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New Bottom Line Volume 14.8 – Social Investment, Social Capital and Social Action

Sunday, October 2, 2005

More than 500 “socially responsible investment” professionals gathered in Snowbird Utah last week for the 16th annual SRI in the Rockies conference. I joined them — just doing my duty, at 8000 feet in mountain beauty — and offer these observations on social investment and social action.

The SRI movement has grown substantially, with — according to some — about 10% of US investment dollars under some sort of SRI management.

“Some sort” covers, it turns out, a wide range of investment vehicles, strategies and philosophies. The origins of the movement are in negative screens — mutual funds that exclude companies that engage in undesired activities, such as production of alcohol, armaments, tobacco or union busting — which often tolerated a lower rate of financial return in consideration of their ethical focus. Then funds developed that focused more affirmatively on companies demonstrating desired behaviors, such as positive environmental profiles. The original impetus may have been ethical, but the financial merits of these strategies is increasingly emphasized, even as the pool of offerings broadens beyond mutual funds to include indexes, exchange traded funds (ETFs), and community based investment.

In fact, the conference awards the annual Moskowitz Prize (named after Milton Moskowitz, author of The 100 Best Companies to Work for in America, and one of the first investigators to publish comparisons of the financial performance of screened and unscreened portfolios), which honors the best quantitative analysis of socially responsible investing. This year’s winner — The Economic Value of Corporate Eco-Efficiency, by Nadja Guenster and colleagues from the Rotterdam School of Management at Erasmus University — found that “company managers do not face a tradeoff between eco-efficiency and financial performance, and that investors can use environmental information for investment decisions.”

There was some debate in the room over whether, and why, companies care about their SRI rankings. Some maintained that companies could care less; others noted that many public traded companies respond to extensive questionnaires (at 100 hours a pop) from multiple SRI analysts (sometimes dozens) — the reason OneReport was developed — while some approach the analysts and rating services (like the DowJones Sustainability Index, FTSE4Good, KLD, Innovest, and others) for advice on what they need to do to move onto the good list. That seems like an indicator of perceived value to me. As does the presence of a former Goldman Sachs CEO at the helm of Al Gore’s new firm, Generation Investment Management LLP.

Perception is key to the investment game, of course. The profit opportunity lives in the value gradients between how different people evaluate risk and opportunity, and hence the value of securities. If I think global warming, toxic products and human rights are likely to be big deals, and you don’t, we’re going to place very different financial bets. Because SRI is a movement as well as an industry, the investors want to move markets — like LEED™ has done in the building industry — as well as profit from them.

The SRI industry faces challenges, and these were on the agenda as well. One session considered the fiduciary duty of investment advisors, and whether they can ethically (and legally) consider “non-financial” environmental and social factors in investment decisions. Peter Kinder, CEO of KLD Research and Analytics, expects that trustees will consider the liabilities of climate change, for example, but will do it on explicitly financial grounds, while denying any moral or ethical basis — even if their morality and ethics guides their financial assessments. (How odd that the law does not allow for morality & ethics. In fact, 33 states — including California — don’t even permit corporate directors to consider “non-financial” factors in management decisions, though recent legislation has proposed broadening the boundaries of acceptability. On the other hand, directors and executives may have plenty of exposure to consider, even if they focus narrowly on the financial implications of environmental and social factors. )

Mercer Investment Consulting’s global head of SRI, Jane Ambachtsheer, who confesses to a “more aggressive stance than many,” sees an evolution of “ESG factors” — environmental, social and governance — from ethical to material concerns, based on impact on stock price. The most striking research finding she reported was the regional differentiation of perceived value gradients: the US investment industry is way behind its European counterparts, with 65% of US professionals surveyed saying ESG will “never” be mainstream, while 65% of European managers say that it will, within ten years.

Another challenge on the agenda — the growing attacks on SRI. Even as 35 state treasurers attended a UN Summit on Climate Change, state pension funds are increasingly under attack. In the guise of “giving workers more control over their retirement investments” by devolving state pension funds into 401(k) plans, opponents are actually challenging the pooled social power of progressive states and labor associations — like the CalPERS and CalSTRS Green Wave initiative — to invest both in support of their values and their interpretations of prudent investment strategies.

Gar Alperovitz, University of Maryland professor and author of the recently published America Beyond Capitalism, put a fine point on this and underlying concerns in his opening keynote, which is worth summarizing in some detail. “The hopeful assumption, during dark political times, that ultimately the pendulum will swing back — that’s complacency.” Believing that the best we can do, in the face of overwhelming trends against us, is help make things a bit less bad — “I don’t believe that either,” he said.

We’re not facing a political, economic or even environmental crisis, according to Alperovitz: “We’re facing, in this generation, a systemic crisis.” He offered several examples to support his point:

Thirty five years ago, corporate power in US was balanced partly by significant organizations allied, above all, with a significant labor movement. Organized labor, which has been at the heart of progressive movements worldwide, has now declined in the US from peak of 35.3% to 7.2% in private sector, and still dropping. One of the fundamental balance wheels in the system that kept things balanced, sort of, is disappearing before your eyes.

The US is the only advanced industrial system in the world that is fundamentally divided on racial grounds.

Globalization has undermined the capacity of communities and organized constituencies to fight back.

In the face of this systemic change, Alperovitz suggests, with power relations shifted in such fundamental terms, “either there is no way forward, or only in a very different form.” Yet, “as an historian, I’m a long run optimist,” even though he expects things to get worse before they get better.

“In the face of McCarthyism in the early 50s, people felt this will never change — but what came next was the 60s.” While Earth Day founder Gaylord Nelson (for whom Alperovitz was Policy Director) was a “conservation governor,” national environmental initiatives “seemed ridiculous… and out of nowhere came a very powerful environmental movement.” It was clear, in 1940s Mississippi, that “nothing could change; their difficulties were far worse than anything we face today; idea you could change it was insane.” And yet the civil rights movement emerged.

With those reminders that even the most seemingly entrenched systems do change, Alperovitz turned his focus to the immediate concerns of the SRI conference — money and the social weal — and the question of “what’s our role in achieving that change?” He began by chastising the industry: “Current income and wealth trends aren’t being challenged: the top one percent in the US have more income than bottom 100 million, and control about half of all investment capital, while five percent owns 70 percent; it’s a medieval distribution of wealth. With those assets go power.”

His challenge: the possibility of slowly developing alternative paradigm that’s beyond capitalism in its traditional form: significantly broadening ownership of capital — “not socialism or capitalism, but a new form.”

“Just possibly,” he suggested, “we’re living at time when the beginning ground work for something very different, very positive, might begin to transcend traditional models.”

Many SRI professional are encouraging their clients to invest one percent of assets in community investment — a step in that direction. Others were wearing buttons saying “1% is not enough.” Gar raised the bar: “What if the goal was to become central players in development of new paradigm to shift the most central structure in this society — who owns wealth?”

The punch line for me — and for the WorldChanging “a better world is here” meme: There’s much more activity in development of institutions to develop community wealth than commonly known: more than 11,000 companies with significantly or increasing employee ownership, employing 11 million people — more than in the labor movement — plus some 4,000-6,000 community and neighborhood corporations (12,000 if you count non-profit housing developers), not to mention land trust. Those aren’t huge numbers, but they’re bigger than I would have thought, and present what Alperovitz called “a systemic possibility, rather than merely and investment vehicle.” And then there are those public pension funds.

How do we get there? Alperovitz the historian again looked backward to look forward, considering other times when people committed themselves to “get beyond doing good things, to become historic actors” — and built transformative movements that “came out of nowhere.”

Except, of course, they didn’t come out of nowhere. They came out of slow, patient, local, face-to-face work. “This is the history of most movements for transformative power; it’s always a national challenge, but it was the programs developed at local level that became the new deal — social security, the eight hour day, workers compensation — that became the preliminary paradigms for the big changes to come.”

How would we plan if we allowed ourselves to think we faced a systemic crisis and wanted to alter it, rather than just do good things? What would such a plan look like? Who would even ask those questions?

What we would do to inform ourselves? Political power doesn’t come out of the barrel of a gun, as Mao claimed, but from 5-6 women sitting in a living room reading, talking to each other, then supporting each other in action.”

In the end, these are essentially existential questions. What is the life you want to live, the risks you’re willing to take, what you’re personally willing to do to move the ball? Are we personally willing to accept the challenge of what it would mean to take our own power seriously? Leadership comes from the person sitting in your seat.

His heroes: “the people in Mississippi in the 1930s and 40s who pushed forward for civil rights no matter what — when raising those issues could get you killed.”

“And I respect, though I disagree with, the intelligent group of conservatives in the 1940s-50s — more marginal than most US liberals today — who said, well before Goldwater in 1964, that they were going to stick to their principles, roll up their sleeves, meet in small groups, help each other — and who now dominate the ideas and power of the most powerful system in the world. People can do that. It’s as common as grass in world history.”

This speech was a pointed challenge to an industry, and a movement, that’s grappling with successes, and debating its next moves. Alperovitz again:

This is a dangerous time for an organization that wants to be serious — with the kind of success that allows you to think you should quiet down, pull in your horns, and not rock the boat. I’m suggesting that now is the time you have to rock the boat. Shrewdly.

We’re trending wrong on almost every major indicator. This needs to be challenged and directly faced, because there’s great difference between slowing down rate of increase of something getting worse — which most of what we all do — and actually turning a systemic trend the other way, reverse where we’re going.

David Brower called it the “great ecological u-turn.” Bill McDonough is fond of pointing out that if you’re in the US in a car headed north to Canada, you can’t get to Mexico by slowing down; you have to turn around.

The question for each of us — for the person sitting in your seat — is, as my mentor Bucky Fuller would ask, “If the success or failure of this planet, and of human beings, depended on how I am and what I do, how would I be? What would I do?”

(c) 2005 Gil Friend. All rights reserved.

New Bottom Line is published periodically by Natural Logic, offering decision support software and strategic consulting that help companies and communities prosper by embedding the laws of nature at the heart of enterprise.

Gil Friend, systems ecologist and business strategist, is President and CEO of Natural Logic, Inc.

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