Quakers and the market

As a religious body, Quakers have a long heritage of viewing the outward manifestation of inward faith as a crucial component of Christianity rightly understood. “Quakerism is not just a set of beliefs or a statement of faith; it is a practical, ethical, and functional religious approach to life,” says Wilmer Cooper, for instance, in A Living Faith: An Historical and Comparative Study of Quaker Beliefs. “That is to say, it is a religious faith to be lived out and not just professed and talked about.” If we can begin to see economics as the study of human action, then given this Quaker perspective it seems clear that the practical application of Quaker faith can benefit from greater exploration of such a discipline.

Early Friends certainly viewed themselves as active economic agents within the larger society. “The early Friends were a people of great integrity, courage and independence of mind and in the second and third generations were among those people who would have gone into the universities and from there into law, the Church and the higher professions,” writes Arthur Raistrick in Quakers in Science and Industry. Business, though, proved a better fit. “Their Quaker beliefs, their refusal of the oath, their plainness of speech and dress and their whole attitude to life prevented this, and they were left with little but the ‘innocent’ domestic trades.” Indeed, as he points out, the Quaker ‘Advices on Trade’ were unique among religious groups of the time.

This economic activity and outlook had a profound impact upon the Society of Friends. First, as Cooper suggests, their “concern for honesty and truth-telling in their public life and in their business dealings” led to success in business. Second, the interaction of their faith upon their business dealings impelled them toward the promotion of the welfare of their employees and the population at large, as Raistrick notes. Finally, their acumen in business affairs had ripple effects on their social concerns. In The Quakers: Money and Morals, James Walvin argues that the successful drive toward abolition among Friends arose from an “insistence that the organisation be conducted on business lines: methodically, systematically, with careful recording of their transactions and finances.”

Many Quakers today, however, are arguably far less inclined to see the value of studying the economy, the marketplace, and our interactions in those arenas. Mark Cary’s research suggests that unprogrammed Friends, for example, view business activity in almost entirely negative terms. Jack Powelson sees these views arising from a focus on greed and consumerism as inherent byproducts of capitalism rather than as personal characteristics meriting personal attention.

John Punshon takes the further step of suggesting that such attitudes likely arise from modern Quakers too often operate as a “sustained class and not a sustaining class.” He worries that “The link between the production of wealth which the community can use for socially productive purposes, and the good ideas about what those purposes are, has been severed.”

If Punshon, Powelson, and the historical activity of early Friends have anything to say to Quakers today about the connection between economic understanding and the living out if Christian faith, it is that to ignore or reject the reality in which we find ourselves is to unnaturally isolate ourselves from the practical, ethical, and functional aspects of the religious tradition to which we claim to adhere.

SRI faces tough questions about group investments

[Palmeri, Christopher. "The Golden State's Not-So-Golden Goose," BusinessWeek, 11 July 2008.]

The latest news about California's socially responsible state pension funds is troubling, to say the least:

"A recent report from the California State Teachers' Retirement System (CalSTRS), revealed that the $170 billion fund, the nation's third-largest, would have been $1 billion richer if it had stayed in tobacco stocks. Meanwhile, investments in California real estate are proving particularly painful for the nation's largest fund, the $230 billion California Public Employees' Retirement System (CalPERS). Among other bad deals, it faces a loss of nearly $1 billion on one land investment alone.

"The performance of the Double Bottom Line plan illustrates the potential drawbacks of socially responsible investing."

In some ways, it seems the SRI field is caught in a Catch-22. There are few moral dilemmas if an individual chooses to invest his or her funds in a manner that may expose them to additional risk but may be more consistent with their values. But individuals taking such action can only hope to have a very small impact on any one company, much less the overall economy.

On the other hand, major group investments have the potential to achieve greater change in the marketplace, but this usually involves a small number of individuals making ethical decisions for a very large number of others. In a political situation, these decisions can be particularly prone to abuse. As Palmeri notes, "Politicians on the campaign trail can generate fast headlines by announcing bold investment initiatives, but the bottom-line consequences of such actions take years to show up."

Author Jon Entine has weighed in on the dangers of mixing SRI and public pension funds. You can read his contribution to the book Corporate Retirement Security here.

The California situation offers a cautionary tale that indicates it is perhaps worth considering whether there still is a place for SRI among very large and diverse bodies or if SRI is indeed best practiced among individuals, families, and groups with relatively homogeneous values.

Investors need to speak up

[Anne Moore Odell, "Mainstream Fund Managers Vary Widely on Social Responsibility," SocialFunds.com, 1 July 2008.]

A new report from RI Metrics indicates that lack of communication is the primary difficulty preventing fund managers from implementing comprehensive and consistent SRI guidelines:

"the number one problem for the managers studied by RImetrics is the 'lack of clear, strong signals from their asset owner clients.' Sixty percent of asset managers didn't consult clients in the development of their SRI policies. This leads to policies that don't accurately reflect clients' priorities, RImetrics reports."

MicroPlace

In a recent article, columnist Subashini Ganesan notes that "according to Coinstar (a national business that distributes and maintains coin-counting vending machines), the American household has an average of $99 in spare change lying around the house!

"While you might want to lavish yourself, there is another way to use your 'small change' to drive big changes, globally. In fact, globally, $100 is often all it takes for a poor person to work themselves out of poverty. And MicroPlace, a subsidiary of eBay, has created a powerful tool for us to aid the world’s working poor while still receiving modest interest on our investments."

You might recall the previous post on microfinance and the discussion of Kiva in particular. NextBillion writer Rob Katz took some time to outline the differences between the two organizations last October. Here's an excerpt:

"As P2P Lending News explains, [t]he big difference between MicroPlace and Kiva...is that loans will be securitized (and therefore potentially trade-able), and lenders will earn interest. Unlike Kiva, lenders on MicroPlace invest in microfinance by purchasing securities. Funds generated by these sales are then invested in microfinance institutions around the world. MFIs, in turn, solicit clients, make loans and collect payments - they do their normal day-to-day business.

"Once client payments are in, the institutional investors receive their loan (plus interest) who can then pay back their investors - people who purchased those original securities. It's not as simple a model as Kiva's, but its differences are very important.

"First of all, Kiva is a non-profit. As Matt and Jessica Flannery have explained, it's very difficult to become a SEC-registered broker/dealer - even more difficult when you're running Kiva from your living room on the nights and weekends. MicroPlace, on the other hand, had the institutional and financial backing of EBay, allowing it to go through the complex regulatory application process and to put up the necessary money for the SEC to sign off. Upshot: Kiva wanted to be for-profit, but had to stay a NGO because it was a regulatory nightmare to register with the SEC. As a result, lenders on Kiva only receive their loans back - without interest. MicroPlace, as a broker/dealer, can pay interest to lenders - thanks to its ability to navigate the aforementioned regulatory maze.

"Secondly, MicroPlace adds a level of intermediation that Kiva doesn't have. With Kiva, lenders provide capital to MFIs, who then lend to clients. MicroPlace is a market for microfinance securities, not just requests for loans. Sure, it takes away some of the intimacy, but for the microfinance industry, it's a big step. Securitizing loans helps diversify risk, and allows microfinance investors to reach into the second and third tier MFIs that are having a hard time raising non-donor money."

Quaker Quotes VIII

In his book Signs of Salvation Quaker author Ben Richmond calls us to "a faith in God that implies rejection of the sway of mammon over our lives."

This can be taken in a couple of ways. One is to see mammon itself as evil, but another is to see the love of mammon as evil and instead look for ways to use the resources at our disposal toward positive ends and achieve the "freedom from anxiety" mentioned by Richard Foster.

Along these lines, John Schneider echoes William Penn when he writes in his 2002 book The Good of Affluence that "Christians ought to have a view of modern capitalism that is 'world affirmative' and 'world formative' rather than mainly negative and prone to strategies of separation and withdrawal."

CFA releases ESG guidelines

The Chartered Financial Analyst Institute, a "global, not-for-profit association of investment professionals," recently released a manual for investors on environmental, social, and governance factors, or ESG (I discuss ESG in this earlier post). The manual includes a list of key ESG issues along with organizations, principles and research central to the ESG movement.

Here is an excerpt:

"This manual aims to help investment professionals identify and properly evaluate the risks and opportunities ESG issues present for Investors in public Companies and in the process clarify the relatively sparse and inconsistent information provided in current financial statements."

The manual "focuses on the legislative and regulatory, legal, reputational, and operational ESG risks and opportunities Shareowners will need to consider to fully understand the Companies in which they invest."

SRI jitters

In an earlier post, I discussed the question of whether SRI is more or less a fad that may quickly fade if the market turns sour. It seems that others are beginning to ask this question, particularly in light of the decision by the board of Calstrs, the California State Teachers' Retirement System, to reconsider its exclusion of tobacco stocks:

"Unlike some socially responsible funds that banned tobacco companies for health-related reasons, Calstrs said it divested in 2000 because numerous lawsuits against the industry and the specter of government regulation made the stocks too risky. It now says those risks have diminished.

"Calstrs also indicated that missing out on a 'market weighting' in tobacco stocks these past several years cost the fund more than $1 billion in lost investment returns.

"Calstrs wouldn't be the first pension fund to reverse a ban on tobacco shares. The Florida Retirement System voted in 2001 to overturn a similar ban after divesting from tobacco stocks in 1997. Still, Calstrs's decision 'will be watched closely,' said Amy Borrus, deputy director at the Council of Institutional Investors. 'At a time when pension funds are under tremendous pressure to boost returns, they are rethinking the costs of divesting from a whole class of shares.'"

In a recent article in the New York Sun, columnist Liz Peek wrote that "The reality is that the performance of these funds is skewed by their relative exposure to various industry groups. Good works today simply don't measure up to oil prices of more than $130 a barrel. Investors may (and possibly should) choose to support firms they consider highly ethical, but they may well have to accept lower returns to do so."

Not all are quick to suggest that SRI is either financially unsustainable or likely to experience an exodus, though.

"Research by Julie Hudson, analyst at UBS, suggests the SRI sector could shrink in the short term as 'firms under pressure may go into survival mode, de-emphasising anything that is not relevant to immediate survival'. Hudson counters this with a long-term view that SRI issues such as climate change, resource constraints, food scarcity, the energy challenge, and corporate control are driven by politics, public opinion, and consumer behaviour rather than market volatility.

"Hudson said: 'SRI investors don’t abandon their values in a downturn. When markets are volatile and visibility is clouded, all investors cast around for other inputs to help them understand companies better.'"

Short break

Hello and thanks for stopping by! I will be away from a computer for a couple of weeks, but will return to updating the blog as soon as I get back.

Best Buy launches recycling program in response to shareholder proposal

[Liedtke, Michael. "Best Buy testing free e-waste recycling program," San Francisco Gate, 2 June 2008.]

Here's an interesting story on how shareholder engagement can impact corporate policy without even bringing a resolution to vote:

"Under pressure to help dispose some of the electronic waste it helped create, Best Buy Co. is testing a free program that will offer consumers a convenient way to ensure millions of obsolescent TVs, old computers and other unwanted gadgets don't poison the nation's dumps.

"The trial announced Monday covers 117 Best Buy stores scattered across eight states that will collect a wide variety of electronic detritus at no charge, even if the Richfield, Minn.-based retailer didn't originally sell the merchandise.

"The pilot stores are in Best Buy's Northern California, Minneapolis and Baltimore markets, as well as parts of North Dakota, South Dakota, Iowa, Wisconsin, Virginia and Washington, D.C.

"Depending on how the test goes, the nation's largest electronics retailer may expand the recycling program to all of its 922 stores in the United States. As it is, Best Buy's test is believed to be the most extensive free electronics recycling program to be offered by a major retailer so far.

"Best Buy agreed to set up the recycling trial after a social responsibility group, As You Sow, submitted a proposal that would have asked the company's shareholders to endorse an electronics recycling program. As You Sow withdrew the proposal after Best Buy indicated it was already exploring ways to expand its existing recycling programs."

Faith and Practice

In earlier post, I mentioned the importance of Faith and Practice to Friends. According to Britain Yearly Meeting, Faith and Practice "is an attempt to express Truth through the vital personal and corporate experience of Friends. It is largely composed of extracts from Friends' writings: a fitting way of expressing the breadth of Quaker theology." Most also include a brief history of the Society of Friends and the roots of their own branch of that society, as well as the organizational structure and business practice of the meeting.

Many of these texts are available online and are searchable. Here is a listing:

- Australia Yearly Meeting
- Baltimore Yearly Meeting
- Britain Yearly Meeting
- Canadian Yearly Meeting
- Central and Southern Africa Yearly Meeting
- Evangelical Friends Church Southwest
- Illinois Yearly Meeting
- Intermountain Yearly Meeting
- Iowa Yearly Meeting
- Mid America Yearly Meeting
- New York Yearly Meeting
- North Carolina Yearly Meeting
- North Carolina Yearly Meeting (Conservative)
- North Pacific Yearly Meeting
- Northwest Yearly Meeting
- Ohio Valley Yearly Meeting
- Ohio Yearly Meeting
- Pacific Yearly Meeting
- Philadelphia Yearly Meeting
- Southeastern Yearly Meeting
- Western Yearly Meeting
- Wilmington Yearly Meeting

Investing in vice

Since 2002, at least one counter trend to the SRI movement has been the Vice Fund. This fund seeks to track down rewarding investments in four sectors - alcohol, tobacco, gambling and defense. In a recent interview, co-Portfolio Manager Charles Norton talks about the fund's outlook and strategy:

"We’re focused on four sectors that have exhibited unvarying demand regardless of economic activity and that have key fundamental strengths that help explain why they’ve been around for hundreds of years. The inherent demand of people to smoke, drink and gamble and of nations to arm themselves is clearly strong and long-lasting. The businesses are typically quite profitable, combining low production costs with tremendous pricing power, especially in tobacco and alcohol.

"It’s also important that governments tend to be large beneficiaries of these businesses, through the collection of billions of dollars in tax revenue. That essentially makes the government a partner, with the financial incentive not only to see that the business stays around, but that it also does well."

The existence and success of the Vice Fund ("the Vice Fund has earned an annualized 20.2% over the past five years," according to the above article, "vs. 11.3% for the S&P 500") should give SR investors at least some pause. It is consistent with Alicia Munnell's comments in Pension Fund Politics on the economics of SRI when she observes that "boycotting a stock is unlikely to have any impact on its price, because the demand for a company’s stock is almost perfectly elastic. In other words, a relatively small change in quantity demanded for a stock – which has been shown to be the case with social investing since it accounts for an extremely tiny portion of total assets – does not significantly alter the price of that stock or the success of the targeted company." Indeed, "Boycotting tobacco stocks may result in a temporary fall in the stock price, but as long as some buyers remain, they can swoop in, purchase the stock, and make money."

Now, this is not to say that SRI has zero impact on the market, but it does suggest that investors should be aware of the limitations of screening alone. Even major divestments such as South Africa achieved debatable impacts on targeted companies. If you see screening as less a matter of corporate change and more one of integrity, then it becomes easier to reconcile oneself to the outcome. As mentioned in previous posts on more active engagement, there may be more effective means to shift the marketplace.

Socially responsible...government

[Kostigen, Thomas M. "Everything You Know About Water Conservation Is Wrong," Discover, 28 May 2008.]

The above article on water conservation provides an interesting jumping off point for a discussion of business and government social responsibility and the role of investors and citizens.

"Proper management and use of the world’s virtual water already save almost 5 percent of the water used annually in global agricultural production, according to Unesco. This follows a simple logic: Places with less water gain access to foods with high water requirements by importing them from areas with high rainfall or substantial water supplies. This allows water-scarce regions to use their own water resources more efficiently for other purposes—and create water savings. For instance, areas of southern China that have more water and are better equipped to grow certain water-intensive agricultural products can send them to northern China. This frees up northern water supplies for other uses, such as drinking and sanitation. Jordan saves 60 to 90 percent of its domestic water supply by importing water-intensive products."

What is striking about this paragraph (and the entire article) is the almost complete absence of any discussion of subsidies and trade restrictions. Perhaps too often, by focusing on the social responsibility of corporations, we miss out on the impact the government has on corporate behavior and the world economy. Agriculture is an excellent example of this.

As far back as Adam Smith and David Ricardo, economists have been making the case that it makes sense for areas with an advantage in one industry to supply the needs of another area, and vice versa. This is called the principle of comparative advantage. And, it is how markets would tend to operate if left to their own devices. These signals become distorted, however, when policymakers subsidize the production of a good or prevent the importation of another good into a region.

In the U.S., this means producing crops like sugar and rice in volumes that would be inexplicable in an unregulated setting. "The single largest check in 2003 ($69 million) went to Arkansas’s Riceland Foods," writes William Shughart in a recent column. We produce so much, in fact, that the rice industry even promotes its programs to dump excess rice on the world market. There are numerous resources on the role of subsidies and trade restrictions in agriculture - Wikipedia has a good entry on the total amounts, for instance, and the Environmental Working Group breaks down those totals to show how many of the richest agricultural producers receive the greatest aid.

These are important considerations in weighing the matter of water conservation in the U.S. and around the world. And they speak to the overlap between SRI and public policy. This is an important reminder that while SRI advocates should not lose their focus on corporate behavior, it is just as vital to maintain a broader perspective on the sometimes behind-the-scenes influences that play into the decisions companies make.

Quaker Quotes VII

"True godliness don't turn [people] out of the world but enables them to live better in it and excites their endeavours to mend it... Christians should keep the helm and guide the vessel to its port; not meanly steal out at the stern of the world and leave those that are in it without a pilot to be driven by the fury of evil times upon the rock or sand of ruin."

- William Penn, No Cross, No Crown

Is SRI a fad?

[Drucker, Vanessa. "Full throttle," Fund Strategy, 19 May 2008.]

This recent article by Vanessa Drucker raises an interesting question about the growth of SRI in recent years and the likelihood of its continued success:

"There is little doubt that environmental awareness is a long-term secular trend. However, a substantial component of today's heightened focus is directly tied to the price of oil and any looming energy crisis. The price of oil and other commodities has skyrocketed over the past quarter, driven by a confluence of forces. Although light sweet crude has crossed $120 a barrel, recall that, not so long ago, in mid-January 2007 it was only trading at $50. Mean reversion could bring the price skidding down again.

"Another scenario could easily dampen the ethical consumer's spending pattern, if a recession takes hold. 'Are organic foods luxury items?' asks Thomas, who adds that so far this year, the organic trend has not slowed, even in America. The stocks of the companies trade at higher price-to-earnings valuations than those of non-organic rivals, and those lofty prices will increase the risks of compression in volatile markets. Meanwhile, competition is thriving along the supply chain, as new entrants squeeze margins.

"The rise and fall of the dotcom stocks left behind bad scars and memories. Some may wonder if the fashion for environmental investing echoes the hype and exuberance of that era."

There is certainly some reason to expect that as long as SRI funds and SR-driven corporations do well that investors will support them. As well, there are equally strong reasons to expect that if investors are doing well they may be more likely to accept greater risk than would otherwise be the case in order to give a "moral boost" to their portfolio. But Drucker's questions about the long-term viability of some aspects of SRI are worth consideration. First, are SR-driven corporations truly unique in the marketplace and if the qualities that make them successful can be copied, won't other companies do the same? And second, is SRI essentially a luxury good that could lose its appeal in a less than thriving economy?

Both questions have to do with balancing money and morals. In the case of the first question, many SRI advocates would be happy to see more companies adopt SR policies, even if it means greater competition for existing SR companies. This development would hardly hamper SRI, however, as the pool of available investments would expand under such a scenario.

The second question is more troubling for the future of SRI. If SRI is indeed a luxury good that can be eliminated in tougher economic times, and if SR companies are buoyed in part by this investment, then SRI could face significant problems should the market take a turn for the worse. That being said, such a series of events would likely only impact the size and scope of SRI, not its continued existence altogether. As mentioned earlier, the tradition has roots that are centuries old, and the ethical commitment associated with its practice runs deeper than the bursting of a market bubble.

What Drucker's suggestion does point out, and this is also something touched upon earlier, is the importance of making sure that one's investments are not tied wholly to the latest fad, but consist of a diverse enough blend to minimize the impact of any one sector's turbulence.

A bit more on the testimonies

In earlier posts, I discussed both Quaker involvement in abolition and the meaning of Quaker testimonies. The two are connected. Early Quaker concern over the slave trade grew out of a strong desire to carry out their inward faith in outward practice. Indeed, Friends meetings to this day publish guidelines for members entitled Faith and Practice. For Quakers, the two are seen as inseparable.

These outward expressions of inner conviction came to be known as testimonies. Thus, Quakers in the eighteenth century practiced a testimony against slavery. Another commonly known testimony of that era – and one still carried on today by some Friends – was the testimony of plainness. That translated into plain speech – addressing important members of society with "thee" and "thou" instead of the more respectful you – and plain dress – modest colors with little if any decoration.

While the most strict of these requirements have faded away with time, today most Friends still hold to a number of key testimonies – simplicity, peace, integrity, and equality. Though these particular terms may be relatively new within Quakerism, one can certainly find in the history of Quakers the seeds of their later development.

The modern testimony of equality, for instance, is rooted in the manner that Friends approached the issue of slavery. The testimony of simplicity carries on, though often in different forms, the testimony of plainness. The practice of early Friends setting one price for goods – rather than haggling as was common – is carried forth in the testimony of integrity. And finally, the modern testimony of peace is well-rooted in Quaker tradition. In the same era as Friends spoke out against slavery they sought to avoid dealings that would violate their concern for peace. Minutes from 1776, for example, note that "We affectionately desire, that Friends may be careful to avoid engaging in any trade or business tending to promote war."

Faith and the bottom line

[Baass Sowa, Carol. "Socially responsible investing coming into its own," Today's Catholic, 23 May 2008.]

In this recent article from Today's Catholic, Interfaith Center on Corporate Responsibility executive director Laura Berry discusses the connection between her Catholic faith and her work on SRI issues:

"When Laura Berry, now executive director of the Interfaith Center on Corporate Responsibility (ICCR), worked on Wall Street as a portfolio manager, institutional clients with justice goals were routinely shuttled her way. 'I was actually enthusiastic about investing this way,' says Berry, who grew up Catholic, with a strong sense of social justice. 'Many of the more traditional investment managers at the time,' she notes, 'thought it was: 'You go to church on Sunday and you worry about investing your money Monday through Friday.' I didn't see it that way.'

"'More and more, powerful institutional investors are starting to look backwards at some of the things that faith investors have been talking about for a long time,' she says. A recent study by the Association of British Insurers on governance issues discovered that good corporate governance adds around 36 basis points to portfolio returns per month. Other studies are revealing similar results, with a U.S. study on governance, done in the wake of ENRON and WorldCom, when companies could no longer opt out of certain governance rules, has indicated gains in investment returns of around 70 basis points when good governance practices are followed.

"Berry is confident that as science gets more sophisticated in measuring such things, it will confirm what faith-based investors have been saying all along — that companies can act morally and still be successful. 'The Creator set us up that when we did good, things would work better,' she says.

"'When you think about just about any faith tradition, not just our own, they say things like: Love the Creator, love each other, take care of the globe.' She notes that we as Catholics don’t need science to prove to us this is the right way to do things; it is part of our social justice tradition.

"'I try to remind myself it’s not my time, it’s God’s time,' she says of the gains made by socially responsible investing. 'I’m here for a reason,' she adds. 'I’ll be doing this as long as I’m doing it and, hopefully, somebody will pick it up after I am gone.'"

Quaker Quotes VI

"Simplicity sets us free to receive the provision of God as a gift that is not ours to keep and can be freely shared with others. Once we recognize that the Bible denounces the materialist and the ascetic with equal vigor, we are prepared to turn our attention to the framing of a Christian understanding of simplicity.

"If what we have we receive as a gift, and if what we have is being cared for by God, and if what we have is available to others, then we will possess freedom from anxiety. This is the inward reality of simplicity."

- Richard J. Foster, Celebration of Discipline: The Path to Spiritual Growth

What is SRI? Part V: Microfinance

A recent development gaining a lot of attention both within and beyond the SRI community is microfinance or microcredit. Offering small loans or grants to people in developing countries can free them to engage in entrepreneurial activity and allow economic vitality that is rooted in local knowledge to emerge from the ground up.

Microlending is also a great way for anyone interested in SRI to become involved with minimal financial commitments. Through organizations such as Kiva, for instance, instance, you can help someone across the world meet their goals of buying an animal, expanding a fruit stand, or something else very concrete – and you can do so for as little as $25.

Right Sharing of World Resources is another option for those interested in a program with a Quaker background and focus. RSWR is "a program of the Religious Society of Friends supporting grassroots projects for economic development and offering educational materials for the study of the lives of the poor, the lives of the rich, and the spiritual meaning of both."

REC issues guide to filing shareholder resolutions

The Responsible Endowments Coalition (REC) has just finished a new guide to filing shareholder resolutions that should be helpful to educational institutions as well as individuals, congregations and other groups. Here's a short excerpt:

"Shareholder resolutions allow investors to express their views and concerns about issues affecting a corporation and influence future business decisions by challenging management in a public forum.

"Filing a shareholder resolution requires little more than sending a letter to a company, but a basic understanding of how resolutions work and their potential impact is necessary for maximum effectiveness.

"To be eligible to submit a shareholder resolution, a shareholder must own either $2,000 worth or 1% of the shares outstanding in the company, whichever is less, for at least one year prior to submitting the resolution, and must continue to meet this minimum threshold through the date of the annual meeting.

"Note that a shareholder who own shares through a mutual fund cannot submit shareholder resolutions because the mutual fund itself is the shareholder of the company. However, shareholders in a mutual fund can influence the proxy votes taken by the mutual fund."

To learn more about REC or their guide to resolutions, contact info@endowmentethics.org.

SRI funds see cash inflow

[David Bogoslaw, "Socially Responsible Funds Hang Tough," BusinessWeek, 15 May 2008.]

This recent article from BusinessWeek highlights the staying power of SRI along with some of the risk questions coming up in recent posts:

"SRI managers said they don't think the market downturn has caused investors to waver in their commitment to socially responsible investing.

"In fact, some SRI managers are seeing net inflows of cash into their funds since the year began. All eight of Pax World's sustainable investment funds are showing net inflows year-to-date, including five funds launched within the past nine months, says Joe Keefe, chief executive of the Portsmouth [N.H.]-based investment firm. 'That surprises us because I've read that many fund companies are at net outflows because of the markets,' he says. 'It speaks to the fact that sustainable investing -- green investing, call it what you want -- is a very hot space right now.'

"Heightened fears about the economy and corporate profits and valuations may even be helping to attract some investors to SRI funds. One of the draws is active ownership, where shareholders can use their stakes and voting power to force changes in companies' ESG practices. 'A lot more clients in times like these, when they have concerns, want to feel a little closer to their investments. They want to know more [about] what's going on with the management of their companies,' says Reynders.

"Chris Brown, Pax World's chief investment strategist, sees a lot of money coming in from deferred compensation plans from various states. 'Municipal employees are demanding to have some kind of SRI/ESG fund in their menu,' he says. 'All the governance problems that have come up and all the environmental issues have driven tremendous demand for our products.'

"What's more, Keefe at Pax World thinks investing in socially responsible companies is a smarter long-term strategy because companies that meet higher ESG standards tend to be better positioned for long-term performance and carry lower risk."

Risk and reward, part II

Above is an amusing short clip of a group singing about economist Milton Friedman's views on corporate responsibility. I couldn't resist including it as part of a discussion on risk and SRI.

In my last post, I spoke about direct investor risk. As I mentioned, though, there are other risks to consider that may nonetheless impact investors. Wall Street Journal columnist Carolyn Cui wrote about this recently in her article "For Money Managers, A Smarter Approach To Social Responsibility":

"Oil giants, power plants, mining companies and steelmakers get blamed for contributing to global warming. The business risk is that they will face taxes or penalties as legislators around the world increase their efforts to reduce pollution. For instance, as of January 2009, New York and nine other Northeastern states will start a program to cap and trade carbon-dioxide emissions. Last year, California passed an act aiming to reduce the state's greenhouse-gas emissions. And earlier this year, the U.S. Supreme Court ruled that the Environmental Protection Agency has the authority to regulate greenhouse-gas emissions as pollutants.

"Investment funds holding stocks of electric utilities, coal producers, oil companies and other carbon-intensive sectors are starting to measure their exposure to risks like these, partly under pressure from investors. In September, the Carbon Disclosure Project, a nonprofit coalition of institutional investors with $41 trillion of assets under management, released its annual report based on a survey of more than 2,000 companies around the world.

"Soon, U.S. mutual funds themselves will get measured based on their carbon 'footprints,' or the collective carbon emissions of the companies they invest in, by Trucost PLC, a London research company that focuses on the environmental impact of business activities. The firm released a report in July 2007 that surveyed 185 U.K. investment funds and found 37% of the funds were exposed to greater potential carbon liabilities than the U.K.'s broad stock-market index."

Amy Domini, of Domini Social Investments fame, makes a similar case in her book Socially Responsible Investing: Making a Difference and Making Money: "The real financial benefit of shareholder dialogue lies in the fact that it accomplishes several things simultaneously. Companies are made aware of potential liabilities before they grow larger, and investment managers have access to more information about the company they are considering investing in. Most shareholder-sponsored resolutions simply ask for reports about progress in addressing certain problematic issues. Any fiduciary would ask for the same, once made aware of the issue. It is, after all, only prudent to want management to report on progress toward removing risks. It is hard to argue that shareholder responsibility through filing and/or voting costs anything to investors and easy to see that it acts to reduce risks.

As Cui points out, though, skeptics of SRI risk assessment certainly remain. "Critics...cite a scarcity of corporate information on nonfinancial issues such as human rights, and a lack of methods for quantifying such matters. Skeptics think some such indicators are too subject to personal choices." In addition, there is the general question of who is best positioned to assess risk - corporate management or advocacy groups - and the question raised by Friedman of whether it is ethical for corporations to act on some vague conception of "conscience" when they have a duty to shareholders. That latter question, at least, shifts when it it is shareholders who are seeking change in corporate practices and governance.

Quaker Quotes V

"If the proportion of questionable involvement is less than ten percent and especially if it is in the one- to five-percent range, I believe the ethical approach is to focus on the positive aspects of the business and to conclude that the bad is overshadowed by the good.

"For me there is a parallel in the disownment of an investment because of a small proportion of impurity and the disownment of members by Friends meetings in the last century because of specific offenses against the prevailing rules. In reading nineteenth-century minutes of meetings in southern Indiana and noting the many disownments, I was impressed that the minutes concentrated solely on the offense with no record of offsetting good deeds or good qualities. Today we would think this is wrong.

"The percentages mentioned above reflect my thinking about broad guidelines, but I caution against decisions dependent on precise mathematical figuring. Ethical selection of investments requires scrutiny of the plus and minus factors pertaining to each company."

- S. Francis Nicholson. "Quaker Money," Pendle Hill Pamphlet 290 (Wallingford, PA: Pendle Hill Publications, 1990).

Risk and reward

In yesterday's post I mentioned the possibility of greater risk arising from limiting your pool of investments. Basically, this is the idea that something along the lines of the S&P 500 contains a broad swath of the entire marketplace. If one sector does exceedingly well, another may at the same time be in trouble.

Holding a broad sampling of economic sectors in relative balance shields an investor from the risk that any one sector's decline will have too great an impact on their total portfolio. One of the consistent criticisms of SRI is that it tends to over-invest in "clean" sectors such as health care and technology, while under-investing in other sectors such as energy and defense. By doing so, are SRI investments inherently more unstable?

This is a contentious question. Henry Blodget, for instance, recently wrote about SRI in The Atlantic that "because companies and stocks that satisfy these criteria will likely be few and far between, you will have to live with the risks as well as the potential rewards of limiting your portfolio to a handful of stocks, instead of holding a diversified basket of hundreds."

Alicia Munnell, however, writing in Pension Fund Politics, states that "Screening securities could make it more difficult to achieve an efficient portfolio. But because an investor needs only twenty to thirty stocks to construct a fully diversified portfolio, the cost of a carefully screened portfolio is most likely zero. Eliminating tobacco stocks, for example, leaves enough securities to construct a market index; conversely, it is possible to put together an efficient portfolio from the full supply of socially responsible funds and companies. Overall, the results [of studies since the mid 1980s] show that the differences in risk-adjusted returns between the screened and unscreened portfolios are negligible and, in most cases, zero."

The Christian Science Monitor also profiled a number of recent studies on this subject here.

Thus, the academic weight seems to be on the side of SRI at least theoretically being able to avoid excessive risk. Nonetheless, it is still important to fully research any investment and to consider whether an SRI fund is too narrowly focused in one sector or too focused on emerging markets that may experience greater volatility.

Direct consumer risk through portfolios is only one part of the equation, though. In a later post, I will look at the possibility that SRI may help shield investors by reducing corporate risk through a change in practices.

Where to draw the line

In my post on screening I explained the concept in brief, but did not get very deep into some of the complications of the subject.

In the case of negative screening, for instance, figuring out where to draw the line can be a difficult task. What constitutes a threshold you are unwilling to cross? A majority of a firm’s sales? It’s profits? Gas stations and drug stores are good examples here. While sales may be primarily in gasoline or prescriptions, profits can derive mainly from other products - the sale of alcohol, tobacco and lottery tickets, for example.

Regardless, though, you will still have to ask yourself how much sales or profit is too much? Is over 50 percent too high a threshold? Are there issues on which you are personally more passionate or concerned about? The production of arms versus the production of tobacco, for instance? These are all tough questions, and they are one reason niche funds are being developed that focus on particular sets of investor goals. It’s also why considering SRI should involve a great deal of thought and prayer.

Similar caveats apply in the case of positive screening. Are you willing to overlook certain practices you might not fully support in order to support a broader goal or a particularly positive initiative or direction a company is taking?

The fact is that it is unlikely you will find very many funds or even companies that align with all of your principles, and restricting your pool of investments can increase your exposure to risk. Many SRI funds were heavily invested in health care and tech firms in the 90s, for instance, and took a hit when those sectors declined.

I'll address the question of risk more fully in a later post, but it points to the difficulty in fully extricating oneself from what one perceives to be morally suspect in the world and the importance of recognizing the value of engagement in spite of this reality.

SRI included in the Stock Market Game

Via The Street: The Stock Market Game, a teaching tool from the Foundation for Investor Education that helps students learn about long-term saving and investing, has incorporated SRI into its educational programs.

"How do your Stock Market Game students find more information about companies that adhere to green or socially responsible standards? TheStreet.com's article 'How to Strike Green Gold' is a good start, as it reminds students that they must first analyze the stock market side, but also the company's business practices to determine whether they mirror one's interests."

Mennonite Mutual reaches out to Friends

Mennonite Mutual Aid, whose SRI mutual funds I mentioned earlier, are now working with a number local Quakers in Richmond to offer health savings accounts tied to MMA's SRI funds. This is an interesting development in that it combines elements of two movements focused on consumer empowerment - socially responsible investing and consumer-driven health care.

According to MMA, the company "does not duplicate programs offered by Friends." Instead, they are hoping to enter "a partnership that will help all Friends move forward on their holistic stewardship journeys."

Quaker Quotes IV

"Quakers in three hundred years have already led three immensely important moral crusades with some success [refusing tithes, abolition of slavery and conscientious objection in WWI]. There were individuals who led the way, but these would not have got very far without corporate support. Could we attempt something as significant again?"

- David Maxwell. "Our Queries and Our Conduct: past, present and future," The Woodbrooke Journal, 2001.

Voting in the marketplace

Yesterday I spoke about how prices emerge and how local purchases relay information back to the global marketplace. From there, it shouldn't be too great a leap to think about how specific purchases - or the lack thereof - send signals to producers. This gets back to my original post about M&Ms.

If our spending decisions impact how the market functions, then it might be helpful to think of monetary choice as a form of voting. Now, it’s important to recognize the limitations of voting. Just as your single vote will not determine the outcome of the Presidential election this November, your purchase of a particular brand of celery will not determine the future course of the agricultural sector. But we still greatly value the ability to vote, and see the act as participating in something larger than ourselves in important ways.

Plus, just as there are ways to maximize the impact of one’s vote, there are ways to maximize the impact of your spending decisions. First, boycotts and similar tools have taught us that collective choice has a greater impact than acting alone – even in a global marketplace.

Second, and perhaps more importantly, we vote in the market far more often than in the political realm. Think about how many times you’ve voted for candidates or ballot measures in the last year versus how many times you’ve bought gasoline, for example. Every transaction sends a message. And in the case of investing, voting is almost constant rather than a single transaction.

More about M&Ms

In an earlier post, I wrote about the growth in variety of M&Ms as an indication of the importance of the consumer in a global marketplace. It might be worth following up on this idea a bit more.

When you buy a bag of Almond M&Ms, for instance, you are making a decision that your dollar is less desirable to you than that candy you happen to be purchasing. Similarly, the grocer would prefer your dollar to yet another bag of chocolate covered nuts.

This is in part an illustration of how value works. Rather than being something intrinsic to a product on the marketplace, it instead arises from the process of buyers and sellers reaching mutually beneficial agreements to trade something they desire less for something they desire more.

A product will only succeed if people like you and me decide that it is worth trading some of our limited funds for it. And how much any product is worth is in part dependent on what I and others are willing to sacrifice out of our wallets.

But these decisions are now taking place in a much larger context than simply at your local grocer's. What you can buy at Kroger or Speedway with that one dollar depends in part on transactions taking place elsewhere in your town, but also in New York, Tokyo, and all around the world. There is a tremendous interconnectedness to any exchange in our current economy.

Once you understand that you are impacted by the choices of others, you can begin to recognize that your choices similarly have repercussions that extend beyond yourself. You are relaying local, personal information back to that global economy. And, you are doing so in a far more important way than merely stating an opinion or a preference – you are putting your money where your mouth is.

In tomorrow's post, I will discuss how such revealed preferences can be seen as a form of voting. If it isn't clear how SRI fits in to this yet, hopefully it will be soon.

SRI no longer exclusively left-leaning

Socially responsible investing is, as mentioned earlier, an incredibly broad term. For years, the label could have meant something to do with opposition to war, divestment from "sin" products such as tobacco, alcohol or gambling, or addressing environmental concerns. As broad as such interests have been, though, they seem to only be expanding of late.

The past success of SRI advocates concerned primarily with arguably more politically left-leaning concerns such as global warming, health, labor and human rights issues has caught the attention of those on the right. Similar methods are now being employed by those concerned with abortion, pornography, and other moral issues - as this post on faith-based funds indicates. Another product of this shift is the development of "terror-free" funds that seek to avoid investment in "terror-sponsoring states such as Iran, Syria, Sudan or North Korea." A new site, the Terror-Free Calculator, is being promoted by controversial conservative talk show host Michael Savage, for instance.

There is even at least one fund, The Free Enterprise Action Fund, that is "dedicated to providing both financial and pro-free enterprise ideological returns to investors." It does this by using the tools of SRI - divestment and shareholder activism - specifically to "defend free enterprise from the Left’s use of capitalism against capitalism."

None of this should be all that surprising - in a free market, entrepreneurs will seek to not only develop new products but adapt successful products for new markets. That being said, it is all the more important to pay attention to how a firm defines social responsibility and whether your values align with that definition.

What is SRI? - Part IV: Community development

Community development generally involves investments in projects that are deemed of social worth to the community but may be considered too risky by traditional lenders – mortgages for low-income families, for example, or housing projects, etc.

The pooling of funds to lend out for such efforts can be done at the level of institutional investors, or by banks and credit unions established with the specific goal of supporting such projects. By placing your funds in a bank such as this instead of a traditional bank, you may sacrifice some return in exchange for the knowledge that your funds are spurring the kind of development you see as most valuable.

Examples of such institutions include ShoreBank and Self-Help.

CSM weighs in on the value of proxy voting

[Dinnen, Steve. "Proxy ballots: Your chance to make a difference,” The Christian Science Monitor, 28 April 2008.]

"Shareholder resolutions often spring up from individual investors. But their fate generally is in the hands of institutions, such as pension plans and mutual funds, which own or control large blocks of stock in a particular company. Mutual-fund companies don't typically communicate their voting plans with their shareholders, but ProxyDemocracy tracks how 80 of the largest funds vote their shares.

"A lot of little voices can add up to one big voice, says James McRitchie, who runs corpgov.net, a website that follows corporate governance issues. He urges shareholders to open the proxy statements that they receive from firms.

"While shareholders are noted for voting with their feet – cashing out a stock that they're unhappy with – Mr. McRitchie says that with some moxie, even little guys can sometimes make a difference.

"[H]e believes that in the post-Enron era, corporate America is listening more to individual shareholders. And investors are better at talking.

"'Internet tools like message boards, social networking, and video-exchange sites are making it easier to galvanize support around good ideas," he says. 'You can make a difference.'"

Quaker Quotes III

"Where cunning people pass counterfeits and impose on others that which is good for nothing, it is considered as wickedness; but for the sake of gain to sell that which we know does people harm, and which often works their ruin, manifests a hardened and corrupt heart, and is an evil which demands the care of all true lovers of virtue to suppress.

"I have felt great distress of mind since I came on this island, on account of the members of our Society being mixed with the world in various sorts of traffic, carried on in impure channels. In this declining state many look at the example of others and too much neglect the pure feeling of truth. Of late years a deep exercise hath attended my mind, that Friends may dig deep, may carefully cast forth the loose matter and get down to the rock, the sure foundation, and there hearken to that divine voice which gives a clear and certain sound."

- John Woolman. The Journal and Major Essays of John Woolman, ed. by Philips P. Moulton (Richmond, IN: Friends United Press, 2001).

What are the Quaker testimonies?

The Quaker testimonies are in many ways the result of a lengthy distillation process. While early Quakers did not hold to a list of specific "testimonies" as such, they did seek to enact their faith in their lives in particular ways that Friends continue to find wisdom and vitality in today.

In his book A Living Faith: An Historical and Comparative Study of Quaker Beliefs, Wilmer Cooper offers some some helpful discussion of the testimonies:

"A testimony is an outward expression of an inward leading of the Spirit or an outward sign of what Friends believe to be an inward revelation of truth.

"The testimonies provide the moral and ethical fruits of one’s inward life of the Spirit. To quote Worth Hartman, 'They arise more out of concern for purity, holiness, consistency with divine order than from a passion for social justice.'"

Cooper identifies four core testimonies central to Quaker belief: peace, integrity, simplicity and equality. Others have been suggested or adopted by various groups of Friends, but these are arguably the most universally acknowledged and accepted, and so I will focus on them for the purposes of applying Quaker principles to SRI. In future posts, I will delve into the meaning of each of the four more deeply.

What is SRI? - Part III: Shareholder advocacy

While this tool presents certain opportunities, its goals can to some extent run counter to those of screening. In the case of advocacy, you use your leverage as a shareholder to encourage or pressure corporations to move their policies and practices closer to your vision of an ethical business model.

This is accomplished through a variety of means. First, simply voting on shareholder resolutions is a basic form of activism. Most shareholders toss these in the trash when they come in the mail, leaving the questions raised to be resolved without their input. Second, as an investor you can encourage your mutual fund to consider issuing a resolution for a specific company on a specific investment, and see what the fund has done in the past and ask about their voting record. Third, at the institutional level you can join with others to file resolutions through organizations such as the Interfaith Center on Corporate Responsibility. Finally, as a shareholder you can draft and submit your own resolution on improving a company's business model. Engaging in dialogue on such a proposal with the corporation can be very helpful and a learning experience for both parties.

Advocacy can potentially be effective within companies that you already support and wish to see get even better, but others also use the tool to shift the practices of more troubling industries. This strategy, of course, involves owning a portion of those companies, and so there are definitely sticky ethical questions to consider.

What's in a name?

As mentioned in an earlier post, the term "socially responsible investing" has become standard in industry and culture, for better or worse. There are, however, those who either continue to hold to other language or push for something else altogether.

Personally, I find the SRI label both too specific and too vague. It is too specific in that it has come to mean certain things to certain people, creating a presupposition regarding what SRI means that may or may not mean what we as individuals or institutions take it to mean. On the other hand, it is too vague in that there can be a multiplicity of such interpretations. SRI begs the questions of what it means to be socially responsible and how it is that an individual or institution is so through its investments. The label carries no distinctive meaning, which is perhaps both its strength as well as its pitfall. A similar critique could be applied to The Christian Science Monitor's insistence on the label "Ethical Investing."

A more forceful claim is that of those who argue for Best Practice Environmental Social and Governance Reporting (ESG). This seems to be part of a trend to differentiate "objective" measures from the "values-based" analysis of SRI. While the development does appear to address the increasing diversity of interpretations regarding what social responsibility means, it could indicate a willingness to jettison the term along with any discussion of values and ethics in an effort to gain legitimacy and secure the scientific high ground. All three, though, involve value judgments and assume a moral high ground that declares other investments "socially irresponsible," "unethical," or "unsustainable."

My preference for the goals I am trying to outline might be something along the lines of "Investment Conforming to Quaker Principles." This narrows the task to that of addressing the goal of seeking financial stability through the unique religious and historical character of a particular faith tradition and secures an understanding rooted in this tradition rather than in potentially fleeting investment practices and phraseology.

Whether or not we use such a label, though, holding on to such a view may help us avoid buying too readily into certain investments or ideas simply because they label themselves as ethical, responsible, or sustainable.

What qualifies as socially responsible screening?

It is worth doing a bit of homework on what companies consider a "socially responsible" fund.

The Social Investment Forum is an excellent resource for finding SR funds, for instance, but it is important to recognize that they consider virtually any screening as qualifying a fund for listing in their database. This makes sense both from the standpoint of advancing the SRI cause ("Look how many funds are socially responsible!") and from the standpoint of where to draw the line - in other words, it is reasonable that they don't necessarily want to get into the business of deciding who is in and who is not.

But this can lead to some odd listings. Taking a look at SIF's mutual fund chart, for example, the Flex-Funds Socially Responsible Utilities Fund appears to have had some good returns in recent years. What exactly is a socially responsible utilities fund, you might ask? Well, that's where things get tricky.

A review of the Flex-Funds site indicates that the company recently changed the name of its Total Return Utilities Fund to the Socially Responsible Utilities Fund (FLRUX) simply for not investing in nuclear energy. No other screen is applied to the fund, and the company makes a point of noting that it "favors companies in utility-friendly states with fewer regulations to constrain earnings growth."

So, basically there is an incentive for SRI advocates to claim as many funds for the cause as possible, and an incentive for mutual fund companies to capture niche market investors by applying the socially responsible label. This is just one of the reasons that discernment is necessary when considering any investment.

Quaker quotes II

“[W]e Friends tend too often to hold highly spiritualized notions about ourselves. We must recognize that our spiritual lives develop in conversation with the socio-economic world in which we live.”

- Douglas Gwyn, “The Dynamics of Quaker Practice,” Unpublished essay, February 2008.

M&Ms and consumer preference

If you are willing, take a moment to think about how many kinds of M&Ms you've seen recently. Here's a little M&M history while you are doing that:

- M&M's were first sold in the United States in 1941.
- In 1954, Peanut Chocolate Candies were introduced.
- In 1988, Almond M&M's hit stores with limited release. Mars gave them full releases in 1992.
- In 1990, Peanut Butter M&M's were released.
- In 1996, Mars introduced a new M&M candy: the "M&M's Minis."
- In 1998, Crispy M&M's were released.
- In the summer of 2005, Mars added "Mega M&M's" to the lineup.
- In July 2006, the dark chocolate M&Ms reappeared.
- In 2006, the company also trialed white chocolate M&Ms.

This is quite a list, and it doesn't even take into account seasonal M&Ms, personalized M&Ms, and some of the limited editions I have been seeing lately like cherry and rasberry. Interestingly enough, this variety is a relatively new phenomenon. As you can see, it wasn’t until the 1990s and later that all of the others became widely available.

M&Ms are not alone in this regard. From detergents and banks to automobiles and airlines, today we are faced with an abundance of consumer options.

So what’s going on here? Well, one possible explanation is that we have in many respects turned a corner in the way producers view the market. Early on in the production of the Model T, Henry Ford was famously said to have commented that "People can have the Model T in any color - so long as it's black." Producers were attempting to mold public tastes to match the products they were releasing. If we think about this in economic terms, supply was in many ways driving demand.

Today, it seems as though the tables have turned - probably for a number of reasons producers are attempting to meet consumer demand with what they are producing.

This has some important implications - particularly for SRI. If it is the case that demand is driving supply, then we are arguably in an era of relative consumer sovereignty. What you do with that dollar in your pocket is significant. We can look into how this plays out in later posts.

The Quaker origins of SRI

As pointed out earlier, Socially Responsible Investing has grown into a multi-billion dollar phenomenon since its official beginnings only decades ago. These early starts were largely associated with divestment from companies involved with the Vietnam War and in South Africa during Apartheid.

But the roots of SRI go back much further - centuries, in fact - to actions the Religious Society of Friends took over the issue of slavery. While it is true that many Quakers were in fact slaveholders, the tide began to turn among this body of believers in the 1700s. More than one hundred years before the American Civil War, Quakers began to divest from the slave trade for reasons that had nothing to do with profits and losses.

Rather, sensing their ethical integrity at risk, these Quakers came to see putting an end to their financial involvement with slavery as the only practical course available. Given their efforts to avoid companies that profited from the slave trade, many within the socially responsible investing movement to this day credit Quakers with being some of the earliest practitioners of the attempt to apply ethical beliefs in the economic sphere.

This tradition is still alive and well as Friends are arguably one of the most socially active religious groups today, including in the field of SRI. A quick review of major Quaker organizations reveals that from the American Friends Service Committee to the Friends Committee on National Legislation to Friends Fiduciary Corporation, all have SRI policies guiding their investments.

CNN profiles faith-based mutual funds

The growth of SRI among religious groups is attracting the attention of market trend watchers in the mainstream press. CNN recently pointed out, for instance, that "There are about 50 Catholic, Protestant, and Islamic-based mutual funds with assets totaling around $17 billion. The category has grown dramatically, from only $500 million in assets 10 years ago, according to David Kathman, a Morningstar analyst specializing in socially responsible investing."

The feature then proceeds to profile five such funds - Amana (Islamic), Ave Maria (Catholic), MMA Praxis (Mennonite), New Covenant (Presbyterian), and Timothy (Evangelical Christian).

What is SRI? - Part II: Screening

As mentioned in the general definition of SRI posted earlier, SRI consists of several different components. The first of these is screening. Screening itself can be subdivided into both positive and negative approaches.

In the case of negative screening, an investor, mutual fund or institution reviews the placement of their assets and determines what investments are unacceptable. This can mean companies involved in the production of alcohol or tobacco, for example, or the arms industry or companies known for environmental or other abuses.

The second screen is positive – this means searching out those companies whose practices you approve of and rewarding those practices with your investment support.

Screening remains the dominant method within SRI and continues to grow in size and scope. The Social Investment Forum reported in March that:

"Assets in all types of socially and environmentally screened funds – including mutual funds and exchange-traded funds (ETFs) – rose to $201.8 billion in 260 funds in 2007, a 13 percent increase over the $179.0 billion in the 201 tracked in 2005."

Further, "At more than $1.9 trillion in assets, socially screened separate accounts managed for institutional investors and high net worth individual clients constituted the bulk of SRI assets tracked in 2007, up 28 percent from $1.5 trillion in 2005."

Quaker quotes I

From time to time, I will post a quote or two from Friends past and present that bear reflection as we seek to follow the Quaker witness in economic matters. Here is one to start things off from Britain Yearly Meeting's Quaker Faith and Practice:

"It was once possible to argue that economic affairs might, like total abstinence, slavery or spiritual healing, be a field of particular interest to groups of Friends. We can now see that the economic order is not a peripheral concern, but central to the whole relationship between faith and practice. This is not a claim that, say, the interest in peace and international relations ought now to take a secondary place in our thoughts and prayers. Still less is it a demand that the Society should cease to be first and foremost a religious body, or to say that it should in any way neglect its spiritual foundations in favour of more good citizenship. It is rather that economic affairs are now so central to our whole existence that no other aspect of personal relationships or individual life-styles can now be looked at without first understanding what it means in terms of our national wealth, incomes, and their distribution."

- David Eversley, 1976

The University of Florida and the question of endowments

The University of Florida has been making headlines lately as a result of a controversy over how the institution manages the funds in its endowment. Here's an excerpt from an article on the subject in UF's paper:

"Eleven members of a student-protest group urging UF to make its investments transparent dug into a vegetarian meal they said could be their last of the semester outside Tigert Hall on Wednesday.

"The students said they plan to strike, or starve, until UF President Bernie Machen agrees to meet with them over lunch to discuss socially responsible investment plans for UF's $1.2 billion endowment."

For those interested in SRI, such clashes certainly raise a number of issues. First is the amount of funds in college and university endowments. Endowments comprise a huge pool of resources, very few of which apply any sort of screen or take any SRI position.

Second is the issue of tactics. Hunger strikes have become popular with activist student groups in recent years, in part due to high profile successes at Harvard and Georgetown. Are such efforts consistent with Quaker principles?

Without knowing all of the details, it is of course difficult to comment on this case in particular. But it is possible to make a few observations on the subject in general. One is that certain Quakers have called into question what they feel are "coercive" actions as being in conflict with the peace testimony. Two examples of this are Francis Nicholson's Pendle Hill Pamphlet "Quaker Money" and Jack Powelson's book Seeking Truth Together. Another consideration is that there are organizations devoted specifically to the matter of socially responsible endowments that are willing to work with students and administrators in crafting an appropriate approach. The Sustainable Endowments Institute, headed by Mark Orlowski (who happens to be a Quaker), is a prime example.

That all being said, what exactly the peace testimony is and how it is to be held in tension with the testimonies of equality, integrity and simplicity, are both weighty questions. We will explore some of the complications of these in future posts, but it is worth noting that there may be no obvious answer to this or many of the other ethical questions that emerge once we begin heading down the path toward investments that align with our beliefs.

What is SRI? - Part I: General definition

Socially responsible investing (SRI) is unfortunately one of those terms that is so broad as to be in danger of becoming virtually meaningless. Essentially anyone who applies any measure of selectivity to their investment decisions can claim to be following SRI principles. Nonetheless, the term has become standard in industry and culture to the extent that trying for more specific labels may prove Quixotic. So, given the breadth of SRI (something that will be discussed in more detail in a later post), it makes sense to adopt a broad definition. Here is one that might fit the bill:

Socially responsible investing involves any attempt to make financial decisions based in some measure on some conception of ethics rather than solely upon economic considerations.

This obviously does not get into the "how" so much as it does the "what" of SRI. The three main components of SRI are 1) screening, 2) shareholder advocacy, and 3) community investment. I would also add microfinance or microloans as another emerging element of great importance. Each of these merits its own entry, though, so stay tuned!

Why SRI matters whether you invest or not

In upcoming posts I'll discuss the wide range of possibilities for involvement with socially responsible investing - whether you're a college student or wealthy retiree. But before getting to that I thought it might be important to consider the ways in which SRI is important even if you're not in a position to invest anything at all.

- First, if you are a college student or alumnus, a member of a congregation, or a member of an organization, then you likely have a connection to one or more institutions with assets that are or are not being managed in a way that meshes with their institutional goals and your ethical beliefs. Your association with these organizations reflects back upon you and therefore their financial decisions do, as well. Further, how their assets are managed may impact the opportunities available to you and others through the work in which these groups engage.

- Second, unless you have somehow managed to go completely "off the grid," you are impacted by the economy in which you participate and the economic decisions of those around you. Participation in and concern with SRI in one form or another allows you to voice your concerns regarding the way the economy functions and cannot help but increase your awareness about the way it does and the interconnectedness of your transactions and interactions in the marketplace.

These considerations touch on a host of issues that will have to be addressed in future posts, and defining SRI is just one of these. Regardless, though, the objections that "I just don't have anything to invest" or "Investing is wrong" simply do not serve as a valid ways to dismiss learning more about SRI and how your faith intersects with economics.

SRI funds fare better than most in first quarter

[MacDonald, G. Jeffrey. "Why ethical investors fared a little better this quarter,” The Christian Science Monitor, 7 April 2008.]

The Christian Science Monitor reports that while most funds took a dive, ethical approaches may have paid off for some:

"[S]ocially responsible (SR) funds, which bring moral values to bear on stock selection, on the whole suffered slightly less in the first quarter than their unscreened peers, according to data from fund tracker Morningstar. Domestic SR equity funds performed better than 56 percent of peer funds in their respective categories.

"'As a group, they did fairly well,' said David Kathman, a Morningstar mutual fund analyst with a subspecialty in SR funds.

"Mr. Kathman posits that large-cap SR funds may be benefiting from jittery investors' search for recession-proof stocks. Investors in the first quarter dumped cyclically sensitive stocks, such as steelmakers, defense contractors, and other heavy industries, which SR funds routinely avoid anyway. By being light on heavy industry, these SR funds may have lessened the consequences of investor flight to steadier sectors in a sluggish economy."

The Monitor is a particularly consistent observer of the SRI movement. In addition to regular story coverage, the paper also devotes an entire page to the subject that includes monthly video interviews.

Letting your money speak

In his book Let Your Life Speak, Parker Palmer discusses the importance of remaining true to inner leadings and convictions in discerning the path of one's career. As his guide for the book, he focuses on the old Quaker adage that he uses as his title.

Vocation, though, is only one component of how you witness to that which you believe, as I am sure Palmer would agree. That's where the title of this blog comes in. Regardless of how many assets you have, when you use those assets you are contributing to certain goals as opposed to others. While there are many sites that discuss the implications of our day-to-day buying decisions, though, few seem to adequately address the ethical implications of our investments from a consistent moral framework. My hope is that we can begin to do that important work here.

Before we get too far, though, it might be worth spending a bit more time with Palmer. One important Quaker principle is "that of God in every one." This ties in with his reflections on letting your life speak. Rather than coming up with an abstract moral code and applying it uniformly to your life and the lives of others, he comes to see that letting your life speak involves listening to what that life is saying and allowing your understanding to emerge in part from your experience. Here's a short excerpt from the book:

"My youthful understanding of 'Let your life speak' led me to conjure up the highest values I could imagine and then try to conform my life to them. There may be moments in life when we are so unformed that we need to use values like an exoskeleton to keep us from collapsing. But something is very wrong if such moments recur often in adulthood. Trying to live by an abstract norm, will invariably fail--and may even do great damage.

"Today, some thirty years later, 'Let life speak' means something else to me, a meaning faithful both to the ambiguity of those words and to the complexity of my own experience: 'Before you tell your life what you intend to do with it, listen for what it intends to do with you.'"

This is an important lesson to keep in mind as we begin this project. Ideally, there will be room to listen to the voices of economic theory and Quaker history and practice as well as the voice that emerges from within our own lives.

Below are some helpful links that may serve as good entryways into this journey:

What is SRI?
- Part I: General definition
- Part II: Screening
- Part III: Shareholder advocacy
- Part IV: Community development
- Part V: Microfinance

The Quaker origins of SRI

What are the Quaker testimonies?