The concept of fiduciary duty sits at the confluence of two powerful streams of Western intellectual thought, the legal and the economic: the legal because fiduciaries are managing the assets of others whose interests the law seeks to protect; the economic because fiduciaries assume the role of investors in the marketplace in managing these assets...
Mutual funds, according to a recent Vanguard statement responding to the mass-shooting in Newtown, Connecticut, are not “optimal agents to address social change.” I agree. But while a mutual fund may not be the best way to promote sound social policy, when trillions of dollars in mutual fund assets are managed without any social or environmental considerations, they can be a very effective way of promoting broad social harm.
Unlike other national tragedies fueled in part by investment decisions – the BP disaster immediately comes to mind – the Newtown massacre has prompted an important and overdue debate about the role of investment in our society. Your IRA is at the heart of that debate.
We’ve read about how the retirement funds of teachers and other public servants were used by Cerberus, a private equity fund, to create Freedom Group, the largest gun maker in the country. Freedom Group makes the assault weapon that was used to kill children and teachers. Unless you are a participant in a public pension fund, or a very wealthy individual, however, you are probably not invested in any of the private equity firms that own gun makers. But you are most likely invested in a mutual fund, and your fund may own gun stocks.
Vanguard’s statement was issued in response to the revelation that it is one of the largest owners of Smith & Wesson and Sturm, Ruger, the largest publicly traded gun manufacturers. Vanguard holds these stocks in passively managed index funds. This, of course, is no real revelation – it is the status quo, the result of a philosophy that treats investments as abstractions, divorced from real world impacts. But it should serve as a wake-up call for the millions of Americans invested in so-called ‘low cost’ index funds. What are the true costs of these investments? 
Vanguard’s statement contains two of the most common excuses offered for failing to address the social implications of investment decisions. Let’s take each in turn.
The first statement involves benchmarks. Vanguard is the inventor and largest manager of index funds – ‘passive’ funds designed to replicate benchmark indices. Smith & Wesson, Sturm, Ruger and ammunition maker Olin are members of the Russell 2000 and Russell 3000 indices. In essence, Vanguard claims that its hands are tied – to track an index, it must invest in all the stocks in that index. But is this true? Is it possible for an index manager to track a 3000 stock index with 2997 stocks?
Does a passive investment strategy relieve an asset manager of all moral responsibility? Do managers have an obligation to choose appropriate benchmarks that do not contain inherently destructive companies?
If an index strategy requires automatic investment in destructive companies – landmine manufacturers, human rights violators, gun-makers – then safeguards need to be put in place to allow passive investment while also protecting innocent third parties. Ultimately, this responsibility should rest with the firms that manage the benchmarks themselves. Generally, companies are selected for major market indices without any consideration of their social or environmental impacts. But what if Russell decided to assess the true value these companies contribute to society? What if Russell identified a set of corporate practices that pose unacceptable risks, and then chose to remove those companies from their indices? Every index manager in the world would divest overnight.
If there’s anything we’ve learned from the financial crisis, it is that even the most arcane financial decisions can have real-world impacts. Such is the case when you allocate billions of dollars to companies that make military-style assault weapons. We can no longer pretend that these decisions are morally neutral – they are not.
Standard-setting is not foreign to index management. Both the index managers and the stock exchanges set all sorts of financial and governance standards. The OMX Nordic Exchange actually has a standard to “investigate”, and presumably to ultimately delist, companies that have committed “serious or systematic violation of human rights or other ethical international norms” including those that manufacture chemical weapons or land mines. They placed these standards under the heading “marketplaces with integrity.” After OMX’s acquisition by NASDAQ, it is unclear where those standards now stand. Some exchanges, including the Johannesburg Stock Exchange, require listed companies to produce sustainability reports. Dow Jones, MSCI and FTSE all maintain indices that include social and environmental standards.
Should investors be able to choose between both responsible and irresponsible indices? That depends on whether you believe there are real-world consequences for allocating capital to firms that are hurting people.
Vanguard’s second claim, drawn from its longstanding statement on social issues, is that “as a fiduciary” it is required to manage its funds in the best interest of shareholders and is obligated to “maximize returns” in order to help shareholders meet their financial goals. Whenever you hear the phrase "maximize returns," add three simple words: “at any cost.” Pure profit seeking should never be conflated with fiduciary duty. Fiduciaries are held to a higher standard.
The 19th century ‘prudent man standard,’ for example, directs trustees to “observe how men of prudence, discretion and intelligence manage their own affairs.” When fiduciaries manage money for parents, they need to think like parents. It is self-evident that a prudent person would not use her own money to harm her children. It is both callous and misguided to suggest that fiduciaries are compelled to do so.
The long-term rationale for investing in gun manufacturers is the belief that society will not act to rein in the costs these companies impose on others. The largest asset managers in the world are backing a future that fails to address broad social harm. They have placed many billions of dollars of other people’s money on the laissez faire side of the scale, and they have done this despite a clear legal obligation to put their investors’ best interests first. We should therefore not be surprised to see our children inherit a passive democracy that is unable or unwilling to protect them.
I believe divestment of stocks in gun manufacturers is appropriate, but there is more that can be done. Beyond divestment, institutional investors – including mutual fund managers – should be using their clout to place this issue on the agenda of every board in the country. Directors should be asking whether their company’s products, services and political activities are contributing to this epidemic of violence, or standing in the way of reform. Many companies, including those that manage theme parks, operate stores in large shopping centers, or are closely associated with children, could benefit from strict gun control. These companies should stand up and say so. Video game companies that partner with gun makers to help market assault weapons should be asked to review these practices. Every retailer that sells semiautomatic weapons should be asked to take them off the shelves. In addition, as we wait for stricter gun control laws, there is no reason why companies that sell guns cannot impose strict rules of their own. I believe that when trillions of dollars of capital unite against gun violence, companies and policymakers will listen.
Money managers, unlike individual investors, have a legal obligation to think about the welfare of others. Institutional investors are not prevented by fiduciary duty from taking these actions; rather, fiduciary duty compels them to do so.
Let’s apply a little common sense. We don’t need to finance violence in our communities in order to provide for our retirements. Now is the time for individuals to speak up and demand an approach to investment that is appropriate for children.
 Passively managed index funds invest in portfolios designed to match the composition of a public benchmark, such as the S&P 500. They are generally offered at significantly lower cost to investors than actively managed funds, and may offer certain tax advantages. Over time, mutual fund operating expenses can negatively impact returns. All mutual funds are subject to expenses and risks, including loss of principal. You should always read the fund's current prospectus before investing.
Looking forward ten, even twenty years, what will Socially Responsible Investing (SRI) have become? What will it have accomplished? What will the field look like? Today, I build a case for a good future. In a word, it will largely be marvelous.
Roughly 15 years ago, I spoke in Jackson Hole, Wyoming. It is a spectacular setting, one that makes a person proud to be in a great nation like ours, one that protects such places. Yet, as I reminded the audience that day, it had not been the public that had kept the Grand Tetons pristine. It was one man, John D. Rockefeller, who had purchased the land and given it to the nation.
This is the classic dilemma we in SRI struggle with every day. It is great that the Grand Tetons are a public treasure, but they became so on the backs of crushed labor forces, pollution and selfishness. One man made his money and then gave it away, but he set in motion the international oil industry, an industry that is robbing us of a climate, a future.
That day I challenged SRI to become relevant. Today, I can see clearly that it has. Over the next twenty years, the positions we have taken and the battles we have fought will lead to a universal understanding that what we have been saying, the way you invest matters, is absolutely correct. We will see our guiding principles integrated into the mainstream. We will be astonished at the acceptance and the impact that we have had.
How We Became Relevant – Performance Matters
Perhaps the most devastating argument we faced early on was the Modern Portfolio Theory (MPT). It argues that the previous “prudent man” idea of buying good stocks alone, created risk. Introduced in 1952 by Harry Markowitz, the original premise was simple: investors should focus on overall portfolio risk. Simply put, even if you love software, you still shouldn’t build an entire portfolio of software stocks. Astonishingly, this revelation won Mr. Markowitz a Nobel Prize in Economics and caused the entire financial services industry to argue that the individual risk characteristics of a company mattered little.
Against this backdrop, SRI seemed hopelessly old fashioned. We argue that each company, by virtue of the industry within which it operates, faces a series of risks that we label as risks to people or the planet. We then argue that taking too large a risk is not necessary and further, that it perpetuates an acceptance of these risks. Wall Street pundits stated with great authority, but with no basis, that our form of analysis flew in the face of Modern Portfolio Theory and so would fail. Our largest barrier was that, to use the vernacular, every smart person knew SRI was stupid.
The evidence proved otherwise. The MSCI KLD 400 Social Index has not only debunked the premise of MPT, but also shown that risk avoidance works. The index has outperformed — and has done so with a lower standard deviation. Clearly, examining the risk of corporate behavior tells us something about a company that is useful to investors.
Why We Are Relevant – An Increase in Reporting
SRI practitioners have pushed for “extra-financial” data and have gotten it. At first, true comparative data on companies was extremely scarce in some areas of keen interest to the concerned investor. Any good researcher understands that the newspapers are a lousy place to start. The fact that we know that Apple sourced from Foxconn does not tell us what Hewlett Packard does. What is needed is data that is universally ascertainable, without the company answering a questionnaire (which allows them to self-define), and the data must be quantitative in nature, e.g. I don’t care as much about a statement that a company seeks diversity as I do about how many minorities have been hired.
Today, thousands of companies self-report. Whereas the one or two companies that issued Social Responsibility reports thirty years ago were real outliers, today it is so mainstream that Forbes magazine maintains a blog to follow them. Accounting giant PWC makes available the 2010 survey of CSR reporting on their website. The highlights: 81 percent of all companies have CSR information on their websites; 31 percent have these assured (or verified) by a third party. Their 2012 update contains examples of what to look for when writing (or reading) them.
Who was pushing for this disclosure? It wasn’t civil society, it wasn’t Wall Street; it wasn’t government. It was a loose confederation of concerned investors who consistently pushed for greater and more standardized “non-financial” information.
Why We Are Relevant – An Increase in Regulation to Disclose
Regulators are beginning to expand on the data corporations are required to disclose. Remember, there was no God-given definition of the right way to report financials to investors. In 1932, when reforms to protect investors began, regulators looked at some of the pre-existing methods and evaluated them. This led to audited annual reports on income statements and balance sheets. It led to quarterly unaudited reports. These had, in the past, come to be viewed as important in judging the financial soundness of a corporation.
However, the regulators did not stop with accounting issues. Given that the 1930s were a period of high unemployment, the number of company employees was considered important, and so its disclosure became mandated. There is no reason that more robust social and environmental reporting shouldn’t be in the financial reports. We already disclose a company’s hometown, without companies complaining of the inappropriateness and burden of so doing.
The Initiative for Responsible Investment at Harvard University maintains a database of Global CSR Disclosure requirements. In it we find 34 nations are taking steps. In 2009, Denmark, required companies to disclose CSR activities and use of environmental resources. In 2010, the United Kingdom required companies that use more than 6,000MWh per year to report on all emissions related to energy use. Malaysia, in 2007, required companies to publish CSR information on a “comply or explain” basis. Regulators, recognizing the societal costs of less than full cost accounting, are moving in to mandate disclosure.
Mainstreaming – With this solid base, here come the “big boys”
Conventional asset managers and the academic community have brought SRI to the mainstream. I began by saying the future for SRI is marvelous. Consider a world in which every major financial asset management firm demands that its staff study the social and environmental implications of the investments they make and bases recommendations upon it.
But this has already begun. Consider MEAG, the American portfolio management branch of Munich Re. Their team buys only publicly traded bonds which then back the insurance the firm issues. They use ESG criteria to give their research the edge and to avoid risk. When I met with their research team, I found that they use several of Domini’s Key Indicators. No, we don’t publish the indicators. It also was not a coincidence. The two firms independently discovered the same indicators to be telling because they both use the same logic in approaching the issues. Or there is UBS Investment Bank, where analysts specifically address the social, environmental or governance risks of a company they are recommending.
Finally, look at the all-important realm of academia, where MPT began. Just three recent examples are telling:
The Impact of a Corporate Culture of Sustainability on Corporate Behavior and Performance by Professors Robert Eccles and George Serafeim, Harvard Business School. “… we provide evidence that High Sustainability companies significantly outperform their counterparts over the long-term, both in terms of stock market and accounting performance. The outperformance is stronger in sectors where the customers are individual consumers, companies compete on the basis of brands and reputation, and in sectors where companies’ products significantly depend upon extracting large amounts of natural resources.”
Corporate Social Responsibility and Access to Finance by Beiting Cheng, Harvard Business School, Ioannis Ioannou, London Business School, and George Serafeim, Harvard Business School. “Using a large cross-section of firms, we show that firms with better CSR performance face significantly lower capital constraints. The results are confirmed using an instrumental variables and a simultaneous equations approach. Finally, we find that the relation is primarily driven by social and environmental performance, rather than corporate governance.”
An FDA (Food and Drug Administration) for Financial Innovation: Applying the Insurable Interest Doctrine to Twenty-FirstCentury Financial Markets, by Eric A. Posner and E. Glen Weyl, Law School, University of Chicago. “We propose that when firms invent new financial products, they be forbidden to sell them until they receive approval from a government agency designed along the lines of the FDA, which screens pharmaceutical innovations. The agency would approve financial products if they satisfy a test for social utility …”
The Next Twenty Years
This article limits its scope to only one leg of the SRI stool. It does not discuss the growth of shareholder activism, which is vibrant. Nor does it address the mainstreaming of selling products with narrow and specific social purpose, also a burgeoning field. Rather, by looking at the application of social criteria to an investable universe alone, we see that barriers have been removed, and that now both a mountain of money, and the force of government and academia, will work with us and introduce our goals into mainstream investment thinking.
We know we can make money, government is increasingly with us, and academia is swinging our way. Now, the rapid acceptance of more robust and integrated accounting has done away with the last barriers. This brings us the assets to have impact. As society sees the full cost of traditional business behavior, SRI will be embraced as the single most important lever towards building a better world than the planet has ever seen.
The Initiative for Responsible Investment, a project of the Hauser Center for Nonprofit Corporations at Harvard University, has prepared this report On Materiality and Sustainability: The Value of Disclosure in the Capital Markets for the Sustainability Accounting Standards Board (SASB). Steve Lydenberg is the report’s author. this report builds on the report From Transparency to Performance: Industry-Based Sustainability Reporting on Key Issues published by the Initiative for Responsible Investment in June 2010.
Domini Social Investments’ Managing Director and General Counsel, Adam Kanzer, has been selected to join the Securities and Exchange Commission’s Investor Advisory Committee (IAC), created under the Dodd-Frank financial reform Act. He served on the SEC’s inaugural Investor Advisory Committee, which was disbanded in 2010 after passage of the Act. The 21-member committee was established to provide the SEC with the views of a broad spectrum of investors on the SEC’s regulatory agenda. Mr. Kanzer participated in the IAC’s first meeting on June 12.
Prior to the IAC appointment, Domini met with SEC Commissioner Luis Aguilar and SEC Chairman Mary Schapiro to discuss the priorities of the social investment community, including swift passage of Dodd-Frank provisions addressing excessive executive compensation, and two provisions relating to peace and government corruption – a provision requiring companies to disclose the sourcing of ‘conflict minerals’ from the war-torn Congo, and disclosure of corporate payments to foreign governments in connection with the extraction of natural resources.
During our meetings, we also asked the Commission to act on a pending rulemaking petition seeking disclosure of the use of corporate resources for political purposes. The petition has broken the record for public comments, with more than 250,000 people writing in support. Domini also reached out to shareholders of the Domini Funds, with an Action Alert.
As a stockbroker in the early 1980’s, Amy Domini got her first glimpse of the potential of socially responsible investing. She realized that many of her clients cared about more than just the bottom line. They cared about where their money was being invested and how profit could be coupled with a vision for sustainability.
Little did she know how big this discovery would be.
Please watch this video and share it with your friends and family.
As the daughter of a Neapolitan, I grew up eating pasta with marinara sauce. My father didn't always make it from scratch, but he did so often enough for me to follow his recipe through memories. Fresh tomatoes were not always available, but we canned them so we had the base for the red sauce all year.
The name "marinara" means "mariner's sauce." There is some debate as to whether the sauce got its start with Spanish or Neapolitan sailors' wives. Since Spain owned Naples during the key years (the first recorded recipe book containing the sauce, written in Naples, is dated 1692), it is a meaningless debate. The important thing is that early on, the healing aspects of tomatoes were discovered, and sailors used the sauce to cure and prevent scurvy.
Tomatoes originated in the New World, and while they probably came from Peru, they were grown at least as far north as Mexico by the time the Spanish sailed. Since the fruit could be dried and was acidic enough to stay preserved, it could be carried long distances. The mariners who carried it could survive at sea without fresh vegetables.
But at some point in history, humankind seemed to stop noticing the connection between the benefits of what we eat and our health. We moved away A from herbal remedies toward pills and gadgets. A stiff neck was no longer treated with a wru;m hand towel wrapped firmly around our neck and fastened with a baby diaper pin. Muscle relaxants became the cure of first resort. I've had friends suffer a tom meniscus and have knee surgery, but most of these injuries used to heal with time and quadriceps exercises.
I admit to admiration for Luddites, but I am not one. I enjoy modem comforts. Still, I cannot help but wonder if we are getting less when we modernize. The stories in the press back me up. It turns out that women of a certain age who take calcium tablets don't benefit as much as women who rely on diet to meet that need. Milk does it better.
I recently read Michael Pollan's In Defense of Food, in which he advises us to eat "real" food. I had to laugh when I read that. I remembered my mother scooping something called "Cool Whip" onto some heated pears for dessert. My father leapt to his feet. "What are you doing? Are you feeding our children plastic?" It wasn't plastic, but it also wasn't exactly whipped cream. In 2007, Patrick Di Justo wrote in a Wired magazine article entitled "Cool Whip" that it is mostly water and air, although it costs twice as much as homemade whipped cream.
Old-fashioned food is cheaper and better for you. Eating a garlic clove when you start to feel sick isn't nearly as expensive as cold pills; gargling with warm salt water actually feels pretty good (I admit, eating garlic does not) and does relieve most sore throats... but where's the profit?
How many ancient wisdoms have we let fall aside because they were more trouble and less entertaining than being a patient and getting a pill? My mom boiled water to clear her sinuses. I don't know; maybe pills do a better job, but they cost a lot and might do some damage, too.
My father took my temperature by touching his forehead to mine. If mine felt hot to him, I had a temperature. Then came the mercury thermometer. Probably the worst part of that was uncovered in 2001 when 7.4 tons of mercury-contaminated glass from a thermometer factory was found to be polluting the area watershed after having been dumped unprotected. Unilever eventually paid a fine, closed the factory and cleaned up the mess. At least thermometers aren't made of mercury anymore. Mercury thermometers have been banned in most of the world.
When I was upset, I was given hot milk. When it was hot out, I sat with my feet in a bucket of ice water. Sleeping pills were not even considered. Oh, and generating electricity to cool homes and retail spaces ultimately means that power companies, which typically bum fossil fuels, bum more. This leads to greenhouse gases, higher global temperatures and more air-conditioning.
One of the concerns I have with the miracles of capitalism is that it has run over the miracles of nature. Corporate profits lie behind much of the erosion of land and the poisoning of air and water. Responsible investors use a battery of approaches to shine light on these issues. But let us also be mindful of what we can do to keep alive the wisdom of prior generations and not fall prey to the marketing myth of ever newer and "better" products.
From the Social Sustainability Resource Guide, published by the Interfaith Center on Corporate Responsibility (June 2011).
In August 2010, Domini Social Investments, announced that it had reached an agreement with Nucor, the largest steel producer in the United States, to address the company’s exposure to slavery and illegal deforestation in its Brazilian supply chain. The agreement followed three years of dialogue with the company...
I hate to date myself, but I'm old enough to remember having three pairs of shoes. The Buster Browns were for all the time; these sturdy brown lace-ups were for school, play and most activities. Next in usefulness were the black patent leathers with the velvet bow; these were for birthday parties, church, dinner with my grandparents and holidays. Finally came the Keds. Keds were only for playing tennis. Yes, this is true, and although it was a long time ago, it was in my lifetime.
This would never work today. Possessions have swamped us. Shoes have become specialized; so have scissors, batteries, candles and razors. Most observers agree that the demand for stuff has horrific implications. It creates ghastly environmental effects as we rip out raw materials to make things. It bankrupts families.
In Culture and Consumption, Canadian cultural anthropologist Grant McCracken introduced the concept of the Diderot effect, the unintentional transformation a simple acquisition sets in motion. In "Regrets on Parting with My Old Dressing Gown," French Enlightenment philosopher Denis Diderot bemoaned the sorry state of his life, the result of a gift of an elegant red dressing gown from a well-meaning friend. The dressing gown had been so fine that he had replaced his straw chair with one covered in Moroccan leather. He had replaced his prints along with his desk and updated his study. This improvement process went on until one day he felt unwelcome in his own study. He had become a slave to a level of fashion befitting his new dressing gown and regretted it.
It may seem a silly story, but we sense its rightness. And I would argue it gives us a special insight. Perhaps some types of consumption are positive change agents. Consumption is an enormously influential force. It affects behavior patterns of individuals at the personal level in such a way that whole societies are transformed. When anthropologists attempt to open communications with a jungle tribe, they leave pots and other goods the tribe finds useful and values. The door is opened.
We know this. Now we must harness it.
I look at my own consumption. A sneaky change took place over the past decade. Maybe it started with purchasing Ben & Jerry's yummy ice cream. I found I read the carton and wondered why other ice creams didn't tell me what a fine person I am. Then came Stonyfield's yogurt. I got so educated that I wandered into a Whole Foods. After three visits, I gave up on fruits and vegetables if they weren't organic.
Pretty soon, I was getting political about this. I boycotted coffee shops that didn't offer fair trade coffee; I started reading more and more about the politics of hunger and the dangers of pesticides. I noticed which politicians were raising my issues. It changed me. My eccentric Aunt Sylvia doesn't buy any clothing first hand. She's in her eighties and has saved what is rumored throughout the family to be a fortune. But she thinks buying new clothing is just plain wasteful. I've gone from thinking she was an oddball to thinking she's fantastic.
Now I'm becoming the oddball. When plastic bags come from a dry cleaner, I tie off the opening where the hanger was and use them as garbage bags. Last Christmas, my adult children came over to take the ribbons, boxes, papers and cards I'd saved, sometimes for several years running. It's a lucky thing they do, because I gave up physical gifts four years ago so have no use for the trimmings. It isn't that I'm against giving. I put three dollar bills in my pocket each morning and give them to the first three people who ask.
Did buying Ben & Jerry's ice cream make me a more tolerant woman? It did mark the beginning of a change. Like Diderot, I am caught in a continuous process of expanding and improving my new sense of self. But unlike Diderot, it feels right. I feel more and more welcome. I feel more and more a part of something important and good.
I'm hoping the purchase of mutual fund shares from a responsible fund family does the same thing. The investor has taken a casual, perhaps thoughtless, step, little suspecting he or she has begun ajoumey of personal redefinition. At some level, this person is no longer one of the overwhelmed, buffeted by forces beyond his or her control. This individual will take small steps: shop more deliberately, vote more deliberately, read the newspapers differently and be a more engaged (and tolerant) citizen.