Effectiveness of SRI
I had an interesting discussion about Socially Responsible Investing (SRI) with some friends yesterday and wanted to extend the discussion here. I posed the general question, “Is it okay for an SRI mutual fund to hold investments that conflict with the investment objective of the fund?” I used the Calvert Social Investment Equity A (CSIEX) fund holding Cisco as an example, noting the discrepancy between Cisco’s questionable actions in China as a potential violation of human rights, an the fund’s investment objective (emphasis mine):
“The investment seeks growth of capital. The fund normally invests in common stocks of large-cap companies having market capitalization of at least $1 billion. Investment returns will be mostly from changes in the price of the fund’s holdings. The fund invests with the philosophy that long-term rewards to investors will come from those organizations whose products, services, and methods enhance the human condition and the traditional American values of individual initiative, equality of opportunity, and cooperative effort.“
If you are unfamiliar with the Cisco + China situation, here are a few resources that cover it well:
- Shareholders Pressure Internet Companies on Human Rights
- Hearings to Review Human Rights in China
- Business and Human Rights: Censorship in China
- China’s Net Police Should Worry US Firms
Clearly, if Cisco’s actions in China can be linked to human rights violations, and they subsequently continue to do business in the same manner, maintaining 3.19% of CSIEX’s holdings in Cisco would be a direct conflict with the investment objective of the fund. Whether or not that is permissible legally (i.e. the fund manager has some “fudge” room), shouldn’t an SRI fund err on the side of over caution? I pose that question as I wonder what percentage of SRI investors blindly trust the fund manager to stick to the fund’s objective. Shouldn’t you be able to invest your money in an SRI fund and then look the other way, completely confident that your money will be put into companies, “whose products, services, and methods enhance the human condition and the traditional American values of individual initiative, equality of opportunity, and cooperative effort?” And if not, why bother investing in an SRI fund in the first place?
Not to bring the post too far off the original question, but why would a fund manager choose to deviate from the fund’s objective? In the case of Cisco and the company’s recent questionable involvement in China’s internet censorship, it is difficult to argue that a fund manager was unaware of the potential conflict – not only has the issue been well covered in the press, but the fund manager would eventually come across the issue during their regular analysis of the fund’s holdings. If we can eliminate naivete as a possibility, what is left? A personal belief by the manager that Cisco is still an appropriate fit, despite the evidence otherwise? Or is it something more sinister, such as a drive to increase returns for the fund?
As a general note, my intention is not to harp on Cisco, or even this specific Calvert fund (although I think it is a perfect example to use for this dilemma), but to question the effectiveness of SRI investments overall. If they aren’t achieving superior enough returns, the market’s interest in funneling money into them will most likely decline. Additionally, if an investor cannot trust the fund manager to strictly adhere to the fund’s objective, why bother going the SRI route in the first place? There are plenty of other investment vehicles available that offer superior results – if an SRI fund achieves average returns and doesn’t really adhere to its objective, why would investors funnel money into an “average” SRI fund that holds a similar portfolio as an “above average” normal fund?
(Thanks to Dave, Kyle and Nic for the interesting discussion yesterday.)
TAGS: This entry was posted on Wednesday, April 19th, 2006 at 6:34 am and is filed under Business Ethics, CalPoly MBA, China, Corporate Social Responsibility, Socially Responsible Investing. You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.
April 21st, 2006 at 10:28 am
I have to agree with your comments about SRI funds and their effectiveness. It seems to me that in order to be truly socially responsible, a fund manager would need to be even more diligent than a traditional fund manager. Maintaining a high level of social responsibility would require a whole new level of research into companies and their activities than would be necessary for regular fund management. I think the idea of SRI is very intriguing and certainly appealing, especially as someone concerned with CSR and all of its implications. 20 or 30 years from now it will be interesting to analyze the CSI funds and see how they compare with more traditional funds. It will also be interesting to look at what companies were held and what sort of monitoring/corporate accountability model was followed, if indeed these managers did follow some sort of model like that at all.
April 25th, 2006 at 1:34 am
Thank you for the comment Matthieu – I’m glad to see that you are blogging more regularly again as well!
I think one of the most appealing aspects of the SRI movement isn’t so much the wider public awareness (via investing) of Corporate Social Responsibility initiatives, but of the potential weight these SRI funds may carry into the capital markets. Beyond simply earning a return comparable to more mainstream investments but in adherence to your morals, by investing in SRI funds you greatly increase the potential for social change at the corporate level. With diligent and ethical fund managers at the helm, owning large stakes in corporations, who cares if you earn 5% instead of 8% if your investment enables the fund manager to invoke positive movement at the shareholder level.
I think more and more people will start to think in a like manner and will be excited to see how widespread this form of social activism becomes.