects", Keynote Address, Conference on Corporate Social Responsibility and the Role of the Lawyer, Amsterdam, June 25, 2004. Quoted by permission of the author.

⁴ Alignment is discussed below in terms of “consistency” in the context of “values-based” investing. Institutions that successfully pursue SRI define their programs in terms of their missions. For that reason, KLD has described it as “mission-based investing”. See generally Steven D. Lydenberg & Peter D. Kinder, Mission-Based Investing (Boston, Mass.: KLD, 1998-2004).

⁵ Corporate accountability or reform did not emerge as an aspect of SRI until the advent of shareholder advocacy in the mid-1960s. See the discussion below and generally David Vogel, Lobbying the Corporation (New York: Basic Books, 1978). The two aspects of SRI did not merge in vehicles accessible to retail investors until Calvert and Domini made the link in the early 1990s. Hence, Paul Hawken is wrong when he says “The SRI industry began as a means to communicate a higher set of values than the mere accumulation of financial return. Responding to both the environment and the oppressive apartheid regime in South Africa, investors were able to hold corporations accountable for their practices, both socially and environmentally.” Paul Hawken & The Natural Capital Institute, “Socially Responsible Investing” (Sausalito, Calif.: Natural Capital Institute, Oct. 2004), p. 20. http://www.naturalcapitcal.org/images/NCI_SRI_10-04.pdf. (hereafter “Paul Hawken, et al.”)

⁶ Geoffrey C. Ward, "A Charmed Life -- Almost," New York Times Book Review, November 3, 1996, p. 10.

⁷ See e.g. Paul Hawken, et al., op. cit., pp. 25-26, 29, which focuses on the search for socially responsible vehicles.

⁸ Sir Geoffrey Chandler disagrees (e-mail to author, May 31, 2005). “I accept that this is a matter of evolution, of continuous improvement, not revolution, but we do know what we are aiming for if capitalism is to survive – that is a point of departure based on principle, not one motivated solely by profit with something added on. The [Universal Declaration of Human Rights] UDHR enunciates these principles and ... [is] embraced as a foundation of policy by a growing number of leading companies today.” He is right on both counts: SRI did evolve without an express foundation, and it is time to consider one. However as to individual screens evolving from that principled base, there must be room for them to evolve over time.

⁹ Id., p. 22.

¹⁰ "The Ethical Ways to Invest," Financial Times, April 14, 1991, p. 6.