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September 09, 2005
A Semantic Hermeneutics of SRI
by William Baue
KLD Research & Analytics Founding President Peter Kinder examines limitations of the term socially
responsible investing, and identifies both overemphasized and overlooked distinctions.
SocialFunds.com --
The term "socially responsible investing" (SRI) is almost universally unloved. Detractors on the
right consider it implicitly judgmental (is one "irresponsible" for not practicing SRI?)
Detractors on the left consider it so broad as to be meaningless (some SRI funds screen out
companies that produce abortifacients while others screen in companies that support Planned
Parenthood.) Supporters wish the term more eloquently described the work SRI does, which they know
to be valid and significant.
 The problem is, nobody has ever performed
semantic hermeneutics on the term, examining and interpreting the relationship between the words
and the activities they seek to encompass and define. That changes today, with the release of a paper entitled
"Socially Responsible Investing": An Evolving Concept in a Changing World authored by KLD Research & Analytics Founding President Peter
Kinder.
"SRI is changing in ways that are obvious and not," Mr. Kinder writes. "The
terminology used to describe SRI has not kept pace with the field it should describe."
"Still no one has devised a better term," he points out. "We are probably going to have to
live with it."
Mr. Kinder exposes reasons why the term is loathed in sketching the history
of SRI's development. What spawned SRI was investors' desire to reflect their moral and ethical
beliefs in the portfolios--for example, Quakers abhor war, and hence find it hypocritical to invest
in defense companies.
These moral underpinnings define what Mr. Kinder calls
"values-based" SRI, the field's "first generation" of development. So while exclusionary screening
of abortifacient producers and positive screening of Planned Parenthood supporters may seem
schizophrenic, they are merely opposite ends of a spectrum expressing moral stances through
investment.
Other distinctions within SRI are, however, much more significant, according
to Mr. Kinder. He traces the historical development of what he calls "value-seeking" SRI in the
late 1990s.
"A small group asked an important . . . question: What aspects of a company's
social or environmental performance drive share value?" Mr. Kinder writes. "Put differently,
ethical considerations aside, which non-financial screens have predictive value for stock
performance?"
Mr. Kinder points out that values-based and value-seeking investors share
many of the same investment criteria, such as competitive financial performance and assessment of
social and environmental performance. It is the definitional divergence between the shared first
term that differentiates values-based from value-seeking investors
"What distinguishes the
two is the value seekers' rejection of a moral underpinning of the application of these criteria,"
Mr. Kinder states. "The loss of the moral grounding to these criteria seems a great one."
Part of the problem with relying exclusively on the "business case" for SRI is that it
encourages "short-termism," or the measurement of shareholder value in quarterly or yearly
increments that tend not to capture the benefits of long-term social and environmental
advancements.
"The shareholder value fallacy is also the foundation for the assertion
that companies need a 'business case' for doing right," stated Sir Geoffrey Chandler in a 2004
speech on corporate social responsibility (CSR) quoted by Mr. Kinder in the paper. "But the
'business case,' even if a necessary route into discussion with companies, is unreal in practice
and amoral in principle."
"It is unreal in practice because. . . there is often an equally
compelling 'business case' for doing wrong in a market which measures only short-term financial
gains," said Sir Geoffrey. "It is amoral in principle because it suggests that you do not do right
because it is right, but because it pays."
While value-seeking investors cloak themselves
in SRI while "concealing" its "moral roots," a third type identified by Mr. Kinder
("value-enhancers") use shareholder engagement to advance shareholder value but largely "reject the
notion that they are SRI investors."
Nonetheless, Mr. Kinder asserts that what separates
these three types of SRI investors should not overshadow what connects them--namely, the
consideration of social and environmental issues on top of financial issues in investment
decisions. It would behoove all three types to make common cause in advancing their shared
interests, he says--for example by jointly promoting increased disclosure of social and
environmental performance data and increased shareholder rights in nominating and electing
directors.
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SRI World Group, Inc. All Rights Reserved.
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