Despite the seeming ease with which tobacco companies can be dismissed as greedy drug pushers, even they do some good—providing tens of thousands of jobs, for starters. And as you move down the SRI screening list, the elimination process gets harder. Take today’s favorite SRI target: the repressive government of Sudan. Will disinvesting in any company doing business with Sudan, as many activists are calling for and many investors have already done, help stop the genocide in Darfur? Or will abrupt withdrawal of foreign capital only strengthen the Sudanese government, as other investors—including Warren Buffett—say it could?
After tobacco, the next two industries on the list are alcohol and gambling; more than half of SRI mutual funds eliminate them. Alcohol and gambling certainly cause plenty of problems. Alcohol, especially, kills, maims, screws up families, and turns customers into addicts and occasionally into murderers. (Car companies provide the vehicles for most booze-addled killings, but no SRI fund that I’m aware of screens out car companies.) On the other hand, would you really want the winery that produces your favorite pinot noir to go bankrupt? The tens of millions of people who jet to Las Vegas each year might tell their pastors that the Luxor is evil, but it’s hard to believe they (or their pastors) never intend to go back.
Companies in the weapons and defense business are shunned by almost half of SRI mutual funds. This presumably means that besides objecting to unjust wars, handgun rampages, and drive-by shootings, the funds’ customers also believe that society would be better off without armed forces or hunting. The next three criteria—environmental impact, labor practices, and product and service quality (including safety)—involve true social responsibility, so it is a pity they are so far down the screening list. Based on rankings alone, far more SRI investors avoid tobacco companies than worry about the abuse of the environment, employees, and consumers.
The rest of the mainstream SRI screening criteria focus on community impact and on workplace diversity. Human rights, faith-based considerations, pornography, and animal testing are considered “specialty-use” screens and are applied by a minority of SRI funds. Less than a quarter of funds screen on such factors as abortion, health-care/biotech/medical ethics, “antifamily” entertainment and lifestyle (don’t ask), and excessive executive compensation.
The main problem with eliminating “objectionable” companies is that “objectionable” is in the eye of the beholder. The other drawback, one that probably deters more people from pursuing the strategy than would say so, is the likelihood of lower returns. By eliminating whole industries from their portfolios, negative screeners reduce their diversification and risk losing out on gains. Not coincidentally—because free markets are, to a large extent, self-correcting—the more “objectionable” an industry, the higher its future returns may be. Bad publicity and lawsuits tend to depress stock prices, and the lower prices set them up for strong future returns. Companies can address objections to many practices by improving labeling, cleaning up manufacturing processes, revising policies, or just getting out of controversial lines of business. Once the changes have been made, their stocks often play catch-up—leaving investors who boycotted them in the dust.
Fortunately, avoiding “bad” companies is not the only way to practice SRI. The discipline has evolved to include “positive” screening, through which investors seek “good” companies; shareholder activism, through which investors try to effect change instead of just passively holding shares; and community development, through which investors inject capital into regions or causes that otherwise would be starved for it. Screening, both negative and positive, is still by far the most prevalent form of SRI, but shareholder activism and community development are growing rapidly. According to the Social Investment Forum, of the $2.3 trillion in total SRI assets in 2005, 68 percent was based on screening, 26 percent on shareholder activism, 5 percent on screening and activism, and 1 percent on community investing.