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Wednesday, January 17, 2007

Brad Plumer: Is Socially Responsible Investing a Sham?

Not too long ago the topic of socially responsible investment was discussed here, in particular the practices of the Bill & Melinda Gates Foundation as described in the Los Angeles Times. Brad Plumer has more on this topic in this follow-up to the Los Angeles Times article:

Is socially responsible investing a sham? Moral Failure by Bradford Plumer, TNR Online: Last week, the Los Angeles Times published an impressive two-part investigative report, uncovering a seamy contradiction at the heart of the Bill & Melinda Gates Foundation... It seems the foundation, for all the immense good that it's done, has invested nearly half of its $35 billion endowment in companies that cause many of the problems it tries to alleviate through its grants. ...

In one sense, the Times exposé was invaluable--a sharp illustration of the damage that corporations can inflict on the planet if left unchecked... A dose of shrillness is entirely apropos. But, if the implication is that the Gates Foundation should try to help fix this sordid state of affairs through its investment choices, there's reason to be skeptical. "Socially responsible investing" (SRI) ... may give foundation managers a clearer conscience, but it won't do much to rein in rogue corporations.

SRI has become all the rage lately among activists ... disillusioned with the ability of ordinary politics to effect change. Hundreds of SRI funds have been set up to include stocks of "responsible" companies that are screened for certain criteria. The screens can vary widely: Green Century Equity, for instance, avoids corporations with dismal environmental records, while Catholic funds like the Aquinas Growth Fund steer clear of investments that might support abortion, contraception, the arms industry, and pornography, among other sins. Many public pension funds--most notably CalPERS in California--also steer clear of "bad" companies.

These funds certainly give people the ability to make ethical choices about where to stash their savings. It's less clear, however, that SRI really affect the way companies do business. David Vogel, a business professor at Berkeley ..., argues that such investing has no impact on share prices, for starters. "Many companies might want to get listed..., so they might take some small steps in that direction," Vogel says. "But they won't make changes that are seriously expensive." ...

For most corporations, after all, there's no real penalty for being shunned by the socially responsible community. Virtually all SRI mutual funds--and most public pension funds--now screen out tobacco companies, but Philip Morris and RJR Nabisco have no trouble raising capital elsewhere. ... For every health-conscious fund that wants to dump tobacco stock, there are dozens of investors willing to buy.

But what about South Africa? The massive shareholder boycott of companies doing business with the apartheid government in the 1980s is often touted as an example of socially conscious investing ... pushing corporations to do the moral, rather than the profitable thing. As it happens, though, a 1999 study by Siew Hong Teoh, Ivo Welch, and C. Paul Wazzan found that the divestment campaign had virtually no impact on the bottom lines of banks or corporations with South Africa holdings. True, the campaign ... put moral pressure on companies to pull out of South Africa, but there wasn't necessarily a financial reason for them to do so--one reason why oil companies paid it little heed. ...

That's not to say socially conscious investors are totally helpless--or hapless. Large investors can try to use their clout to pass shareholder resolutions that influence corporate behavior, a strategy employed by charity groups like the Nathan Cummings Foundation (but not the Gates Foundation) and funds like the Domini Social Equity Fund. ... "It's a reasonable strategy," says Vogel, "although companies will usually fight off resolutions they see as too costly." ... In the end, government action is often the only thing that can dramatically alter corporate behavior. ...

So should the Gates Foundation just throw up its hands and invest solely in pursuit of profit, without regard for other concerns (as it appears to have decided to do in response to the Times report)? Hardly. Both SRI and shareholder activism can still do a world of good, by pushing for modest changes and raising awareness about corporate wrongdoing. But it has real limits. One final anecdote: Last week, Exxon announced that it would stop funding attacks on the science of climate change, but it seems to have done so not because of pressure from activists but rather out of fear that Democrats in Congress are going to shift the global warming debate--and the company doesn't want to be left behind. In all things, the messy business of politics still matters.

See also "Corporate Social Irresponsibility" for more on the ability of socially conscious investors to bring about changes in corporate behavior.

Since Exxon is mentioned, here's the statement on their sudden metamorphosis into a socially responsible company: Exxon cuts ties to global warming skeptics. I've been getting email and phone calls with an invitation to participate in a "conference call on climate change issues with Kenneth Cohen, ExxonMobil’s VP of Public Affairs," and some links to information on their change of heart (e.g. the previous link and a speech by CEO Rex Tillerson). So it appears the company has quite a PR blitz underway. I've been wondering what exactly motivated it.

    Posted by on Wednesday, January 17, 2007 at 02:34 AM in Economics | Permalink  TrackBack (0)  Comments (8)

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