Looking for (Mis)Guidance in SRI?

Earlier this month Joe Nocera of The New York Times (NYT) published an article entitled “Well-Meaning But Misguided Stock Screens” about the socially responsible investment (SRI) industry.  He argues not that SRI produces lower financial returns – in fact, asserting that many funds have done well or even outperformed non-SRI funds – but that they “oversimplif(y) the world, and in so doing distort reality.” 

Being a casual observer of the SRI industry for some time now, I find his insistence that the SRI industry lets clients believe that they are only invested in “good companies” to be dubious at best.  While I don’t doubt that media reports, such as his, convince people that investing in socially responsible funds means simply giving money to “good” companies while avoiding “bad” companies, I believe that people who do their research will realize that the industry is anything but black and white.

In his article, Mr. Nocera brings up the inclusion of a Nike (NKE) or a BP in a socially-responsible index, yet he does not adequately address the motivation behind the inclusion of these companies.  Obviously they are profitable, growing businesses with well-valued stocks, otherwise there would be no incentive to invest.  But beyond the desire for high returns, why would a socially responsible index want to include these two companies, which work in industries often scorned by social activists? 

I don't have a definitive answer.  Perhaps it is an acknowledgment of the fact that these are industry leaders making moves toward more environmentally-friendly and sustainable techniques compared to their peers.  Perhaps it is a desire to advocate for more to be done.  Perhaps it is simply profit, and no investor is watching too closely at what goes into the fund.  There are many ways in which funds are created, many reasons why companies are included or not, grey all around.  

The article brings up many valid critiques of the industry.  For instance, is there enough research being done on the companies that are included/excluded from these funds?  Mr. Nocera delves into the process by which KLD Analytics reviews companies and concludes that their methods don’t pass his muster – too few analysts, not enough on the ground reporting – but he fails to emphasize that the rating of companies on environmental and social standards is a new and evolving endeavor.  Rather than suggesting what can and should change, he indicts KLD and the system as a whole. 

What is unfortunate about pieces like Mr. Nocera’s, is that his audience is probably unacquainted with SRI and now have a bad taste in their mouths.  Certainly his article will help people working in the SRI industry reexamine parts of their work; a useful and necessary process. But I hope that his black and white analysis doesn't turn people off from investing in socially-responsible financial products altogether.