Social Investment Forum Talking Points:
Paul Hawken Article on Socially Responsible Investing

Paul Hawken recently published an article in Common Ground magazine (“Is Your Money Where Your Heart Is?” ) based on a report posted on his Natural Capital Institute Web site (“Socially Responsible Investing: How the SRI industry has failed to respond to people who want to invest with conscience and what can be done to change it” ). The Social Investment Forum (SIF) is working to correct a number of errors and omissions in the article and the report. Already, Dragonfly Media, the owners of Common Ground, has agreed to provide equal space to SIF to provide an article highlighting the important achievements of SRI in the United States.

The Social Investment Forum and its members respect Mr. Hawken for the role he has played for some time now in terms of leadership efforts in catalyzing the movement toward sustainability. We have every reason to believe that Mr. Hawken and the entire socially responsible investment (SRI) industry are in full agreement on the importance of improving corporate social responsibility, encouraging sustainability, and steering investments to low-income communities around the world that are overlooked by traditional financial institutions. We all seek to encourage more responsible behavior and more positive impact on the part of major corporations.

It is for these reasons that SIF — and SRI industry leaders in general — were disappointed that Mr. Hawken’s article and report on SRI contain so many errors and misunderstandings. For your benefit, the following talking points address the gravest misrepresentations and omissions in the article:

• WHAT SOCIALLY RESPONSIBLE INVESTING MEANS: SRI is a set of investment-related strategies (portfolio screening, shareholder advocacy and community investing) aimed at (1) identifying and setting standards for corporate social and environmental performance and (2) leveraging changes in company behavior and impact. SRI is not, as Mr. Hawken implies, about anointing some companies as "socially responsible" by virtue of their inclusion and others as socially irresponsible by virtue of their exclusion from one mutual fund or another. SRI does not certify companies as “socially responsible.” SRI is series of strategies utilized by investors to focus their power as shareholders on improving corporate citizenship and improving quality of life for all.

It is much too simplistic — and even misleading — to think of SRI as nothing more than investing in “good companies.” While it may be useful to know what companies are held in an SRI portfolio, the key question is this: What is the mutual fund doing as a shareholder to change the company for the better? Since no company is without problems, many SRI funds consciously use their position as company shareholders to work from within to push for change and continuous improvement.

• PROBLEM HOLDINGS. Mr. Hawken suggests that most or all SRI mutual funds hold "problem companies," including Altria, Coca-Cola, and MacDonald’s, but he fails to mention which SRI funds he is referring to, where these SRI funds are located, and whether many of them are funds employing a best-in-class approach — as is popular in Europe. Much of Hawken’s work crudely lumps together SRI mutual funds from around the world, and fails to distinguish between different approaches (e.g.; best-in-class; negative screening; screening plus shareholder advocacy) that funds use. He fails to distinguish which funds are deliberately holding “problem companies” because they are engaging in shareholder advocacy with these companies. Mr. Hawken claims that SRI funds do not screen companies on their raison d’etre — the core product(s) that the company produces and whether these products are of benefit to society. In making this claim, he appears to completely ignore the fact that nearly all SRI mutual funds in the U.S. avoid companies involved in tobacco, alcohol, gambling and weapons manufacturing — all products that have an adverse impact on society.

• SHAREHOLDER ADVOCACY. Contrary to the evidence of increasing shareholder influence on corporate conduct, Mr. Hawken altogether ignores the role of shareholder advocacy in his article. In his longer report, Mr. Hawken gives the topic more attention, but only to downplay the effectiveness of shareholder advocacy. This dismissive perspective may explain why Mr. Hawken does not understand the motives of some socially responsible mutual funds holding the stock of problem companies. The explanation is simple; you have to be a stockholder of a problem company (e.g., ExxonMobil) if you are going to be active in shareholder advocacy to force change. These investments permit SRI funds to dialogue with companies and file shareholder resolutions, which are only open to stockholders. SIF member funds are active filers of shareholder resolutions, which requires deliberately holding companies in their portfolios in order to press corporate management for greater social and environmental reform. As owners of companies, SRI shareholder advocates played a key role in important corporate social and environmental responsibility advances, including:

• Forest preservation and paper recycling (Home Depot and Staples);
• Elimination of polluting mercury thermometers (Cardinal Health, HCA, JC Penney);
• Sexual orientation non-discrimination policies (Cracker Barrel, MBNA, Fifth-Third Bancorp, Wal-Mart; 97 of the Fortune 100 companies now have such policies);
• Climate change (American Electric Power, ChevronTexaco, General Electric, Cinergy);
• HIV/AIDS pandemic (Coca-Cola, ExxonMobil);
• Labor audits (Cintas, The Gap); and,
• Burma and labor standards (Unocal)

• COMMUNITY INVESTING. Mr. Hawken does not mention the fact that the fastest growing part of SRI in the United States is support of community investing. Most SRI mutual funds do not achieve an impact through screening stocks alone. In addition to screening their portfolios, 70 percent of SIF member funds are improving corporations and communities by also engaging in shareholder advocacy and/or community investing (investing in low-income communities) — high-impact work not mentioned in Mr. Hawken’s article. The Social Investment Forum and its members have led a successful campaign to help grow community investing from $5 billion to over $14 billion over the last three years. Community investing is the fastest growing SRI sector in the U.S., creating new jobs, housing and social services in the domestically and abroad.

• INDUSTRY RATINGS. Mr. Hawken proposes that the SRI industry create a rating system and regulate participants in the industry. In so doing, he fails to recognize the strength of having a diversity of approaches in the industry (including best in class, negative screening, and screening plus shareholder advocacy) and the leadership that SIF members have played in setting best practice standards. He also fails to note that the SRI trade organization in the U.S., the Social Investment Forum (SIF), and its members, are setting and raising standards for their industry in screening, advancing corporate governance, pursuing social and environmental corporate responsibility, and advocating for greater disclosures in their own industry, as well as in Corporate America.

• DISCLOSURE. Mr. Hawken critiques the SRI industry for not providing greater disclosure about screening criteria and holdings. This is an odd perspective that ignores the extensive disclosures of screening practices provided on SRI fund Web sites and in prospectuses. He also appears to completely overlook the fact that SRI funds were leaders in pressing for and leading the implementation of disclosure of proxy voting for the entire U.S. mutual fund industry. In addition, SRI funds in general are judged to be tops in corporate governance practices, with Morningstar recently finding that SRI funds are generally leaders in corporate governance.

• PERFORMANCE. Mr. Hawken also recommends that SRI mutual funds no longer seek to achieve financial performance that is competitive with non-SRI funds. This argument mistakenly assumes that performance must be sacrificed in order to achieve meaningful social and environmental ends. Abandoning the pursuit of competitive performance for SRI mutual funds most likely would result in substantial investor disaffection and a meltdown for the industry’s credibility in financial circles and in the news media. Investors purchase shares in SRI mutual funds to earn competitive returns and to create greater corporate responsibility and sustainability. Sub-par performance also would reduce the ability of SRI funds to pursue shareholder dialogue and advocacy and reduce the amount funds can direct to community investing. Sub-par performance would also raise fiduciary concerns, and could prevent entire classes of investors from investing in SRI funds. Research increasingly shows that well-managed companies with good corporate social responsibility characteristics perform as well as or better than their peers, which means that SRI portfolios holding these companies should continue to demonstrate competitive performance.

• “WALKING THE TALK.” Mr. Hawken also fails to note how the SRI industry “walks its talk,” for example, when planning its annual conference. While writing disparagingly of SRI conference venues, he fails to consider our work to advance “green” hotel practices, raising the bar with each facility. The SRI industry has also dialogued with hotel management on the offensive use of American Indian imagery at one facility, and won agreement from the hotel management to change the derogatory name of a meeting space and to explore other changes as well. These are examples of successful engagement, explaining the new policies that are needed and working with corporate decisions makers to set a new direction.

FOR MORE INFORMATION: Stephanie Kendall, (703) 276-3254, skendall@hastingsgroup.com; or Todd Larsen, (202) 872-5310, toddlarsen@socialinvest.org. Social Investment Forum (10/21/04)

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