The Truth About Ethical Investing
On Jan. 28 at the World Economic Forum in Davos, Switzerland, a Canadian magazine and Innovest, an investment research firm specializing in corporate social responsibility, released a list of the "100 Most Sustainable Companies in the World." In the words of the press release, these were the "one hundred companies most open to leading the way to a more sustainable world."
On the face of it, this should have been a watershed moment. Corporations that disavowed the word "sustainability" not so many years ago were proudly showcased at the world's most prestigious conference dealing with corporate issues.
Near the top of the alphabetical list was ABB Ltd (ASEA Brown Boveri), a one-time promoter of mega-dams including the Narmada dams in India and the Arun Dam in Nepal. On July 6, 2004, ABB settled a U.S. Federal Court action for bribing government officials in Nigeria, Angola and Kazakhstan, paying $5.9 million in ill-gotten profits. On the same day, it pled guilty to violating the anti-bribery provisions of the U.S. Foreign Corrupt Practices Act (FCPA) and agreed to pay $10.5 million in fines. In Nigeria, ABB paid illicit bribes to officers of NAPIMS, a Nigerian government agency, to evaluate and approve bidders for oil and gas contracts. In Angola, it was doling out money in brown paper bags to government employees. Meanwhile, the U.S. Justice Department continues its ongoing investigation of still more corruption.
Moving from A to B is Bristol-Myers Squibb, under investigation by the SEC for violating the FCPA in Germany following prosecutorial action there. The company was fined $150 million last year by the SEC for cooking its books; it paid $135 million in claims and settled with the Federal Trade Commission on charges that it conspired to prevent the cancer drug Taxol (which was developed by NIH and U.S. taxpayers) from becoming generic after patent expiration, costing women with breast cancer hundreds of millions of dollars (Bristol-Myers Squibb was charging $6.09 per milligram compared to foreign generic producers charging $.07 per milligram). It also paid a $535 million settlement to 29 states to settle litigation over whether it had illegally blocked generic production of BuSpar; and Bristol-Myers Squibb joined with other big pharmaceutical companies in lobbying for a provision in the new Medicare regulations prohibiting the U.S. government from negotiating with drug companies on bulk purchase discounts for drugs, what used to be called price-fixing.
Included on the list of the 100 most sustainable companies were corporations in oil, gas, beer, mining, utilities, defense, soda pop, candy and hard liquor ("Did you know 43 percent of the milk produced in Ireland goes into Bailey's Irish Cream," brags Diageo, which also makes Smirnoff, Johnny Walker, Tanqueray, Cuervo and J&B). Three of the 100 companies have a business model that directly addresses the well-being of the future of the planet: Vestas and Gamesa, both manufacturers of wind turbines, and Whole Foods. There was no explanation at the time of the press release as to why these 100 were the most sustainable companies, or what sustainability means, or which criteria were applied.
Sustainability specifically means living within carrying capacity of the planet, which is to say living on current solar income. Easy to say, difficult to do, and admittedly no company of any scale is doing it. The question is whether they are moving toward or away from it.
There are companies throughout the world that are approaching sustainability; mostly they are small and owner-operated. They are providers and growers of organic food; retrofitters and developers of green buildings; designers of new materials that are biomimetic and compostable; health care providers relying on phyto-pharmaceuticals and natural healing; manufacturers of bicycles; creators of local food webs linking school lunch programs and nearby farmers; makers of hemp clothing; environmental banks; sustainable foresters; trained midwives; and hundreds of other workers and professionals who understand that the work of sustainability is not glamorous and does not accrete into transnational corporations with corporate jets and weekends in Switzerland or Palm Springs to help manage a complex web of affairs.
The mindset that informed the list doesn't stop with the announcement at Davos. Innovest's research is sold to SRI (socially responsible investing) mutual fund companies so they can do ethical investing on our behalf. You can buy shares in a SRI fund, but you can't analyze the methodology, research or data. The research that Innovest and other research companies do for the SRI mutual fund industry is proprietary with heavy restrictions about disclosure. The same research that came up with ABB, Pepsi, Diageo and Bristol-Myers Squibb as the most sustainable companies in the world is used to select stocks for SRI portfolios. Investors are asked to take SRI mutual funds at their word, even though the research and methodology are hidden.
When you invest in such SRI funds as Domini, Calvert, Sierra Club and Pax, you are investing in American corporations that fight against environmental regulation; whose trade associations lobby against living wages or increases in the minimum wage; that lobby for and receive corporate welfare from Congress in the form of pork-barrel tax breaks and subsidies; create non-profit organizations to fight claims that junk food causes obesity; prevent people from getting price breaks on pharmaceuticals, whose CEOs raise millions of dollars for the Bush administration's assault on human rights and the environment, and more. You would never know this because you invest in the "language" of social responsibility, not the reality. The advertisements cater to our desire to do good things with our savings, and based on their language and promotional material, investors trust that the SRI mutual funds live up to their word.
The Sierra Club decided a few years ago to go into the mutual fund business. Why not take a great brand name and invest in environmental companies and make some money for a deserving organization?
Who says you can't invest responsibly and still beat the S & P 500? Now You Don't Have To Choose Between Your Financial Goals And Our Planet's Future -- The myth about environmentally and socially responsible investing is that as an investor, you have to give something up--investment quality, portfolio diversification, or fund performance. At Sierra Club Mutual Funds, we beg to differ. While you do your part to protect the planet for your children and for future generations, we do ours by seeking attractive investment opportunities in well-known companies that meet strict Sierra Club social and environmental guidelines.The language employed corresponds to a generational shift in values. There is this "myth" that to be green you have to give up financial returns, but that is not the case. You can give your money to the Sierra Club Funds and lay this myth aside. It is tantamount to saying you can be progressive and have your carrot cake and eat it. Who are the companies that meet the "strict" Sierra club guidelines? Well, that's hard to know. The Sierra Club web site doesn't don't reveal the whole portfolio, only a part of it. (Find the entire portfolio, from the fund's last report, 12/31/2004, on the Natural Capital Institute web site.)
One of the bigger holdings in the Sierra Club Balanced Fund is EsteÃƒÂ© Lauder, makers of Donald Trump--The Fragrance, available at Bergdorf's, Saks and Bonwit Teller. Sierra Club members can do more for the Republican Party than buy a mega-capitalist's aftershave. The Sierra Club Fund holds shares in the Outback Steakhouse. Putting aside the questions of where Outback gets its beef, how it is raised (public lands?), if it contains hormones, or if Outback's subsidiary chain Cheeseburgers in Paradise isn't your idea of socially responsible investment, it is good to know that of the $500,000 Outback donated last year to politicians, 98 percent of it went to Republicans.
If you own shares of Sierra Club funds, you will also own HRPT, which builds office buildings for the Department of Defense, the FBI, and the DEA. And then there is Celgene, whose division Celgro licenses its chiral technology for agricultural pesticides. When queried by Fortune magazine as to why Sierra Club funds didn't own any environmental companies, Garvin Jabusch, director of sustainable investing, said that their fund wasn't allowed to take "flyers on microcaps," meaning small companies with innovative environmental technologies. John Muir and David Brower, please meet George Orwell.
If big corporations are to change, they need feedback from investors, customers and citizens. In this, the whole purpose of SRI is germane and necessary. About a dozen of the 110 SRI funds in North America collaborate with nonprofits such as the As You Sow Foundation in forming shareholder resolutions that challenge management policy; this tactic has proved fruitful.
Another way companies get feedback is through their stock price. A rising stock price makes companies more powerful and makes their shareholders and executives wealthier. Falling share prices have the opposite effect. When we put our money into SRI funds, we are voting with our dollars. But we are voting with our money like they vote in corrupt countries; we walk into the room and are given a ballot that is already filled out. For sure, we can choose this SRI fund or that, but at the end of the day, that's all we can do. We can't always see our portfolio online in real time; we can't see the research; we can't see the detailed inclusion criteria.
SRI mutual funds do not obey or follow the same level of transparency they demand of the corporations they invest in. You can see the salary and stock options of the management of any publicly held corporation in America. CEO Peter Dolan, who presided over Bristol-Myers Squibb's $670 million of legal settlements and paid a $150 million fine for cooking the books, was paid $5.92 million in 2003 for his management skills. But how much did the CEOs of Domini, Pax and Calvert make? That's a secret.
To counter some of the recent bad publicity concerning socially responsible funds, the industry has stepped up its advertising in the progressive media. Calvert Fund's full-page advertisements in magazines such as Utne depict a bearded liberal baby-boomer saying he likes his investments "GREEN" in both senses of the word.
I went to the Calvert Capital Accumulation Fund to find out what these green investments are. According to the company web site, this Calvert fund holds the Cheesecake Factory, makers of "decadent cheesecakes perfect for any occasion." It owns Electronic Arts, makers of Battlefield, a video game for children that offers "more firepower, modernized weaponry and vehicles, and a deeper infantry experience from the jungles to the beaches of Vietnam." It owns PETsMART, a big-box retailer of pet supplies that is under attack by PETA for its treatment of exotic birds. And it owns Fossil, which announced a Dick Tracy PDA for the wrist at the Consumer Electronics Show in Las Vegas. What do these companies have to do with "green?"
When I asked Terry Mollner, one of the co-founders of Calvert how it was that two-thirds of the 1,000 largest corporations in America qualify as green, he asked me who did I think I was to say what was and wasn't green?
My hunch is that the progressive movement would prefer to invest in the future of the planet rather than the future of Donald Trump, obesity or steakhouses. If we are to see the kind of transformation required to abate climate change, rescue our oceans, eliminate species die-off, stop the assaults on indigenous cultures, eradicate clear-cutting and restore our water, air and soils, we will need to move a lot faster and more elegantly than we are now. Will investors put financial return before conscience? Many will, and the number of people who won't compromise their values for profiteering is increasing.
To do that investors need a real choice and true transparency. It is time we had truth in labeling; in fact, it is time we had labeling. An investor should be able to visit Calvert's web site and understand how it evaluated Electronic Arts. Owners of Sierra Club mutual funds should be able to understand how Outback Steakhouse "protect(s) the planet for your children and for future generations."
To invest wisely, investors need good information. Investors and stakeholders should be able to go online and find the complete investment portfolios of SRI funds, foundations, NGOs, churches, universities and unions. They should be able to click on a company name and be given a thorough understanding of its strengths, impacts and weaknesses. The world of socially responsible investing is a bastion of secrecy. As long as information is sequestered by "professionals" and not revealed to citizenry, power is concentrated in the hands of the few.
Many SRI funds state they don't want to reveal their portfolios and research because it will give away their "secrets." That is exactly the argument big food companies used when labeling laws were first proposed. It was the same argument used by cosmetic companies when they were first required to disclose ingredients. It is what tobacco companies said when they were subpoenaed to disclose the 900 odd chemicals, additives and ingredients contained in a cigarette. None of these companies went out of business. It is time for disclosure by the SRI industry. The planet and its people deserve no less, and anything less than full transparency is unfair to conscientious investors who entrust their savings to these funds.