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.