When Is a Company Unacceptable to Socially Responsible Investors?
Many SRI mutual funds contain controversial companies
If you read the fund information at many investment families it will often say that the manager will not invest in companies that draw a substantial portion of their revenue from a certain activity.
But what is considered “substantial?” It’s an intriguing sustainable investing question.
Consider the conflict a company such as General Electric raises. GE has been involved with nuclear power for decades. That fact alone will leave it out of the portfolios of most environmentally responsible portfolios.
But GE has also steadily morphed into a very large alternative energy company. It makes solar power products for homes, utilities, and commercial customers. It makes products for the hydropower market, steam and wind turbines, and equipment to improve energy efficiency. Given the market demand, undoubtedly that all represents an increasingly large segment of GE’s total revenues, and is now called "ecomagination," representing $25 Billion in revenue in 2013 alone.
Assuming those revenues keep growing—and ignoring for the moment any other SRI flaws GE may have—at what point would GE’s environmentally positive revenues be large enough to outweigh its revenues from nuclear power? For many investors, the answer is never. But for others, that’s not so clear. Our Value Driver Model case studies included GE, while the company also is an oil & gas producer. Decisions for sustainable investing fund managers are not always cut and dry as a result of this type of dilemma.
One fund manager, Matthew Zuck of the AHA Socially Responsible Equity Fund, some years ago didn't own GE for a variety of reasons. His definition of “substantial” was 5 percent. He concedes this was “arbitrary to a degree.” But he also tried to give his fund some flexibility while respecting the principles of his clients. “We want to invest in companies where their primary business doesn’t involve things we don’t want to be in,” says Zuck, whose fund screened for tobacco, as well as faith-based guidelines of the U.S. Conference of Catholic Bishops.
“At the same time we don’t want to be in a position where if somebody buys a company that has some ancillary operation that isn’t key to the profitability of their business, we have to sell the holding.” A case in point: Zuck’s fund included Emerson Electric, a large industrial company that is in the wind turbine business. But Emerson also derives some revenues from nuclear power. The AHA Socially Responsible Equity Fund screened for nuclear power at the time. “They were involved with some equipment for nuclear power plants but it’s minimal,” Zuck says of Emerson. “It’s not really material.”
Is this a compromise of principles?
Only if you take an all or nothing view of socially responsible investing. But consider the position of Arthur Ally, founder of the Timothy Plan, on his investing niche - morally responsible investing.
“We have a zero tolerance in a very subjective arena,” he says. “When you operate on biblical principles you start out with the understanding that there are none righteous. There’s no such thing as a righteous company. There is a difference between those who are passively unrighteous and those who are pursuing an unholy agenda.”
Looking back further to 2004, the seminal piece on this subject remains Paul Hawken's Natural Capital Institute analysis of Socially Responsible Investing still available at this link.
Hawken slammed the field for saying they were better than the average mutual fund, but his analysis found few differences. He went on to found the Highwater Global Fund as per the case study and his chapter in our book Evolutions in Sustainable Investing. That fund is now known as Arjuna Capital, and whose claim to fame is engagement with oil companies on their carbon asset risk.
There are many approaches to sustainable investing, but the field is still trying to figure out a best way forward in many ways. That's a good thing, as whoever gets this right will likely manage many billions of dollars going forward. As long as we come up with a way of benefiting shareholders and society through intentional investment strategies, it should be all good.