At first glance the idea behind socially responsible investing appears pretty simple: avoid investing in companies that are engaged in certain behavior. SRI practitioners don’t want their money buying shares of companies that produce tobacco or weapons; that disrespect the environment and that ignore human rights in the workplace.
Yet it’s not unusual for socially responsible mutual funds to own stock in companies that violate some of those principles. Rather than sell their shares the fund managers try to change corporate behavior by holding talks with management or offering shareholder resolutions.
Such “engagement,” as it’s often called, is at the heart of shareholder activism, which is one of the basic strategies of socially responsible investing. But how do investors decide which companies to boycott and which ones to engage?
Some cases are obvious. There’s no point in engaging in talks with Philip Morris, a subsidiary of Altria Group, to stop producing cigarettes. If it did, it would no longer be in business. The same would be true of a company whose primary source of revenue comes from alcohol or weapons production.
But then there are companies whose situations are not so clear. Consider Walmart, the retail giant. In recent years Walmart has taken several steps to improve energy efficiency not only in its stores, but in its supply chain. It has convinced its suppliers to reduce the amount of packaging they use, enabling them to put more on delivery trucks, which has meant fewer deliveries and less gas consumed.
But to many investors Walmart still has work to do in terms of employee relations. They argue that the pay is poor, managers work long hours, and the large part-time staff receives few benefits. To them Walmart is an SRI outcast.
“Among investors who think about these things I’d say half of them come down on the side that believes Walmart has done good things, they’re profitable and well run, let’s reward them and invest,” says Steve Scheuth, president of First Affirmative Financial Network in Colorado Springs, Co., a portfolio management firm for socially conscious investors. “About half come down on the side that says ‘I don’t want to own that company. I’m not comfortable with the way they treat their people.’”
But that 50-50 split shows progress Walmart has made among investors who care about the environment and how a company once avoided by investors can earn their interest by making changes – exactly the point of shareholder engagement, according to Scheuth.
“You need to be in dialogue with companies continuously to ask questions,” he says. “In the questions are buried suggestions for improvement. Many companies respond to the dialogue.”
Nike is apparently another of those companies. In the 1990s investors became aware of many of the Third World locations where the athletic shoe and apparel company was making its products – and the poor conditions that the workers in those supply companies were laboring under. So they began pressuring Nike to make changes. The company was dropped from the Domini 400 Social Index. Some investors sold the stock and the share price declined. Others maintained discussions with management.
The company responded and instituted new policies to benefit its supply chain workers. It has improved its transparency as well. Investors can find the names of countries in which it operates on the corporate web site and the names of contract factories with which it does business. Today Nike is back in the Domini 400 and viewed more favorably by socially conscious investors.
Timothy Smith, director of socially responsible investing at Walden Asset Management in Boston, says the practice of dialogue goes back 40 years when there were calls for companies to pull out of South Africa because of the government’s policy of apartheid. He notes that in 1971 the Episcopal Church was practicing engagement when it filed a shareholder resolution with General Motors Corp. concerning South Africa.
“Even then there was discussion about should you divest or not own stock in companies that were in South Africa or should you engage them through shareholder resolutions,” says Smith.
While improving corporate behavior on environmental or ethical issues are a priority for social investors, they don’t exceed in importance the goal of making money. The argument in support of engagement is that urging management to make positive changes is also a way to protect shareholder value. Is it ever effective to just sell the stock of a company when it acts in a way contrary to socially responsible investing?
“In terms of changing behavior I’d have to say no,” says Scheuth. “Getting out of the stock is motivated by one or two reasons: One, it’s a bad economic deal and if there’s no profit potential why be in it at all. The second reason is because you have a client that simply doesn’t want to be there, doesn’t want to profit from that activity and doesn’t want its name associated with certain types of companies. Period.”