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A new organic/natural food store just
opened up in town. If you've ever been inside one of these massive
chemical free superstores you can appreciate the experience. These
are not your corner health food stores with rows of vitamins and a
few displays of protein bars. They resemble in many ways old
fashioned department stores: instead of cheap metal racks and
shelving, products are displayed on aisles of neat blond pine;
instead of piles of prepackaged meats, specialty kiosks dot the back
walls with impeccably dressed butchers, bakers, and sushi chefs.
I like such stores not for their
appearance or even the convenience of ordering a delicious black-out
cake made with real sugar instead of over-processed chemical
substitutes, but to indulge the economics geek in me. I like Kashi
brand breakfast cereal and Paul Newman cookies. The first I have no
trouble finding at normal supermarkets, the latter is almost
impossible to procure outside in the Double-Stuffed Oreos world. But
when I walk into a Trader Joe's or a Whole Foods I usually find that
my Kashi breakfast cereal is a whole dollar more expensive than it is
at the Stop and Shop down the road.
It's classic price targeting: I'll come
into the store anyway to get my hard to find products and who wants
to run around to six different stores to get the best price for each
grocery item separately anyway? The store knows I don't want to get
in my car and drive off to a new store and wait on another line just
to buy cereal, and maybe they figure I'll be so impressed by the
store itself that I'll write off the mark-up like I'm supporting a
good cause. For many shoppers at these organic-megastores I'm sure
this is true, but it doesn't stop with a buck more for good cereal.
Take, for example, the existence of the
organic avocado. Now I've never grown avocados, but from what I
understand they don't have much in the way of pest problems in the
first place. Their thick alligator like skin is peeled off and thrown
away before you consume the fruit, meaning any pesticides or
chemicals never touch the stuff you eat. At the normal supermarket
avocados are two for a dollar, at the organic grocery they are $2.98
per fruit.
One could argue that since pesticides
and industrial fertilizers can have such nasty potential
environmental effects, the justification for organic avocados is not
so much that they are healthier products but that they are more
responsible. But are they a whole 400% more responsible? Really?
As responsible business practices
become more and more economically viable, dry and straight-forward
capitalism is getting unfairly shafted. Classic for-profit business
models, so often ridiculed by Corporate Social Responsibility
proponents, have a simple elegance to them that should be respected
and even admired. They have effortlessly accomplished what so many
responsible businesses are still struggling with: studying and
maximizing the impact of their actions. Of course, the traditional
for-profit company only looks at the bottom line, which gives them a
dirty little advantage, but still they have identified ways to
efficiently measure how changes to their business practices impact
their mission. The fact that the mission is money is beside the
point.
Too many “responsible businesses”
operate under the assumption that ideas that are good in theory will
produce desirable impacts and that's that. Research to support and
scale these theories are left to the skeptics who may not have the
industry's best interests at heart. A traditional for-profit company
doesn't hand over the responsibility of determining the best way to
succeed at its money-making mission to its critics, why do so many
social initiatives?
While I was browsing through the new
organic supermarket I noticed something funny: the lights in the
freezers kept going on and off seemingly at random. At first, I
confess, I was actually kind of alarmed at the idea that the freezers
were losing power, but then I realized what was happening. The
freezers were on a cycle, each unit going on and off for a few
minutes, in order to save electricity.
I've always thought the expression
“saving electricity” was a funny. Electricity is not like canned
food; short of using batteries you can't produce it, preserve it and
use it later. When you turn your lights off at night the electricity
is still being spent, still flowing into your house, regardless of
whether you're using it or not. The theory behind “saving
electricity” is that if you use less electricity, demand goes down
and power plants produce less, thereby consuming less fossil fuels.
But this theory only has an impact in the right scale: if every
household in America or even your hometown starting using energy
efficient light bulbs then yes. A single market rotating freezer
power? Not so much. Outputs of power plants are not determined by
single users, but general patterns. So if you're the only person in
your neighborhood not blasting your air conditioner 24/7 this summer
the only thing you're doing is saving money on your electric bill.
The issue is not whether responsible
businesses are doing enough. The issue is whether such businesses
have even the slightest idea of how much they are actually doing, how
much of an impact they're really making. Our main flaw in wanting
social responsibility is assuming that something is better than
nothing. Okay, maybe something is better than nothing, but if
businesses don't study and project the effects of their practices
then potential innovations that may further the mission never get
noticed. We end up doing “something” but not getting the impact
that we actually want. Conserving energy by running freezers on
cycles, in my opinion, has a negligible impact on fuel consumption,
but if the money saved on the electricity bill is used to buy and
retire a few fossil fuel credits the resulting impact is all the more
efficient. Such solutions are easy to identify once we have a clear
picture of the real impact of “responsible” actions. Just because
an initiative doesn't live up to our expectations, doesn't mean it
can't contribute if it's used as part of an overall strategy.
The sad thing is that so few of our
responsible businesses have a strategy. In this way they are simply
traditional for-profit companies with extras tacked on. Their
responsibility comes down to basic economics: price discrimination
because people shopping for responsible products will pay more,
taking up energy efficient technology because it cuts costs, going
green and organic to increase market share. There's nothing wrong
with this (in fact if it breaks the technology out of the CSR niche
so that traditional for-profits take it up to cut costs and increase
profits I think it's a wonderful thing) but it leaves the industry as
a whole vulnerable to backlash when we claim righteous goals yet have
no plan to achieve those goals or data about the impact we're making.
Is a $3 avocado really more responsible than a .50 one? Or are we
ignoring the reality of the $3 avocado and merely pretending to make
an impact?
Consumers may spent the $2.98 for the
organic avocado and the extra buck for the cereal now, but at some
point they're going to read an article that casts doubt on whether
these extra costs are necessary or benefiting anything other than
profit margins. If the Socially Responsibility movement doesn't have
answers for them we will produce nothing but cynics that throw the
baby out with the bathwater. Then this whole exciting new frontier of
business will be lost.
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Socially Responsible Investing: why it fails and how to fix it.
The future of Socially Responsible
Investing (that is investments made to serve a social purpose instead
of a purely financial one) faces a long difficult battle against its
inherent contradictions. If SRI strategies are disappointing it's
because their proponents have thrown out financial planning basics
and lack the creativity necessary to compensate. Most SRI options
take the form of mutual funds which are popular investing products
because their diversity, flexibility, and professional management
shelter them from violent swings in the market. But SRI philosophy is
all about screening, an action that whittles down the list of
potential stocks and bonds under the fund considerably. This limits
diversity and ties up the discretion of the fund manager in
sustainability reports and corporate responsibility ratings.
SRI converts are quick to point out
that despite the higher costs of these mutual funds, despite the
restrictions on what companies and industries can be invested in, SRI
funds do produce returns for the investor. Modest returns, sure, but
returns nevertheless. A quick look at major holdings reveals why this
is and brings up another reason why SRI doesn't work. SRI funds are
bursting with blue chip stocks: Walmart, AT&T, Apple, Dell....
This may be fine and good, but how socially responsible is Starbucks
really? Sure they buy Fair Trade coffee and probably aren't dumping
toxic waste into the ocean, but will their business practices produce
a better world or just change the troubles in the background?
Perhaps the biggest indictment of SRIs
is that they are sold as proactive investments when at best they're
more like the financial equivalent of carbon neutral. The companies
in their folds aren't necessarily improving society, they're just
progressive enough to cancel out whatever other damage they might be
causing. Since there is no way to objectively measure social benefit,
there's no definitive way to say SRIs don't improve society at large.
It comes down to common sense: would you live in a world that Xerox,
McDonalds, Microsoft and WholeFoods built? What would that world even
look like?
The SRI theory excuses owning shares
of such companies by claiming that by being stock holders, the fund
has voting influence over the corporation and can guide it to better
business practices. But in reality we run into another contradiction
between form and function: mutual funds are supposed to spread assets
over as many different companies as possible, in order to have enough
of a voting share to really make a difference one way or the other in
a company the fund would have to have an insane amount of capital.
For example, PAX World's Women's Equity Fund owns 12,500 shares of
Johnson & Johnson (roughly 2.5% of the total portfolio) valued at
about $840,000 currently. 12,000 shares seems like a nice piece of
action unless you consider that Johnson & Johnson has over 2
billion shares in play. If we assume that 50 million shares might
give you enough influence to really change corporate policy, PAX
would have to invest roughly $3 billion. In order to keep its
portfolio appropriately diverse its holdings would have to be within
the trillions.
Building Better Social Responses
I may not see the point in trying to
completely nullify my carbon footprint, but I accept that working to
offset our damage is a positive step that needs to be embraced. So it
is also with SRI, it's a step in the right direction that shouldn't
be thrown away.
Can SRI actually improve our world and
our pocket books? Yes. The key is creativity, the willingness and
ability to stretch out beyond the small safe pool of blue chips. In
fact, there are five steps that the SRI community can take right now
to bring the industry closer to its goals. Some are already being
done a little bit here and there and all of them are well within the
grasp of industry leaders.
Step 1: Have a Vision
The problem with most SRI options is
that they are too general. They don't produce any social benefits
because they don't have any specific social goals. There's no such
thing as a perfectly responsible company and there never will be, so
SRIs need to stop screening and start prioritizing. Already on the
market there are “Green Funds” that are specialized around
improving the environment, but there needs to be more movement
towards specialization. Without it, SRI funds end up holding
investments that often seem to cancel each other out in social
benefit, like Corning and Coca-Cola.
Step 2: Go Global ... No REALLY Global
Why don't more SRI funds invest in
foreign markets? When the dollar began to sink, my European ETF's
were strong performers. Still, despite the dippiness of the US market
over the last ten years (first the dot com bubble burst then subprime
tanked...) the closest most SRI funds get to global are American
conglomerates. While some SRI groups have special international
funds, these too stay with blue chip stocks in major exchanges.
Emerging markets may be a huge risk for a fund, but companies trading
on the smaller exchanges are often dealing more directly with the
issues SRI supporters want to get behind: human rights, development,
poverty, health. Cellphones and solar power, for example, are huge
thriving industries in developing parts of Africa and Asia because
they allow businesses to sidestep the massive infrastructure
investments that would otherwise have to be made by their governments
to get telephone and power service across the country. Companies
dealing in this are listed on smaller exchanges across the globe and
our doing more for poor countries than billions in foreign aid have
done.
Step 3: Embrace Social Enterprise
A few funds talk a bit about investing
in smaller more innovative private companies, but in practice this is
translating to a few scrappy alternative energy investments. A sad
state of affairs indeed because the possibilities for this kind of
investing are plentiful. Little private companies aren't just
building better fuel technology, they're also running Fair Trade
factories, building energy efficient houses, rehabilitating street
youth ... the list is endless.
Step 4: Amp Up Community Investing
Most of the major SRI funds claim to do
Community Investing (putting money into credit unions, rural banks
and microfinance institutions) as part of their commitment to social
responsibility, but in fact even Calvert Funds, which runs its own
bond program specifically for this type of investing (Google Calvert
Foundation Community Investment Notes), only puts 1%-3% of the assets
of SOME of their funds towards it. With the impressive repayment
rates of microfinance loans, Community Investing risks are relatively
low. The only reason not to put more into it is that such investments
have no hope of covering the overwhelming expenses of SRI funds.
Step 5: Get into Real Estate
Until recently economic development and
environmental protection did not go nicely together, but the age of
the global citizen has given birth to many new trends where we can
have our cake and eat it too. If only there were some Real Estate
Investment Trusts around to nurture growing industries like
ecotourism and agritourism! Ecotourism alone is the fastest growing
sector of the world's largest service industry. Tourists come in to
see the untouched beauty of the planet, resorts that offer low key
sustainable accommodations, and a slice of local life. It's a
win-win-win situation: the environment gets protected, the economy
gets stimulated, new jobs get created while local traditions are
preserved. Although not without potential flaws, ecotourism has been
successful in Costa Rica, in West Africa, even underwater.
SRI strategies do not fail because
it's a bad idea to blend capitalism with causes. They fail because
instead of trying to create truly new investment products, they
create old investment products with trendy marketing and little
substance. If an investment company is going to employ a full
research department to screen companies for SRI criteria, there's no
reason why they should be so myopic in where they find their
investment opportunities. Discretion and good judgment are
essential-- blowing your money on a shady cotton company or a failing
biofuel producer doesn't really help anybody-- but “safe”
investments should be there to balance out a few “risky” picks
that are carefully selected because of the social impact they can
make.
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