November 04, 2004
Paul Hawken Critiques Socially Responsible Investment: Is He On Target or Off Base?
by William Baue
A Natural Capital Institute report criticizes SRI for lack of standards and transparency on
screening and holdings for shareowner action.
What exactly is socially responsible investing (SRI)? This is the question posed by a
written by the research staff of the Natural Capital Institute (NCI) and its founder, renowned ecologist/entrepreneur
Paul Hawken. The report critiques the global SRI industry for lacking transparency of how it
screens its investments and which companies it holds specifically for shareowner action, among
other things. To what degree are the report's criticisms founded, and to what degree do they rest
on shaky ground?
"The term 'socially responsible investing' is so broad it is
meaningless," states Mr. Hawken in a Common Ground magazine article
based on the report. In the report, he adds, "SRI mutual funds have no common standards,
definitions, or codes of practices…"
The Social Investment Forum (SIF), the SRI industry organization in the US, admits that
the SRI community is indeed inclusive of a broad diversity of values and investment styles.
"[Mr.] Hawken is correct that there are no rigid standards dictated for SRI funds to follow in
the United States," said Alisa Gravitz, vice president of SIF. "SRI funds offer a wide range of
options for investors in order to meet diverse ethical and investing criteria."
diversity of SRI provides options for investors across a broad spectrum of ideological beliefs
ranging from social progressivism to cultural conservatism, as well as a wide range of tolerance
for the degree of stringency of screening. For example, some social investors prefer screens that
exclude "sin" sectors such as gambling, while others prefer best-in-class screening that invests in
companies with the best practice on corporate social responsibility (CSR) in all sectors, including
Mr. Hawken takes more of a purist approach, dismissing best-in-class
"What does it matter if one fast food company is singled out as 'best in its
class,' which is the rationale employed by KLD
Research & Analytics?" writes Mr. Hawken in the report. "As a friend once put it, if you are
going the wrong way, it doesn't matter how you get there."
While many social investors
might share Mr. Hawken's definition of what is "wrong," others value using the best-in-class
approach to try to encourage better corporate citizenship in all sectors.
stands on less subjective ground when it calls for transparency in how SRI firms screen, so that
investors can make their own informed decisions.
"Although funds will publish their
criteria in general terms, they do not publish the analysis of how those criteria were applied to a
given corporation," the report states.
The report, which is based on a year-long
compilation of a database of all
retail mutual funds that describe themselves as socially responsible or variants thereof, has
generated some controversy around its stance on shareholder advocacy.
recommends that if funds hold a company for purposes of shareholder action, they should clearly and
explicitly state that they're doing so," said Hilary Mandel, NCI's lead researcher on the report.
"Otherwise, investors have no idea about whether the company in question is one that passed the
screens or flunked so badly that it needs to be addressed in this fashion--again, the issue here is
In recommending that SRI funds become more transparent, it acknowledges
that achieving greater transparency is not simple or simply done. It does, however, provide
suggestions. For example, it suggests labeling funds that hold problem companies specifically for
conducting shareowner action with them "Hold-Your-Nose-We-Are-Going-In Funds." While this
particular suggestion lends a light touch to an otherwise heavy report, it may actually be
"I don't think it would be productive for a fund to invest in a company
solely for the purposes of conducting shareholder action," said Bob Walker, vice president for
sustainability at Vancouver-based Ethical Funds. "In my view this
approach would allow the target company to use this information to discredit the shareholder in
front of the SEC (exclude the proposal from the proxy circular and submit a no-action request),
Institutional Shareholder Services (which would likely recommend against shareholder proposals
filed by those holding 'action shares'), and other shareholders (who would likely see the
shareholder as a flake)."
Returning to the issue of standardization, the report recommends
the institution of a rating system for SRI research and SRI mutual funds. The authors concede,
though, that such a goal could not be achieved "without significant effort." Such effort is
already under way in Europe with regard to SRI research. The Association of Independent Corporate
Sustainability and Responsibility Research (AI CSRR) was founded earlier this month to promote
standards for firms that provide CSR research to SRI firms.
It remains to be seen if
similar standards or ratings will be adopted for SRI mutual funds.