BWZ  Opinion

In Defense of 'Ethical Investing'

Peter Kinder rebuts Dr. Digby Anderson's article, "What has 'Ethical Investment' to do with Ethics?", from the Apr/May BWZ.

1. Hoax?

In light of Alan Sokal's marvelous hoax in "Social Text", I was not entirely sure Anderson, et al. were serious. With the demise of Punch and the Americanization of everything save the spelling in The Economist, Tory humour has been in short supply recently, at least over here.

But, "What has 'Ethical Investment'..." lacks the indicia of the donnish hoax. Sokal's piece contains dozens of hilarious footnotes. Anderson's "research report" contains eight citations in 20 pages, seven of which are to texts in its appendices. Sokal peppers his paper with "examples." Anderson, et al. manage to avoid describing how any of the screens they attack work in practice. In fact, he and his colleagues do not mention a single company. Sokal writes in the argot of post-structuralism. Anderson, et al. are just mad.

Consider this statement: "The history of how these [portfolio screening] criteria emerged and who helped them emerge is not the object of this study, though it might well repay someone's attention. Our interest is in the list as it now stands." (p. 6) Hmm. Maybe Philby and Blount were at work in our field, and we dupes didn't know it. Bishop Wilberforce, perhaps, was a communist tool? And, hasn't it been the most valid criticism of the left that it ignores historical context? How pleasant it is to find that the right indulges itself similarly when they think it advantageous.

2. Ethical, it is

I've always believed that what we practice is "ethical investing." Amy Domini and I even so titled our first book. Isn't the incorporation of your social, moral, or religious beliefs into your investment decision-making process "ethical investing?"

We moved away from the phrase precisely because of academic pettifogging like that of Anderson, et al. I don't like "socially responsible investing" because it is a phrase that puts audiences to sleep. But as Anderson notes, "ethical investing" has the down side of implying that anyone not following your dictates is "unethical." So, I'd like to renew my years-old challenge to all concerned to come up with a better phrase.

One of the (many) problems Anderson has with portfolio investment end of SRI/EI is that he doesn't understand what motivates the investor, nor does he understand the nature of what he says he's studied. What could be more in keeping with one's ethics than the attempt to order one's financial activities accordingly? That is one of Adam Smith's most important lessons. One has to conclude Anderson, et al. think "ethics" is something to be studied, not lived and expressed.

3. Silence is never golden

Expressing one's views on how the world might be improved a bit is what SRI/EI is about. Portfolio screening has no point if you don't let the world--and the company--know what you're doing and how.

So, Anderson is wrong when he says of social research on corporations, "What starts as a quasi-private service to individual investors may end as something rather different in the hands of others." (p. 7) The social research process is never "quasi-private." Very rarely is the client an individual investor. (Kinder, Lydenberg, Domini & Co., Inc. (KLD), never takes on individuals as clients.) The research is conducted for institutional investors who typically represent many investors. And, there are those "others" (Philby? Blount?), again.

SRI/EI is a technique by which one can advance one's political, moral, social, etc. views. Through the research of firms like EIRIS and KLD, it adds weight to the various movements it supports. To use David Vogel's brilliant phrase, we in SRI/EI lobby the corporation. In the U.S., the CERES group has advanced the environmental agenda considerably by putting investment dollars to double work in bringing corporations, like GM, to the table to discuss accountability. Also, by sponsoring or participating in shareholder actions, ethical investors take more direct roles in changing corporate behavior.

4. SRI/EI: Tools for action

Put into Anderson's framework, ethical investing is not the study of ethical dilemmas. Rather, it is the action taken after the analysis. So faulting SRI/EI firms for not offering this analysis gigs them for not doing someone else's job.

Let's be clear: SRI/EI is politics by other means. It is aimed at achieving results. So, for example, it is possible to make progress on cigarette advertising by convincing 3M not to sell billboard space to tobacco companies. That SRI/EI cannot address "adultery, deception, sponging off others, and sinking into sloth and moroseness in front of a television" (p.14) simply points to the limitations of the technique. SRI/EI does not stand alone as an ethical system. No one has ever suggested that it does. It is simply a tool used to effect incremental change in publicly traded corporations.

What has "ethics" to do with lobbying the corporation? Everything. It is an assertion of responsibility for one's actions--his/her investments--in organizations which, through limited liability and the immunity of their officers, are insulated from responsibility for their actions. So, here's a pretty puzzle for our "ethicists": what forces, apart from the capricious actions of understaffed regulators and the force of public opinion (most forcefully expressed by shareholders), can keep corporations in bounds? From the cases of Warren Hastings in the 1780s to Robert Maxwell in the 1990s, we see how limited our ability to discipline great corporations really is.

5. The money manager's role

And, let's be clear about something else. SRI/EI is implemented by money managers. Even those deeply commited to SRI/EI are not, and cannot be, either "ethicists" a la Anderson, et al. or social researchers. They don't have the time. (I don't mean to imply that these managers don't care about the issues they work with. To the contrary, they do.)

What Anderson, et al. see as deficient research is, rather, designed for managers who serve SRI/EI clients and who have very limited time to research particular companies. These managers want bellwethers from research houses they believe to be reliable and credible. The pressure to serve money managers has had some bad effects within SRI/EI. On both sides of the pond, there's been a dangerous tendency to simplify research, to reduce complex questions to a yes/no or % basis. Social benchmarks have been chosen on the basis of the availability of data susceptible to database sorting.

Catering to the manager's need for quick answers by giving up discursive analysis hurts the very political movements we in SRI/EI exist to support. First, it leaves us open to the kinds of attacks mounted by Anderson, et al. But far more importantly, we give up the opportunity to educate both financial managers and their ultimate clients on the issues the clients--and we--believe vital. So, there is a valid point in the work of Anderson, et al.

6. Closing off discussion

For me, the most disappointing part of "What has 'Ethical Investment'..." are the quotations attributed to Roger Scruton. Scruton's admirable Dictionary of Politics has been one of my core reference books for nearly a decade and a half. But, here is Scruton's lead: "For the most part 'ethical' is another name for fashionable causes, and a way of pre-empting complex moral arguments in favour of a particular foregone conclusion." (p. 13)

That bolt from Olympus brings to mind the work of another pair of facile writers--and thinkers--on SRI, Professor John Langbein, and now, Judge Richard Posner. In a masterpiece of argumentation without supporting facts (or law), they defined "social investing" "to mean excluding the securities of certain otherwise attractive companies from an investor's portfolio because the companies are judged to be socially irresponsible and including the securities of certain otherwise unattractive companies because they are judged to be behaving in a socially laudable way. By 'attractive' and 'unattractive' we refer to the conventional objective of investment, which is to make money...." (79 Mich. L. Rev. 72, 73 (1980)). Langbein, Posner, Anderson, et al. are not debating us. They're telling us in the most unpleasant fashion that we're stupid, and they're not.

Like Langbein and Posner, Scruton has the knack of presenting the implausible as fact. In attacking tobacco screens, he asserts, "A wholly new morality is emerging, in which you guarantee your purity of heart simply by controlling the substances that enter your body. If this is a serious moral viewpoint ... then it becomes possible sincerely to believe that investment in tobacco, wine or whatever is sinful." (p. 14) Surely, it is not only observant Jews, Muslims and Hindus--and those of us who remember meatless Fridays--who would find nothing novel in Scruton's "wholly new morality" and take offense at his off-handed dismissal of long-observed sumptuary laws.

7. A final shot

I could go on like this for even more pages, but "the reader over my shoulder" tells me that I'm shooting fish in a barrel, which is hardly sporting. I could argue it's more like that great small town sport of shooting rats at the dump, but I'll heed Constant Reader this time.

Peter D. Kinder is the President of Kinder, Lydenberg, Domini & Co. (Cambridge, Mass., (617) 547-7479)