obstacles to social investing

ADDRESSING OBSTACLES TO SOCIAL INVESTING
By Stephen Viederman

Triple Bottom Line Simulation Conference - May 15, 2001
Social Investment Organization of Canada - June 4, 2001

Focusing on obstacles to social investing is not a counsel of despair but rather the first step in a process that any fiduciary must face in seeking to add social value to the management of an investment portfolio.

These insights refer particularly, but not exclusively, to foundations and endowments, but also apply to other institutional investors, including pension funds. They are based upon more than a decade of working with boards and others on these issues. There is no generic list that will cover all institutions. Even within institutional sectors, issues can vary widely.

Please see this as a dialogue, as I hope you will share your own ways of addressing these obstacles with me so that I can then share them with others.

Here is what I have experienced:

GATEKEEPERS AND CONSULTANTS usually tell us that we cannot or should not get involved in SRI.

They are usually poorly informed about what is happening in SRI and about positive SRI results.
They often present SRI results with inappropriate benchmarks thereby misleading clients concerning SRI performance.
They have presented misleading pictures of what other institutional investors’ interests may be by presenting the results of surveys of their clients showing lack of interest in SRI, which is of course a result of the fact that they have discouraged these clients from considering SRI.
They take a narrow view of what constitutes SRI, focusing exclusively on screening and often only on negative screening, which does not reflect the latest practice in SRI.

THE LANGUAGE AND PROCESS OF SOCIAL RESPONSIBLE INVESTING often creates problems for boards, making it difficult to get a substantive dialog going.

Most fiduciaries take issue with the term socially responsible investing because it infers that, if you are not doing SRI, you may be socially irresponsible.
The term socially responsible investing suggests to boards that they must be fully involved in all aspects of social investment (or at least fully involved in screening) and all at once. Various degrees of involvement--doing shareholder activity, or screening part of a portfolio—developed over time are not believed to qualify as SRI
SRI is often perceived as a style of investing—like large cap, small cap, value, or growth—rather than as a discipline that can be applied to all styles, adding confusion to the board’s discussion of the issues.
Boards often feel that there is ambiguity about what SRI is and what it is trying to achieve. Is the board against the manufacture of weapons, or do they just not want to profit from an investment in defense industries? Is the institution against alcohol, or is it simply trying to use screening to deal with the issue of excess drinking?
There are as many types of "responsibility" as there are investors and boards seem to feel the SRI discipline is untutored unless there is one definition. This is surprising given the plethora of investment styles and strategies that are routinely accepted and analyzed.
Boards, perceiving a world of imperfection, are often unclear about what are reasonable goals SRI can expect.

THE CULTURE OF FINANCE AND INVESTMENT COMMITTEES has a significant effect on if and how SRI is discussed.

Committees more often than not operate under the false assumption that SRI results in a lower financial rate of return, unaware of or disregarding all of the studies dating back to the 1970s that show no effect on financial performance, or positive effects, on a risk-adjusted basis.
In some institutions, including many foundations and endowments, members of the investment committee are not members of the board and may only be dimly aware of the institution’s purposes and goals. This makes it vastly more difficult to reduce the dissonance between asset management and mission.
Committee members are usually chosen for their financial and investment expertise, not for their social concerns. They are often loath to screen or become active shareholders because in their regular workplaces they might themselves become the objects of other people’s concerns. Robert Monks refers to this as "The Golden Rule: Our Pension Fund will treat your management the way your Pension Fund treats our management."
Citizenship, defined in terms of concern for the commonweal, is often in conflict with the corporate cultures of the committee members
The discussion of SRI as it relates to an institution’s mission often tends to focus attention on personal values of committee members, which is a problem for them, rather than on institutional mission and values. They would rather avoid such issues and discussions. The goal instead should be to frame the issue in terms of the positive and negative social and environmental consequences of investments and how these effect shareholder value by raising and lowering risk and liability, and by creating opportunity. This approach focuses the discussion more on "bottom line" concerns, which is the narrowly defined fiduciary responsibility of the committee, an area where they feel greater comfort.
The "experts" on the committee, buttressed by legal definitions of the need for "expertise" in financial management, tend to obfuscate efforts to discuss SRI. This occurs despite evidence that SRI is legal in virtually all institutional settings, especially if proper procedures of due diligence are followed.
SRI takes more staff and board time because it adds an additional layer of analysis to the investment process, time that volunteer members are often unwilling to give to something they do not necessarily believe in.
Proponents of SRI on the board are often impatient with the time that it takes to convince their colleagues to move ahead with SRI.

THE POLITICS AND CULTURES OF BOARDS

Experience suggests that a committed board member, willing to use some of his/her political capital, is necessary to ensure a serious conversation on SRI. The member must also be knowledgeable.
It is often assumed or asserted that SRI raises legal issues that are insurmountable or sufficiently difficult to make the effort not worthwhile, despite evidence to the contrary.
Boards often express a concern with "slippery slopes" when staff and others urge screening, divestment or shareholder activity on an issue, such as tobacco.
Experience suggests that there is an inverse relationship between the size of a foundation or nonprofit and its attention to SRI. This may reflect a larger number of corporate members on large foundation boards.
Prudence as part of fiduciary responsibility is often interpreted as backward looking, rather than farseeing, which is the original meaning of the term.

THE TEACHINGS OF BUSINESS AND ECONOMICS present a framework that discourages discussing SRI.

Economics teaches us that the dollar spent today is worth more than the dollar spent tomorrow—discounting. This principle encourages a concern for the next quarter rather than the next quarter century, a more prudent approach.
Economics teaches us that externalizing costs can increase profitability, while avoiding the fact that the costs are borne by the society as a whole.
Equity as an issue of justice and fairness is not found in the index of an economics textbook.
Economics departments and business schools focus on financial returns in the short term, and pay little attention to the social and environmental consequences of investments, either positive or negative.

ADDRESSING THE OBSTACLES TO SRI

Changing institutional behavior is difficult and often unique to the institution. Thus it’s necessary to focus not only on the outcomes of the changes desired, but also on the processes of change and the time frames to achieve a positive result. Assessing the obstacles is a beginning of the process. Patience is a virtue.
Education of the board as a whole is necessary on all aspects of investment, including SRI. Among other things, this means that board members must require that money managers, consultants, and investment committee members learn to speak English rather than ‘financese’ if the board is to be able to fulfill its fiduciary responsibilities.
Board and investment committee members need to be well informed about SRI to initiate and sustain the discussion of SRI. Of particular importance are the data documenting SRI performance over the years on a risk-return basis, showing equal or out-performance. In addition, materials are needed that demonstrate the legality of SRI for all institutions, and describe the particular actions need for particular types of institutions. These materials exist but are not readily available, nor are they written in language that can be easily understood.

Knowledgeable board and investment committee members are needed to assess the depth of commitment, knowledge and experience of consultants and investment managers claiming to "do" SRI. This is important to avoid a process that is unsatisfactory because the professionals hired are not really engaged.
Interest among some number of the members is necessary, but the commitment of one or more members is essential if the process is to move forward.
Staff members can be instrumental in raising SRI issues for board discussion but usually cannot drive the issue without a board proponent.
Prudence, in its original 14th century meaning, was to be farseeing. Over time its usage tended to suggest backward looking, as in the case of the ‘prudent man.’ Boards must restore prudence to its original meaning to fulfill the board’s fiduciary responsibilities. The lawyer William McKeown has suggested that foundations and nonprofits may not be fulfilling their fiduciary responsibility if they do not consider the consequences of their investments on their missions.
Language is important. The term SRI is itself often off-putting, and every effort should be made to find some other term to describe what is essentially an investment process. The following ‘definition’ is proposed for what is now called SRI in the hope that it responds to the cultures of finance committees and boards. An investment process that considers the social and environmental consequences that all investments have as part of the rigorous financial analysis that fiduciaries are obliged to engage in. By identifying the positive and negative social and environmental consequences of an investment the process identifies opportunities, as well as risks and liabilities, facing companies that are reflected in the financial bottom line.
Boards need not feel obliged to engage in all aspects of SRI immediately. There are many paths to Rome. An institution might begin by screening some portion of its portfolio (either positively or negatively) to develop a comfort level with the process. It might decide not to screen, but to become an active shareholder through its unscreened portfolio. It might make some small investment in private equity that has explicit social and environmental goals. Similarly, community development investments can help a board decide what emphasis they might place on these instruments as part of their asset allocation. It can do some of each of these activities, or some of one of them as a way of beginning.
Lay board members interested in SRI, and SRI professionals, need greater sensitivity in approaching expert committee members who have spent their lives in finance and investment. Looking exclusively at the financial bottom line has been the core of their training and the measure of their success. To ask them to look beyond the financial and to include the social and environmental is asking a lot. Respect and sensitivity are crucial.
In institutions where the finance/investment committees are made up of people not on the board, efforts must be made to educate them about the purpose and goals of the institution. Then they can understand the importance of reducing dissonance between investment decisions and program mission. This is especially true for foundations and nonprofits.

Comments and critiques of what is outlined here will be greatly appreciated.

STEPHEN VIEDERMAN
stevev@noyes.org

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