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September 09, 2005
A Semantic Hermeneutics of SRI
    by William Baue

KLD Research & Analytics Founding President Peter Kinder examines limitations of the term socially responsible investing, and identifies both overemphasized and overlooked distinctions.

The term "socially responsible investing" (SRI) is almost universally unloved. Detractors on the right consider it implicitly judgmental (is one "irresponsible" for not practicing SRI?) Detractors on the left consider it so broad as to be meaningless (some SRI funds screen out companies that produce abortifacients while others screen in companies that support Planned Parenthood.) Supporters wish the term more eloquently described the work SRI does, which they know to be valid and significant.

The problem is, nobody has ever performed semantic hermeneutics on the term, examining and interpreting the relationship between the words and the activities they seek to encompass and define. That changes today, with the release of a paper entitled "Socially Responsible Investing": An Evolving Concept in a Changing World authored by KLD Research & Analytics Founding President Peter Kinder.

"SRI is changing in ways that are obvious and not," Mr. Kinder writes. "The terminology used to describe SRI has not kept pace with the field it should describe."

"Still no one has devised a better term," he points out. "We are probably going to have to live with it."

Mr. Kinder exposes reasons why the term is loathed in sketching the history of SRI's development. What spawned SRI was investors' desire to reflect their moral and ethical beliefs in the portfolios--for example, Quakers abhor war, and hence find it hypocritical to invest in defense companies.

These moral underpinnings define what Mr. Kinder calls "values-based" SRI, the field's "first generation" of development. So while exclusionary screening of abortifacient producers and positive screening of Planned Parenthood supporters may seem schizophrenic, they are merely opposite ends of a spectrum expressing moral stances through investment.

Other distinctions within SRI are, however, much more significant, according to Mr. Kinder. He traces the historical development of what he calls "value-seeking" SRI in the late 1990s.

"A small group asked an important . . . question: What aspects of a company's social or environmental performance drive share value?" Mr. Kinder writes. "Put differently, ethical considerations aside, which non-financial screens have predictive value for stock performance?"

Mr. Kinder points out that values-based and value-seeking investors share many of the same investment criteria, such as competitive financial performance and assessment of social and environmental performance. It is the definitional divergence between the shared first term that differentiates values-based from value-seeking investors

"What distinguishes the two is the value seekers' rejection of a moral underpinning of the application of these criteria," Mr. Kinder states. "The loss of the moral grounding to these criteria seems a great one."

Part of the problem with relying exclusively on the "business case" for SRI is that it encourages "short-termism," or the measurement of shareholder value in quarterly or yearly increments that tend not to capture the benefits of long-term social and environmental advancements.

"The shareholder value fallacy is also the foundation for the assertion that companies need a 'business case' for doing right," stated Sir Geoffrey Chandler in a 2004 speech on corporate social responsibility (CSR) quoted by Mr. Kinder in the paper. "But the 'business case,' even if a necessary route into discussion with companies, is unreal in practice and amoral in principle."

"It is unreal in practice because. . . there is often an equally compelling 'business case' for doing wrong in a market which measures only short-term financial gains," said Sir Geoffrey. "It is amoral in principle because it suggests that you do not do right because it is right, but because it pays."

While value-seeking investors cloak themselves in SRI while "concealing" its "moral roots," a third type identified by Mr. Kinder ("value-enhancers") use shareholder engagement to advance shareholder value but largely "reject the notion that they are SRI investors."

Nonetheless, Mr. Kinder asserts that what separates these three types of SRI investors should not overshadow what connects them--namely, the consideration of social and environmental issues on top of financial issues in investment decisions. It would behoove all three types to make common cause in advancing their shared interests, he says--for example by jointly promoting increased disclosure of social and environmental performance data and increased shareholder rights in nominating and electing directors.


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