Organic Consumers Association

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Product Plunder: Most Socially Responsible Mutual Fund Investments Are a Form of Greenwashing

Web Note: More and more organic consumers are asking us how they can promote health, justice, and sustainability with their investments or IRAs, and whether various claims of Socially Responsible Investments are true or not. OCA has decided we will start focusing more on this issue, beginning with an important, though little-known report, issued by Paul Hawken's group, the Natural Capital Institute, in Oct. 2004.

From: Paul Hawken's web site

Socially Responsible Investing: How the SRI industry has failed to respond to people who want to invest with conscience, and what can be done to change it.

Naively or intentionally, phrases such as 'corporate social responsibility,' 'sustainability,' 'green business' and 'socially responsible investing' are being employed by corporations in ways that confuse consumers and diminish the work of businesses that are dedicated to responsible practices. SRI mutual funds, which purport to invest responsibly, are in fact buying shares in many companies that have co-opted these terms. In response to this blurring of meaning, NCI (Natural Capital Institute) published a report in 2004, and developed the first database of socially responsible mutual fund portfolios in North America, accessible free of charge to the public. see:

The article below, from Common Ground magazine, basically summarizes this study
Is Your Money Where Your Heart Is? The Truth About Socially Responsible Investments
By Paul Hawken

"In fact, few SRI funds screen for environmental responsibility. Some funds exclude companies that flagrantly violate environmental law; but, with the exception of Portfolio 21 and a handful of other US and European funds, just about any company is acceptable."

From Common Ground magazine October 2004

Paul Hawken is an environmentalist, entrepreneur, journalist, and best-selling author. He is founder and director of the Natural Capital
Institute (NCI).

The full NCI report on SRI mutual funds can be viewed online at

Imagine an organic food trade association any company could join. Members set the standards to suit themselves. Thus, any store or company can label their products "organic" if they choose because there are no rules defining what organic means.

If your company does anything to improve its production methods, no matter how inconsequential, it qualifies for membership and can use the word "organic" on its labels. The association awards an annual prize to an academic paper showing that, if you eliminate six of the twelve pesticides commonly used on lettuce, you still get just as much lettuce as before.

Consumers who want to know about the food they buy can't find out how it is grown or how it is certified. Instead of an independent outside agency, association members hire private for-profit "screening" companies to determine what is organic. The screening companies compete, each has a different screening method, and none reveal how they define or determine what is "organic." The screening standards allow 90% of all food produced in the world to be labeled organic.

Inside this organization a small group of core producers believe that organic should mean no use of synthetic pesticides and fertilizers. The big food companies are amused by their romanticism and see them as "idealists."

Sound ridiculous? Yes, except this trade association exists. It doesn't sell food; it sells investments. It is the international SRI (socially responsible investing) mutual fund industry. Like our imaginary trade group, it has no standards, no definitions, and no regulations other than financial regulations. Anyone can join; anyone can call his or her fund an SRI fund. Over 90% of Fortune 500 companies are included in SRI portfolios (see sidebar, below).

The term "socially responsible investing" is so broad it is meaningless. If a fund doesn't own companies involved with gambling and pornography, it can be called socially responsible. Never mind that it owns Halliburton and Monsanto. SRI can be determined by what is called a negative screen, i.e., if you don't do something, you qualify. Or if you say you do something even though you really don't (such as screening for environmental responsibility), you also qualify. That's all it takes to be named an SRI mutual fund.

The analogy would be a gang member who is a mugger. If the gang member says he will stop mugging senior citizens over 65, he now qualifies as a socially responsible gang member. By creating an industry that is identified by specific exclusions or inclusions, key information and criteria are conveniently overlooked.


There is a difference between buying food and investing money. When people invest, they want a return, the highest return they can get. SRI returns are compared to conventional investments as a test of their worthiness. Industry advertising claims that SRI funds outperform conventional funds. That is true with some funds. When you look at the makeup of these funds, it's not hard to see why: the stocks held are the same as stocks in conventional funds.

Table One has two lists. One list is the 30 US companies that make up the Dow Jones Industrial Average. The other list is the 30 top US holdings in North American SRI mutual funds. Can you tell which is which?

SRI portfolios not only look like the Dow Jones (list "B"), they use the Dow Jones Industrial Average as a benchmark to evaluate their performance. We don't know what a socially responsible rate of return is because no true SRI portfolio has been tracked over time. Because the industry has hooked people on the idea that SRI funds should do as well or better than other mutual funds, they have to demonstrate it, which leads to portfolio creep < porous and spurious criteria about what is a socially responsible company.

Striving for the highest rate of financial return is a cause of social injustice and environmental degradation worldwide. It consistently leads to "externalization" of costs to workers, people, the environment, and the future.

Colonization, imperialism, slavery, and virtually all wars are directly attributable to oligarchies trying to achieve the highest return on investment. It is called "sacred hunger" in Barry Unsworth's prize-winning novel of the same name on the slave trade. How the SRI industry came to believe that it could use avarice to reverse the suffering that greed causes has everything to do with marketing and nothing to do with philosophy.


The history of SRI goes back to the ethical precepts embodied in Jewish law. Quakers and other religious orders starting in the 18th century refused to invest in "sinful" industries such as distilleries and weaponry. In the 1960s, the environment, civil rights, and militarism were all brought to the national foreground. Apartheid, the Vietnam War, Bhopal, and later, Exxon Valdez, spurred public indignation about corporate practices. With the adoption of the Sullivan Principles, created by Rev. Leon Sullivan in 1977 to enlist companies to combat apartheid, there was a clear divide between multinational corporations perceived as responsible and those not. Twenty years later, Rev. Sullivan developed the Global Sullivan Principles of Social Responsibility, which called for equal pay, fair employment practices, and affirmative training and promotion of people of color in all communities.

Even before Sullivan, people were creating SRI funds. The first SRI mutual fund was Pax World Funds, a $1 billion fund created in 1971 by Luther Tyson and Jack Corbett both of whom worked for the United Methodist Church. A parishioner queried Tyson whether there was a fund that screened out companies involved in the Vietnam War. There wasn't, so Tyson, Corbett and two businessmen started the first public fund to include social criteria in its investment decisions.

Today, Pax advertises aggressively in the alternative media such as Mother Jones, Green Money Journal and Utne magazine. Its ads are bordered by its guiding investment principles with body copy saying: "For over 33 years, we've subjected potential investments to rigid social and environmental-responsibility screensS We believe our lofty ideals don't hurt our performance."

In Table 2 (Principles vs. Holdings), we can see some of those principles next to a list of portfolio companies in the Pax World Balanced Fund as of June 2003. I don't think anyone questions Pax's commitment to social equity. It is the interpretation and application that is confusing.


I was unaware of what SRI mutual funds did two years ago. But I knew enough about corporations to be skeptical of how SRI funds could invest "responsibly." In a speech at the 2002 Bioneers conference, I made passing reference to the Domini Social Equity Fund's holdings of McDonald's. Immediately after the speech, an ex-manager of Domini's collared me and said I obviously didn't understand SRI investing. For a moment I didn't know what to say.

Then I realized the person was absolutely correct. I didn't understand SRI investing. It didn't make a whit of sense to me that you could own companies like GE, Monsanto, and Coke and pat yourself on the back. I decided to research the industry. At the Natural Capital Institute, our staff created the world's first comprehensive database of SRI mutual fund equity holdings and then we analyzed them.

What became apparent is that the criteria that are being employed by SRI screening companies are upside down and backwards. The most important criterion to determine a company's social responsibility is whether it should exist at all. In other words, is the company helpful to the world and its people? Although every company believes in its mission, the raison d'etre of SRI is to challenge the process and purpose of publicly held corporations.

McDonald's spends upwards of $2 billion a year on advertising, much of it aimed at young children. Obesity and Type 2 diabetes in youth are major news stories. The connection to fatty, sugary junk food is undeniable. Yet McDonald's fights all legislative or regulatory moves that would limit its practices. For Domini to cite McDonald's waste management practices as valid criteria for inclusion avoids the real issue: Why is McDonald's wasting our children?

In fact, few SRI funds screen for environmental responsibility. Some funds exclude companies that flagrantly violate environmental law; but, with the exception of Portfolio 21 and a handful of other US and European funds, just about any company is acceptable. Take the Sierra Club Stock Fund. There are few companies in its portfolio that address the environment in a proactive way; only one (Starbucks) that measures its ecological footprint, and no alternative energy companies. Sierra invests in companies that make surge protectors, fastening screws, steakhouses, anti-wrinkle creams, and candy bars.

The Sierra Club invests in Cousins Properties, one of the major contributors to sprawl in Atlanta ("From the time Cousins was founded, the Company has understood the value of land and has sought to control large tracts of strategically located land holdings for future commercial and residential development"). I single out the Sierra Club because it is one of the oldest and most respected NGOs in the world working for land conservation. But it is not just the Sierra Club. Their performance is duplicated by other funds because they use the same investment advisor, Harris Bretall Sullivan &
Smith LLC.

The SRI industry needs to change. While SRI investors call for corporate transparency, the industry is closed, proprietary and secret. While SRI calls for workplace diversity, it is an almost entirely white industry. While the industry calls for environmental responsibility, it meets at luxury resort hotels that are far from being environmentally responsible. To put it plainly: if the SRI industry were a corporation, it wouldn't qualify in a rigorously screened portfolio.

Either the industry has to reform in toto (or rename itself), or that portion of the industry that wants to maintain credibility must break off from the pretenders and create an association with real standards, enforceability, and transparency. It needs to model the behavior it purportedly demands in other companies. In the US, there are funds that make real contributions to corporate reform and accountability: Portfolio 21, Calvert, Domini, Citizens, Walden, and Women's Equity are rightfully considered leaders. But they are the minority.

The world needs true fiscal and social responsibility, the ability to respond to poverty, inequity, environmental degradation, income polarization, women's rights, global warming, and the global corporate takeover of the commons. There are companies that meet, or are striving to meet, that standard. If others want to invest in Wal-Mart, ExxonMobil and Clear Channel, so be it, but let us at least have the grace not to confuse funds holding those companies with responsible and ethical investing.

See Also:

Paul Hawken: The Truth About Ethical Investing
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