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.