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Capitalism With a Conscience

Does "social investing" make a difference? Does it make money?



The idea came to Thom Clark in the early 1970s--he was young (in his early 20s), involved in the anti-Vietnam War peace movement, and working in the Loop. He didn't think it up himself: "A local group, I think with church sponsorship, was doing research, looking at the investment patterns of local banks," he recalls. The idea was to see which bank contributed least to an immoral war.

"At the time it led me to use the Amalgamated Bank--it was a labor-union bank and had a better investment portfolio as far as multinational corporations and defense contractors. That was when I first realized that an individual could have some control over his own money and where it went. I started thinking seriously about putting my money where it would do the most good."

Since the late 60s lots of people have thought, and acted, along the same lines:

Today you can judge your bank or savings and loan by its annual Community Reinvestment Act (CRA) statement, which it is required to make available to anyone who asks.

If you invest in stocks you can evaluate each firm's charitable contributions, number of minorities or women on the board, South African ties, and involvement in weapons making, and choose which stocks to buy accordingly. They're all tabulated in the Council on Economic Priorities' book Rating America's Corporate Conscience.

If that's too much work, you can put your money into any one of a number of funds that do the screening for you. The Calvert Social Investment Fund, for instance, "seeks to invest in companies that support their workers, provide opportunities for women and minorities, and deliver safe products and services in ways that sustain our natural environment. The fund will not invest in companies engaged primarily in business activities with oppressive regimes like South Africa, the manufacture of weapons systems or the production of nuclear energy." Calvert likes local companies such as R.R. Donnelley, Quaker Oats, Commerce Clearing House, Illinois Tool Works, and Wallace Computer Services.

Or you can buy into a moneymarket fund like Working Assets (it buys short-term securities rather than corporate stock), which makes a similar pledge and makes additional promises to invest in higher education, family farms, and small businesses, and to avoid companies on the AFL-CIO's "Do Not Patronize" list.

If these goals seem a little too remote, you can target your money to low-income housing in Chicago's South Shore and Austin neighborhoods ("save our neighborhoods while you save for retirement"); a venture-capital fund specializing in improving the environment; or credit unions active in lending for community development.

If you're into plastic, you can use a Working Assets Visa card, and then vote on which groups working on which issues should receive the donations pool--in 1988, $218,452 was generated when the operation set aside its marketing fees and allowed a percentage of each card transaction to be set aside.

In none of these cases will your money be at any greater risk than it would be if you picked your investments the old-fashioned way.

Welcome to the world of social investing, a happy if unnatural hybrid of financial savvy and progressive social concerns--"unnatural" because it breaks with the more doctrinaire views of both sides. Traditional leftists have condemned living off interest (presumably sweated out of underpaid wage slaves) rather than one's own labor. From that viewpoint, "social investing" is an oxymoron like "military music."

Traditional capitalists, on the other hand, buy and sell with clear consciences because they believe that the social good is accomplished by each individual's seeking his or her own self-interest (profit) in the market. From their standpoint, social investment is a meddlesome impertinence, or even a desecration of their shrine. Says one bemused Chicago investment adviser, "We don't have any businessmen who get hung up in [social investment]. The normal person who wants to invest in stocks has only one goal--greed. That's just the way we're made."

Not anymore. The idea that you can use your money to support a good cause and still go on compounding interest has caught on. "I'd never been aware of investing, socially responsible or otherwise," said Shelley Sandow as she finished up her job as Lawrence Bloom's mayoral-campaign schedule director. "I was paying off student loans. Then, I guess around 1984, I began seeing ads for Working Assets in these magazines I get, Sojourners and the Other Side. So when I started getting a little bit ahead, I sent in for information. I didn't want my money to go to making nuclear weapons, or making weapons at all." Now, she says, I feel good every time I get my statement. And they have a wonderful newsletter that reinforces my commitment and informs me about the world of business."

The 322-member Boston-based Social Investment Forum (of which Chicago banker Joan Shapiro is outgoing president) estimates that as of mid-1988 some $450 billion was invested according to social criteria of one kind or another. That is a little more than one-tenth of the total $4.2 trillion invested in stocks and bonds that are traded on the largest U.S. exchanges.

By far, most of that $450 billion is invested by institutions (pension funds, churches, etc) that have been pressured into selling South Africa-related stocks, but that use no other social criteria in making investments.

The number of dollars being invested for the purpose of achieving good results (as opposed to simply avoiding bad ones) is very much smaller, according to Shapiro. No more than $250 million is being targeted directly to local communities' needs in housing and small business.

In finance as in farming, diversity makes for safety. If all your eggs are in one basket, it only takes one accident to break them. Normal investors choose among the entire stock-exchange universe of reasonably well performing companies; social investors begin with that universe and then rule out those firms involved in enterprises they consider unsavory. (South Africa, nuclear weapons, and environmental pollution are the three most often abhorred.) Logically, it would seem that the social investor wouldn't do as well.

But logic seems to have been wrong. Between 1981 and 1987, social-investment accounts managed by United States Trust Company of Boston grew faster than the Standard & Poor's index and Shearson Lehman Government Corporate Bond index. In its February 20 issue on "The Best Mutual Funds," Business Week describes Calvert's "managed growth" social-investment portfolio as having "very low" risk and "very good" performance. Working Assets' record has also been quite satisfactory: on a recent weekend, its rate of return was slightly higher than that being offered locally on six-month certificates of deposit--"without any penalty for early withdrawal," says midwest associate Ron Freund. More technical market analyses confirm that social investments in general have done at least as well as the market at large.

There's not really any paradox here. Many people believe that companies do well by doing good--at least up to a point--so that social screening only screens out some potential bad apples. "Maybe there are some associations between a positive environmental record and profitability," speculates Michael McGillicuddy, broker and assistant vice president of the Chicago Corporation, about half of whose 300 clients are social investors. "Maybe there is a relation between a company having model employee relations and higher productivity. Maybe we are uncovering some useful investment factors."

Robert Cooke, who directs the Institute for Business Ethics at DePaul University, is cool to such talk, pointing out--correctly--that no study has proven that such connections are more than coincidences. But at least one Chicago-based mutual fund managed on the basis of these assumptions has done very well indeed. The Calvert-Ariel Growth Fund, under the direction of John Rogers Jr., earned a 39.9 percent return last year--fifth best in Lipper Analytical Services' ranking of 915 all-equity funds. Rogers's conservative investment criteria (aimed at long-term growth) coincide nicely with Calvert's "progressive" social screens. Ariel's director of finance and administration, Mary Beth Hughes, explains: "We avoid conglomerates, because you can't do everything well. Right away that would rule out, say, Rockwell International [a big defense contractor]. We avoid recently deregulated firms. We avoid commodities and cyclical companies in general, like cars. We avoid high tech and biotech."

Why no defense contractors? "It's not political--there are business reasons why we don't invest in them. They tend to be heavily regulated, which can depress earnings or make them erratic. Also the large amounts of government money makes those companies vulnerable to possibilities of unethical practices [another threat to earnings]. We thrive and do well on stable, consistent earnings growth" in small, specialized, consumer-oriented firms like the Topps Company, which makes baseball cards, and Sanford Corporation, which makes the ubiquitous marking pens.

Doing good by doing well--how could anyone be against it? Let us count the ways:

For one thing, your idea of "good" may be different. Social investing is often called "socially responsible" or even "ethical" investing, which simply begs the question: whose ethics? If Jesse Helms or Jerry Falwell believes it would be ethical to divest from communist regimes and invest in the building of additional weapons systems, then he could organize his followers to do so--and thus become, strictly speaking, "social investors." But such efforts have so far failed. (Of course, not everyone who abhors apartheid necessarily objects to the building of nuclear warheads. Joan Shapiro says the Social Investment Forum has taken care to avoid identifying itself with particular causes--say, by endorsing the nuclear freeze--so that it can serve as an umbrella group for all.)

Libertarian conservatives, as opposed to traditionalists, are uncomfortable with the idea embodied in the title of one social-investment newsletter, Clean Yield. "That sounds like the old adage that there's clean money and dirty money," growls DePaul business ethicist Robert Cooke. "I think that is just blatantly wrong. It's unfair to the companies involved. There's a political reality that has to be made clear--if we don't have defense, we don't have a free country." (Calvert and Working Assets, of course, are not opposing national defense when they divest from weapons contractors. The point, according to spokespersons for both, is that the current U.S. military policy is wildly out of line with the nation's actual needs.) "No business that is legal would be unethical or unclean," Cooke adds. "I can't think of any."

For those who can't take that seriously, Cooke has a backup argument--social investment is too simplistic. "People have the idea that every ethical dilemma has a black or white answer--a kind of Sunday-school approach. The notion that somehow magically I will be clean is just that--magic."

He especially dislikes the checklists in Rating America's Corporate Conscience and similar publications. "Who determined they have God's truth in their criteria? Investment in South Africa, involvement with weapons, nuclear energy, amount of charitable contributions, women directors and officers, minority directors and officers, social disclosure--these are all political-agenda items.

"Sure, the position of women and minorities is a reasonable question to ask when you're looking at a company. But there may be lots of mitigating factors--what if the company is out in the middle of Wyoming? Simply putting it in a column I think is arbitrary. . . . I feel sorry for companies that get labeled unfairly."

But most social investors aren't all that fanatical about what they want to avoid, says Michael McGillicuddy. "There are people I've met up with who would at any cost avoid involvement. But they are a definite minority. Most people have a financial need, and if no well-performing social option is available, they'll go on with their life and not do anything socially."

Likewise, fund managers are aware that there are few black or white options and that they must set priorities or even (shh!) make compromises. "We are invested in DEC [Digital Equipment Corporation], which Insight [a social-investment newsletter] recently cited as one of the top 100 defense contractors," says Cynthia Chin, vice president of the Calvert Social Investment Fund. "We were concerned--it's one of our favorite companies. They have an outstanding record on women and minorities. They pioneered flextime and job-sharing and a day-care resource hot line.

"So we called them up--we thought we could enact some social change. They were very responsive--that's another criterion. First of all, the computers they're selling 'go into administrative functions [not bomb guidance]. And over the years, after repeated dialogue, their percentage of sales to the Defense Department has been reduced."

"What's most important to me," says Thom Clark, who has an IRA in Working Assets, "is peace of mind when I'm falling asleep at night. I haven't bought any more bombs that might gas Iranians or blow up somebody in Beirut."

This kind of talk makes market people cringe. "The gap between cause and effect is so large," shrugs one financial veteran. "I buy 100 shares, and the company does business in South Africa. It's so remote, it becomes a meaningless gesture."

"That's a cop-out," replies Clark. "We all make economic decisions every day, about where to buy a newspaper or a loaf of bread. If you buy your paper from a metal box instead of from a person, that money will be used differently."

True on the consumer level (and in alternative investments), but marketwise people explain that the stock market is very efficient, whatever you may think of the social priorities that emerge from it. In general, for every seller there is a buyer, for every buyer a seller. If you sell your 100 shares of Weapons Unlimited and buy 100 shares of Peaceful Solar instead, you won't affect the price of either one. (For purposes of this example, we'll assume that both companies are doing equally well and that your reason for selling Weapons Unlimited is your revulsion at its products. Obviously if you sold its stock because it was performing poorly, you wouldn't be a social investor, just a smart one.)

Let me repeat this, because many social investors don't want to hear it: your sale of Weapons Unlimited stock may make you feel better, but by itself it does not hurt the company at all. (Of course, social investment as part of a widespread social movement--like South African divestment, with consumer boycotts, demonstrations, civil disobedience, stockholder protests, and media pressure--definitely affects corporate decisions. But the question here is whether you can sleep better at night just because you shifted your money from one stock to another.) In fact, the only way your sale could hurt the company's stock price would be if (a) a very large number of stockmarket players came to disagree with U.S. military policy and began selling defense stocks for that reason, and (b) there were so few normal (greedy) investors in the market that they couldn't bid the stocks right back up to their original market value. But if we had that kind of consensus against the military-industrial complex, Jesse Jackson would be into his second term as president. As things stand now, the world continues on its wicked way, because someone else's money has taken the place of yours in Weapons Unlimited's coffers. (This argument, by the way, is not the same as the argument that it's useless to vote. Votes do add up. If, for example, you gave yours to Evans the other day, Daley did not get one to replace it--at least not in most precincts.)

Social investors don't counter this rather cynical argument, they sidestep it. First, they say, there's nothing wrong with feeling good (a point worth making in these neo-puritan times). "Personal change is part of social change," insists Ron Freund, who besides being a Working Assets midwest associate is an Evanston-based investment adviser and former executive director of Clergy and Laity Concerned in Chicago. "Feeling good isn't a bad thing if it's coupled with some positive action."

Cynthia Chin: "Sure, they're going to find another buyer somewhere. But we've got one more person who sees that I don't have to separate who I am from my investments." Adds Shelley Sandow, "It makes a difference to me--I'm more consistent with my beliefs. And that is important. If everybody was consistent with the values they mouth, the world would be a much better place. . . . I think there's something else at work out there besides the marketplace and the balance sheet."

Second and more surprisingly, they say in essence: "Sure. We know it's mostly just shifting money around. But you have to start somewhere." Consider, for instance, the eight founders of Working Assets six or seven years ago. Julia Parzen, now a social-investment consultant, author, and Chicagoan, was one of them. "In 1983 we did not say, 'Let's go out and start a money-market fund.' We had a broader strategy and vision for an alternative financial system"--and Working Assets was only the beginning, the first of many financial products.

"In general, most people involved in social investing aren't concerned with making a direct contribution. They want to know where their money is going. They want it out of South Africa and out of polluting companies. But they don't really think about whether this just amounts to shifting money." Working Assets and its counterparts in the stock market offer these people a convenient choice--and, perhaps, an education and an incentive to move into more direct kinds of social investment.

"Most people get into social investing because something catches their attention," says Joan Shapiro, who is also senior vice president of South Shore Bank. Typically it's something bad--apartheid, toxic waste, the proliferation of superfluous weaponry--that they don't want to contribute to.

Later on, people may want their investments to do affirmative good, and then they seek out companies that match their concerns. At this stage, Shapiro recommends that the social investor step back and systematically identify the important issues he or she wants to affect. That may sound obvious, but "investing in securities on Wall Street isn't going to help the homeless much. If that's your priority, buying a 'good' money-market fund is not going to do it."

Social investments that do make an immediate difference and are not "replaceable" like stocks are often called "alternative" investments--not because they pay less, but because they are not easily accessible through a broker. They include community-development credit unions (three in Chicago), community revolving loan funds (one in Chicago), any of the full range of bank accounts in a community-development bank (South Shore Bank, 7054 S. Jeffery), and a few venture-capital funds like Chicago's Neighborhood Fund, which supplies capital to minority-owned businesses. Money invested in these places is loaned out to affordable-housing and local business ventures that are usually in poor neighborhoods little served by traditional financial institutions. (Working Assets and Calvert also buy some certificates of deposit from banks and savings and loans with good records of community lending. Soon Working Assets will also be putting money into a new loan program aimed exclusively at family farms.)

Are alternative investments chancier? No way, insists Joan Shapiro. "We [South Shore Bank] have made more than $110 million in development loans since 1975, and our repayment rate exceeds 98 percent. That compares very well to the losses in money-center banks. The community revolving-loan funds [nationwide] haven't been in business as long as us--they've put out about $35 million--but their cumulative losses so far are no more than a percent. [The Chicago-based Anawim Fund of the Midwest has made loans to an employee-owned printing company, a Hispanic-operated grill, and an American Indian graphics partnership, among others, and reports no defaults in three and a half years.]

"Perceptions and reality are very far apart in this business. In reality it's far riskier to buy 20 shares of stock over the counter than to buy a certificate of deposit insured up to $100,000!" (Alternative investments are the opposite of "redlining," since they infuse capital into poor and minority areas. Their success, when managed properly, indicates that banks that redline certain neighborhoods are acting on prejudice, not market reality.)

All these alternative investments pay a market rate of return. "Of course," adds Kathryn Tholin of the Woodstock Institute, "you can do even more good if you do less well." South Shore Bank offers "Rehab CDs," their only below-market account, where depositors choose a discount from the market interest rate, and the differential subsidizes the renewal of especially deteriorated buildings. Bethel New Life, Inc., has received $225,000 in its "May We Have Your Interest" program: depositors make zero-interest loans, which the west-side community-development corporation invests in high-yield certificates. The difference goes to provide cash down payments on new homes for low-income families.

"The vision was that one day we would be the Shearson American Express of social investing," says Julia Parzen about Working Assets--"able to provide any type of financial product and level of risk that a customer might want, with enough size and reputation and performance to have a big impact and draw in more mainstream investors. We would become financial power brokers with the values we're trying to transmit."

As more players have entered the social-investment field, Working Assets may not be the vehicle through which these dreams are realized. But the movement continues to spread insidiously across the financial landscape. South Shore Bank's "development deposits" (accounts of any kind from outside its target neighborhoods, South Shore and Austin) have tripled since 1981, from $20 million to more than $72 million, and the bank is expanding its locally targeted development programs to Chicago's Austin neighborhood and is advising the Southern Development Bancorporation on the adaptation of its model to rural Arkansas. Chicago's Woodstock Institute (with the help of Parzen, South Shore Bank, and the Crossroads Fund) has published and is selling the Midwest Guide to Social Investment 1988, which lists 48 social-investment opportunities (including brokers and advisers), half of them in Chicago. Kathryn Tholin is now investigating the feasibility of starting a community-loan fund in Chicago.

The Calvert Social Investment Fund is now available through all major brokerage houses. Working Assets is offering nonprofit membership organizations an electronic fund-raising service. The Social Investment Forum has a grant to figure out ways to "make a market" in alternative investments, that is, to make it easier to find them and pick the one you want. The financial press used to alternate between ignoring and mocking social investment. "Piffle. . . . pious nonsense," Forbes's senior editor William Baldwin called it in 1985. Now it is seen more as an unexceptional part of the real world. It helps that socially screened funds weathered the October 1987 stock-market crash better than most.

"Especially after the past year" of financial scandals high and low, says Cynthia Chin, "the public has had it. I think ethics is becoming much more of a concern to the American public." And not just ethics in the abstract, adds Ron Freund. "Certain social mores are now accepted by society. One is nondiscrimination. You could do the job with just white males. But the point is not just to get the job done, but to do it with justice.

"The same thing goes for environmental and occupational safety. Those are accepted principles. We can argue levels and standards, but over time things have changed and what was once idealism is now realism.

"An even longer-term area is military and nuclear weapons. Society has not yet reached a consensus on their immorality. They are now where human slavery was once. Many people consider nuclear weapons immoral and don't want to support them. We provide a way of doing that while still supporting their needs."

Still, the ideological barriers loom large--the very idea of thinking such thoughts on LaSalle Street! "Traditional money people hate this with more vehemence than is appropriate," says Tholin. "The idea that anyone would screen investments for social value challenges the basic premise that capital should go where it makes the most money."

But the essence of the market is not that everyone there wants to maximize return--it's that whatever they do want is ultimately expressed in money. And the essence of social investment is discovering that you can express more than one thing with your money. It's like finding out that there's more than one color of crayon in the box. How could anyone who believes in the free market complain about its becoming a little bit freer?

Art accompanying story in printed newspaper (not available in this archive): illustration/Slug Signorino.

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