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..over the backdrop of the green revolution, investing with the well-being of the world in mind is an idea whose time seems to have come. If you have some spare cash around at the moment, or are interested in the prospect of investing once you have said cash, then ‘socially responsible investing’ is worth a look. Nathan Rose asks what it is, and does it really make a difference to the planet?
 
When we switch on the news and see the depressing stories of war, environmental destruction, and corporate greed, it is easy to feel helpless. We all want to feel like we are making a positive difference in the world – and socially responsible investing has been dreamt up to achieve this.
Most funds that call themselves socially responsible engage in ‘negative screening’, refusing to invest in certain morally questionable companies, rather than picking especially morally righteous ones as would be the case in ‘positive screening’. A typical socially responsible fund employing negative screening is run by Forsyth Barr, which offers a Socially Responsible Investment Fund option, also available within their KiwiSaver Scheme, which allows investors to avoid exposure to organisations involved in uranium, alcohol, tobacco, armaments, or pornography.
A commendable concept, on the surface. Does it go far enough? Green party co-leader Russel Norman says that “there is not enough independent certification out there about what is socially responsible and what isn’t.” He is calling for a consumer watchdog to monitor those funds that call themselves ‘socially responsible’. However, calling a fund socially responsible or not is impossible to judge by objective standards, because everyone has different ideas of what a moral stock is and isn’t. Some would have no problem owning McDonald’s stocks, as they have added a healthy salad menu, and have tried to reform their business practices – but to others, owning a fast-food company which has contributed to obesity would be anathema. Others may object to Microsoft for its monopoly practices, Nike for running their production in low-wage economies, or even banks for providing funding to these companies – where do you draw the line? There is no moral black and white here, except for companies of the ilk of ‘carbon-neutral solar panels for third-world countries’ at one end of the scale, and perhaps the landmine and cluster bomb manufacturers at the other. Everything else is a different shade of grey, depending on who you ask. The only way to be sure the companies you are invested in are consistent with your own moral compass is to do your own research, and do your own stock-picking – which for the lay person is difficult, time-consuming, and expensive.
The groups Critic spoke to in the funds management industry say those companies who offer socially responsible options do so because they have seen an attitudinal change in what consumers want, and have moved to create an offering to satisfy it. Greg Easton, from Craigs Investment Partners says the types of people who demand a socially responsible option tend to have higher education, and be concerned about the ‘greater good’. Andrew Gawith, a professional economist and director of Gareth Morgan Investments (a company which does not offer a specialist socially responsible KiwiSaver option), says “The basic rationale for business is to sell products or services to people at a profit. So, firms that produce socially responsible products do so to satisfy consumer demand first and foremost.” It seems that cashing in on green hysteria is big business these days. As Al Gore says, “ultimately, people do what you pay them to do.”
One idea behind the movement is to bring attention to issues in the media: the idea being, if a company is blacklisted by a fund, people will start asking questions about that company. However, Andrew Gawith believes that the media would only pay attention to socially responsible investments if they made big losses or big gains. If there were big gains, the story would be more about the firm cottoning on to some winning product or service that investors make a great return from, rather than whether or not it adhered to some sort of socially responsible investment philosophy. Russel Norman counters this suggestion with the fact that the New Zealand Super Fund, and many other sovereign funds, invest with a socially responsible philosophy, largely due to media pressure. Gordon Tucker from Forsyth Barr believes that New Zealanders generally like to view themselves as clean and green, anti-war, and anti-nuclear. We also like the rest of the world to think of us in this way – which may explain why we expect our Government to fly the sustainability flag when it comes to where we put our money.
The Vice Fund offers an interesting counterpoint to all this. Set up in the United States in 2002, the Vice Fund only invests in companies that are not socially responsible – their portfolio consists entirely of stocks in aeronautics, the military, gambling, alcohol, and tobacco. Some of their biggest holdings include cigarette company Phillip Morris, alcoholic spirit king Diageo – then there’s Lockeed Martin and Raytheon, which produce ballistic missiles and war planes, and Wynn Resorts, which are a major casino operator.
There is an old saying – “Be good. But if not, be good at it.” To the horror of the proponents of socially responsible investors everywhere, the Vice Fund has actually significantly outperformed the S&P500 US market index.
 
[INSERT GRAPH:The Vice Fund Since Inception (black), vs the S&P 500 Index (yellow)]
 
Sex sells, and so, apparently, does vice. People have willingly and deliberately invested $US80 million into the fund, and counting. No small potatoes. “Why would anybody deliberately invest in things that destroy the planet?” asks Russel Norman. Certainly some investors from the conservative right of the voting spectrum hate political correctness, and may buy into the fund purely out of reactionary spite against the tree-huggers. But really, just like the socially responsible providers, the fund managers saw a demand and moved to satisfy it: as Nick Naylor from the film Thank You For Smoking put it, doing it “for the mortgage.” The Vice Fund also sells for the same reason vice itself sells – those with a psychological dark side find being amoral just plain more fun. The marvels of the modern financial world mean that instead of buying the products directly, we can now get a devilish kick out of putting our money into them: benefiting from the profits they reap from screwing over the world, just like warfare, alcohol, tobacco, and gambling to excess screw up our own bodies and minds. Another reason is given on the fund’s website – the companies owned by the Vice Fund have steady demand regardless of whether the economy is in boom or bust; they provide global exposure; the industries have naturally high profit margins; and high barriers to entry exist – in short, ethics aside, these are good, profitable companies to invest in. From 1957 to 2007, Philip Morris was the single best-performing stock in the American S&P500, returning 8400 percent.
Charles Norton, the manager of the Vice Fund, is not a big-drinking, cigar-chomping high roller behind a mahogany desk who was nationalistically cheering on every bomb dropped in the name of Uncle Sam during the invasion of Iraq. He does, however, have this to say about socially responsible investing: “socially conscious investing comes at a significant financial cost to shareholders … screening out certain companies based on ethical guidelines instead of fundamentals automatically eliminates some of the country’s most profitable companies. To me, that seems irresponsible.”
Irresponsible only, it can be argued, if investors don’t know what they are getting. If socially responsible investing is costly, then investors should be informed of its cost – both in terms of lower expected returns over time, and in loss of

potential diversification benefits through a drop in the selection of stocks available. Some proponents of the movement assert that socially responsible investing is without cost. Clearly, this is not the case.
Imagine that the manager of a socially responsible fund has a decision to make. The fund is ticking along, but she sees some signs that a tobacco company is about to announce a record profit, and could make her clients money by getting some of the fund’s cash into tobacco for a while. Should she do it? If she does not, a cost of her ethical boundaries has been realised. This manager would likely face decisions such as these many times over the years if she is skilled, but refuse all of them because of the fund’s policy not to invest in companies it considers morally wrong. Over time, that opportunity cost simply must add up. Even if you subscribe to the belief that socially responsible companies will have a long-term advantage over the broad market, missing even one stock pick because you’re ‘not allowed’ to invest in it will cause your returns to suffer.
Some people dismiss the pursuit of profit by shareholders as being morally reprehensible. Don’t. Profits create jobs, and livelihoods. Remember that a lot of investors are not corporate fat cats; they invest for their retirement funds, for their children’s university education, or in the case of KiwiSaver, to save up to buy their first home.
The cost of ‘being good’ can even be quantified in dollar terms. Imagine these two scenarios: you start investing for your retirement at age 25. After inflation, taxes, and fees, you can earn an annualised return of four percent per year with an ordinary fund, and 3.5 percent per year with a socially responsible fund of equivalent risk. You contribute $5000 a year in the first year, growing at three percent a year along with inflation. By the time you are 65, the socially responsible fund would be worth $200 000 – and the regular fund $272 500. A difference of $72 500 at retirement. So, make that decision now with open eyes: is ‘doing good’ with your retirement portfolio worth $72 500 to you today? Feel free to tweak the numbers to your own circumstances – start saving later, or earlier. Contribute more, or less. Adjust the expected annual returns of both hypothetical funds up or down. These are all excellent exercises, especially if you are considering joining the socially responsible investment movement. When it is laid down in such explicit terms, it will make it easier for you to decide whether making socially responsible investments costs too much, or whether you think it is worth it. Either decision can be correct, so long as you know what you’re getting yourself in for – it’s your money, after all.
Timothy Adler and Mark Kritzman run Windham Capital Management, and are sceptical of socially responsible investing. They argue that if you are concerned about the unethical things of the world, then your aims would be attained more effectively by avoiding the socially responsible investing route, and using all the extra money you make to further your aims. In the above hypothetical scenario, you could get the same amount of money at retirement as the socially responsible fund, by going for an ordinary fund, and starting contributions at $3670 with inflation growth instead of $5000. You can give away the difference to whatever charity you feel is most appropriate.
The real question to answer is whether socially responsible investing makes a significant difference to the well-being of the world. Avoiding the bad companies doesn’t have any effect, says Chris Worthington of Infometrics: “consumer boycotts of unethical products hurt the bottom line of the companies. But it is unclear that boycotts of investing in these companies can ever be as effective. A switch to ethical investments doesn’t change the total amount of capital available … if an unethical company’s revenues remain intact, it follows that the value of the company is unchanged, and there will always be amoral investors willing to provide funding to companies trading below fair value.” But Greg Easton from Craigs Investment Partners points out that seeking out the companies whose morals you agree with, and that otherwise may struggle to get funding, can make a difference. For instance, Windflow Technology in New Zealand was funded in large part by the green dollar, and may not have got off the ground if it were judged on profitability potential alone. However, given that most managed funds only avoid the bad companies rather than seek the righteous ones, you have to wonder what impact is really being achieved by the majority of the money out there.
It is undoubtedly more important to some people to feel like they’re making a difference, than actually make a difference. Gordon Tucker from Forsyth Barr talks to clients on a regular basis, and explains that at the end of the day, people want to be able to put their money somewhere that lets them sleep soundly at night.
For some, that means investing in low risk assets that aren’t going to travel up and down on a roller-coaster every time the world economy sneezes. For others, it may make them feel better if they do not own or benefit from the profits of ethically questionable companies.
Even though socially responsible investing cannot force unethical companies into changing their ways, it still has a place in raising awareness amongst individuals – and because people are out there demanding it, it is here to stay.
 
Andrew Gawith is a professional economist and director of Gareth Morgan Investments. His comments in this article are his personal views, do not represent the views of Gareth Morgan Investments, and are not intended as financial advice.
Gordon Tucker is the KiwiSaver Specialist for Forsyth Barr, Dunedin. His comments in this article do not represent the views of Forsyth Barr, and are not intended as financial advice. Full disclosure can be obtained by emailing gordon.tucker@forbar.co.nz
Greg Easton is an Investment Advisor at Craigs Investment Partners. His disclosure statement is available free of charge under his profile on www.craigsip.com. This article is general in nature and should not be regarded as specific investment advice.