Green Is Good

Imagine an organic food trade association any company could join. Members set the standards to suit themselves. Thus, any store or company can label their products "organic" if they choose because there are no rules defining what organic means.

If your company does anything to improve its production methods, no matter how inconsequential, it qualifies for membership and can use the word "organic" on its labels. The association awards an annual prize to an academic paper showing that, if you eliminate six of the twelve pesticides commonly used on lettuce, you still get just as much lettuce as before.

Consumers who want to know about the food they buy can't find out how it is grown or how it is certified. Instead of an independent outside agency, association members hire private for-profit "screening" companies to determine what is organic. The screening companies compete, each has a different screening method, and none reveal how they define or determine what is "organic." The screening standards allow 90% of all food produced in the world to be labeled organic.

Inside this organization a small group of core producers believe that organic should mean no use of synthetic pesticides and fertilizers. The big food companies are amused by their romanticism and see them as "idealists."

Sound ridiculous? Yes, except this trade association exists. It doesn't sell food; it sells investments. It is the international SRI (socially responsible investing) mutual fund industry. Like our imaginary trade group, it has no standards, no definitions, and no regulations other than financial regulations. Anyone can join; anyone can call his or her fund an SRI fund. Over 90% of Fortune 500 companies are included in SRI portfolios (see sidebar, below).

The term "socially responsible investing" is so broad it is meaningless. If a fund doesn't own companies involved with gambling and pornography, it can be called socially responsible. Never mind that it owns Halliburton and Monsanto. SRI can be determined by what is called a negative screen, i.e., if you don't do something, you qualify. Or if you say you do something even though you really don't (such as screening for environmental responsibility), you also qualify. That's all it takes to be named an SRI mutual fund.

The analogy would be a gang member who is a mugger. If the gang member says he will stop mugging senior citizens over 65, he now qualifies as a socially responsible gang member. By creating an industry that is identified by specific exclusions or inclusions, key information and criteria are conveniently overlooked.

Portfolio Creep

There is a difference between buying food and investing money. When people invest, they want a return, the highest return they can get. SRI returns are compared to conventional investments as a test of their worthiness. Industry advertising claims that SRI funds outperform conventional funds. That is true with some funds. When you look at the makeup of these funds, it's not hard to see why: the stocks held are the same as stocks in conventional funds.

Table One has two lists. One list is the 30 US companies that make up the Dow Jones Industrial Average. The other list is the 30 top US holdings in North American SRI mutual funds. Can you tell which is which?

SRI portfolios not only look like the Dow Jones (list "B"), they use the Dow Jones Industrial Average as a benchmark to evaluate their performance. We don't know what a socially responsible rate of return is because no true SRI portfolio has been tracked over time. Because the industry has hooked people on the idea that SRI funds should do as well or better than other mutual funds, they have to demonstrate it, which leads to portfolio creep – porous and spurious criteria about what is a socially responsible company.