Socially responsible investing isn't just a fund category or radical chic. It cuts into the core of your clients' most deeply felt values.
Investors who abhor smoking or environmental degradation are regularly advised to choose stocks that yield the highest returns, including stocks of companies that produce tobacco or pollute the environment, and then donate their profits to campaigns to limit smoking and clean the environment. This is akin to advising an Orthodox Jew to forgo kosher food for cheaper non-kosher food and donate the savings to his synagogue.
The advice is symptomatic of a more general desire to separate the "utilitarian" investment characteristics of risk and expected returns from its "expressive" characteristics. Expressive characteristics are those that convey to us and to others our values, tastes, wealth and social class.
Almost all products combine utilitarian characteristics with expressive ones. For example, the utilitarian characteristics of a car include gas mileage, reliability and safety, while its expressive characteristics include style, status and social responsibility.
Both a Hummer and Prius would get you from home to work and back. But a Hummer expresses dominance while a Prius expresses environmental responsibility. There is no way to separate the utilitarian characteristics of a Hummer or Prius from their expressive characteristics. The same is true for investments, much beyond socially responsible investments. For example, hedge fund investors might attain high returns from their investments, but they surely attain high status. Mention your hedge fund and we instantly know that your income is high and so is your wealth. We might even think that you are a smart, sophisticated investor. Similarly, mention your shares of the AWM Fine Wine fund, whether Bordeaux bordeaux Cruxcrus, Burgundy burgundy Cruxcrus or World world Crux crus, and we might think that your tastes are refined. Or we might think that you are a wine snob.
I learned the utilitarian and expressive features of socially responsible investors in quiet conversations with a nun, a video producer, a graduate student, a consultant and an owner of military-related companies. I asked each about their ethical, religious and societal goals, and the background, experiences and ideas that led them to support those goals. I asked them if they could separate investment goals from ethical, religious and societal goals and whether they would be willing to sacrifice investment returns for their goals. I also asked them how they support their ethical, religious and societal goals with actions beyond investments, such as volunteer work and donations.
Social responsibility means different things to different people and meanings are intimately connected to life experiences and the sense of what matters. The nun I spoke with belonged to an order that was founded as a teaching order, and it defines human dignity as the characteristic that is most important to them, and human rights are part of that. The order's members are now engaged in teaching and social work in 50 countries. So the order excludes from its portfolio companies that use sweatshops as well as companies connected to the military.
Companies are like people, virtuous in some parts and not so virtuous in others. Raytheon, a company that produces military supplies, also has wonderful ethical guidelines for itself and its employees. "But given the nature of the business in which it's involved," said the nun, "we came to the conclusion that we don't want to make an investment in Raytheon."
The environment is the most important topic to the video producer I interviewed, and its importance is reflected not only in her portfolio but also in her "green movement" work. Lack of resources in the early years compelled her to work for some companies she considered socially irresponsible. At the same time, poor performance of a socially responsible mutual fund compelled her to switch to a conventional fund. But her resources are substantial now. "I consider it a luxury that I now have the ability to invest more in line with my values," she said.
The graduate student grew up in a wealthy family but encountered poor children during summer vacations. These encounters instilled in her a desire to promote fairness to all. This goal includes the promotion of civil rights, reproduction rights and rights for gay, lesbian, bisexual and transgender people. The student's father worked in the financial services industry and he advised her to "invest where I could get the highest returns and then give away all the money if I wanted." But she thinks that "the only way to separate investing from social responsibility is to put on a blindfold. If your investments cause harm and you try to alleviate that harm by contributing your profits, you do (not) more, and probably less, than negating yourself."
The consultant told of a grandfather who emigrated from Eastern Europe when he was 14, founded a major union local and then went on to start his own business. "When I was a teenager," she said, "I was doing some work for him when there was a strike at his business, and he told me I couldn't cross the picket lines. My mother said, 'You have to go to work and help him,' but my grandfather said, 'You can't do that.' Those are the experiences and the key framework that led me to emphasize feminist and workers' rights in my investing. Thus, labor justice and women's issues are the main things I look at."
"My peace of mind is part of what I get out of SRI," said the consultant, "but there's a bigger part of trying to make a change in the world itself. I don't expect capitalism to become a socially just system just because I don't invest in certain companies, but I do believe that ... if there were a larger socially responsible movement, tobacco companies could not have gotten away with what they did for so long."
The owner and manager of military-related companies sees no contradiction between his work and social responsibility. "To me," he said, "the type of industry has nothing to do with holding the board and the leadership of a company accountable in terms of being socially responsible. ... You can choose not to invest in companies that have products or services you don't agree with. However ... SRI should be more about supporting those companies that, based upon objective criteria, are the best-or at least very good-in their field in terms of their policies and practices." These include effective corporate governance, practices that truly value employees, protecting the environment and supporting the community, he says.
Social responsibility lacks a common definition and it does mean different things to different people, but the same is true for risk. Financial advisors must know and respect the preferences of their investors for utilitarian and expressive features, whether the social responsibility of a portfolio excludes tobacco stocks or the status conveyed by hedge funds.
Meir Statman is the Glenn Klimek Professor of Finance at the Leavey School of Business, Santa Clara University. His research focuses on behavioral finance. He attempts to understand how investors and managers make financial decisions and how these decisions are reflected in financial markets.