Friday, October 22, 2004
From: Paul Hawken and Hilary Mandel on behalf of the Natural Capital Institute
To: SIF General Discussion

NCI’s Response to SIF’s “Talking Points” Regarding Paul Hawken Article on SRI

Dear Forum Members,

We are disappointed but not surprised that the Social Investment Forum (SIF) has begun to engage in a one-way conversation with its membership, taking a defensive posture in response to the Natural Capital Institute’s (NCI) recent report on SRI, which is now available at a new website. In addition to shedding light on what we found to be questionable industry practices, we intended for our report be the provocateur of a constructive, engaging and respectful dialogue aimed at improving and reforming those practices.

In that spirit, NCI would like to add some of our own comments and corrections to SIF’s “talking points,” released yesterday to its membership, as well as to SIF’s initial response to our article that appeared in the October 2004 issue of the Dragonfly Media publications. In both of its issuances, SIF sidestepped or misconstrued most of the findings and recommendations of the full report upon which the Dragonfly article (“Is Your Money Where Your Heart Is?”) was based. With regard to several of the points raised by SIF, our comments follow.

• PROBLEM COMPANIES. All of the data supporting our report’s findings are publicly available at www.responsibleinvesting.org. At this site, any investor can learn exactly which funds in which countries are holding which companies, at least as far as that information is publicly available. NCI found that in one SRI portfolio after another, there are companies that pollute, lobby for corporate subsidies and tax breaks, have poor labor records, actively support and promote fossil fuels, market junk food to children, and avidly support globalization. To say that “bad actors” are there for shareholder action is not borne out by the activities of those funds.

The SIF memo accuses NCI’s report of failing to distinguish “which funds are deliberately holding ‘problem companies’ because they are engaging in shareholder advocacy with these companies.” Why do you think that is? Because not a single fund we looked at spelled out that they were holding a given company deliberately for the purpose of engaging in shareholder advocacy. Perhaps this is, in fact, the agenda of some funds, and if that’s the case, that’s terrific. We just didn’t see that clearly explained to investors. If anything, our report simply mirrors back the lack of transparency that we found in the industry itself.

• SHAREHOLDER ACTIVISM. SIF states that NCI misses key trends and impacts, notably shareholder activism and resolutions. In fact, the NCI report addresses and praises both. Significantly, the report found that only a small minority of SRI funds engage in shareholder activism, less than 10% in North America. The figure is even lower globally. Again, this idea that we own problem stocks in order to be active in them doesn’t wash very much when you match the holdings with the activity. The Sierra Club, for example, didn’t do shareholder action at Clear Channel.

• COMMUNITY INVESTING. As SIF’s own figures show, community investing is still a relatively small proportion of the overall SRI base. Our intent was not to deliberately ignore, and certainly not to disparage, the efforts of SRI firms in the realm of community investment. Rather, we chose to stay away from that subject, along with many other issues we considered tangential to our core objectives, so as to delve more deeply into the questions we were trying to address and to do that well.

• PERFORMANCE. While SIF seems most concerned about “the industry’s credibility in financial circles and in the news media,” NCI is primarily concerned about the industry’s credibility with individual investors. The report does not state that investors don’t care about rates of return. Obviously, many fiduciaries have no choice but to be concerned about ROI. The report does suggest, however, that the sole use of stock indices, Morningstar ratings, and other standard financial indicators as benchmarks is inappropriate for the SRI industry. Regardless of whether SRI fund performance exceeds or lags behind these benchmarks, by using them as “standards” we tacitly claim that SRI funds will and should have returns at least as high as the leading indices. We don’t believe that is a valid claim or assumption; rather, the subject requires a lot more thinking, dialogue, and conferences to sort out. In our informal discussions with many investors, we’ve gathered that they would accept a lower return if they received a greater amount of information and rationale for portfolio selection.

In addition, SIF has either avoided or failed to adequately address the following issues:

• DECEPTIVE ADVERTISING. SIF does not address the issue raised by the NCI report regarding the false and deceptive advertising and marketing practices that SRI mutual fund companies, including SIF members such as Pax World Funds, Sierra Club Funds, and Domini Social Investments, employ to promote their funds.

• DISCLOSURE. SIF does not address the fact that investors are not provided detailed information about how screening criteria are applied to specific stocks. The NCI report notes that SRI screening is done by a plethora of for-profit companies, each with its own proprietary, non-transparent methodology. Mutual fund investors are essentially kept in the dark as to why and how specific companies are chosen, but are asked instead to “trust” the fund. While the SRI industry continues to rightfully ask its corporate investment prospects for transparency and accountability, we found no empirical evidence to support a move toward transparency within the industry itself in terms of disclosing the exact reasons for including a particular company in an SRI portfolio.

• ACCOUNTABILITY. SIF does not address the lack of regulation in the SRI industry described in the NCI report. The industry markets itself on employing and maintaining higher standards, but then refuses to set or enforce any standards. SIF calls the lack of standards revealed by NCI’s report a “strength” in that it allows for “a wide range of options for investors in order to meet diverse ethical and investing criteria.” “Diverse” is arguably another word for “anything goes.”

SIF members are engaged in trying to set standards for themselves and are to be applauded for their effort. The NCI report analyzed the entire SRI industry, not just a small subset of SIF members. One SIF board members called NCI and reprimanded us for including SRI mutual funds that were not “real” SRI mutual funds. This is quintessentially the problem with respect regulation and standards. Who is to say what a “real” SRI fund is? Even the SIF board member couldn’t say exactly what that meant. And if the SIF doesn’t know, how will a small investor know?

“SRI” as a term is misused, and one would think that SIF would have an interest in preventing that. At this point, SRI is a $2 trillion industry that, it would seem from its response to this report, does not want to have its boat rocked by legitimate concerns about its practices.

Lastly, NCI is pleased to note that its work has already helped stimulate a forthcoming conference taking place in Portland, Oregon. The conference will address the shortcomings of the industry and propose solutions for the future.

Sincerely,

Paul Hawken and Hilary Mandel
Natural Capital Institute
3 Gate Five Road, Suite A
Sausalito, CA 94965
Phone: (415) 331-6241
Email: sri@naturalcapital.org
Website: www.naturalcapital.org

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