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October 31, 2000
Controversial Companies Help Define Social Investing
Social screens devised by investment managers are challenged by companies that fall through the
cracks.
SocialFunds.com --
In recent years, the screening process applied by social investors has grown in sophistication from
simple exclusionary screens to a multi-tiered analysis of diverse variables. But some companies
raise serious social concerns not necessarily addressed by conventional screens, demanding the
development of yet more sophisticated tools for social investors.
 "As long as there are socially responsible
portfolios, there will be debate about which companies should or should not be in them," said Steve
Lydenberg of Kinder, Lydenberg, Domini, & Co (KLD), the social research firm that maintains the
Domini Social Index (DSI). His comments were part of a panel discussion titled "Controversial
Companies in SRI Portfolios," part of the recent SRI in the Rockies conference in Snowmass,
Colorado.
"These debates are important ones," said Lydenberg. "They arise because in the
socially responsible investing world we are concerned about what the proper role of for-profit
corporations is in our society. The choices social investors make in responding to controversy
helps define who we are."
At the center of this debate is what the relationship should be
between social screening and other aspects of social investing, such as dialogue with companies and
shareholder advocacy. Recent examples have illustrated that there are some issues that social
investing is better at addressing than others.
For instance, WalMart is a company that was
widely held by social investors, admired for its early efforts toward positive corporate culture,
diversity initiatives, and environmental performance. But since the death of CEO Sam Walton the
corporate culture has changed, and the company has been beset by charges of labor abuses, overseas
contract sweatshops, urban sprawl, and being one of the largest retailers of tobacco and firearms
in the U.S.
While these issues may not on their own warrant screening, several socially
responsible mutual fund firms, such as Calvert Group, Citizens, and Pax World, do not hold
positions in WalMart based on the cumulative effect of the company's offenses. KLD, conservative
about removing companies from the DSI based on qualitative issues, still retains its WalMart
holding and remains persistent in addressing social concerns through dialogue with management.
Another important example of companies that are challenging the practices and policies of
social investors is Microsoft. Although it is still widely held by social investors, Microsoft has
been found guilty of illegal antitrust and anticompetitive practices associated with the marketing
of its software products. Social investors are still debating how to respond, and most social funds
still retain Microsoft holdings in the meantime.
"The Microsoft case dramatizes a dilemma
for social investing," said Lydenberg. "The dilemma is that there are certain kinds of issues of
burning importance to society, and great public import, that are difficult to screen on
consistently. It's not hard to be concerned about these issues, to express outrage, to want to do
something, but they're hard to screen."
Far from suggesting that these issues should be
ignored, social researchers agree that they need to develop new tools and new vocabularies to
address them in a consistent manner. For instance, Calvert Group is developing alternative measures
of Microsoft's social performance more appropriate to the challenges of the industry.
According to Jon Lickerman, Director of Social Investment Research at Calvert Group, the
extremely aggressive economic environment in the technology industry is a structural issue that
social screening will have little influence on. He suggests that Microsoft's commitment to
standards of openness on the Internet, thereby allowing it to support a variety of platforms, is a
significant proxy for their social performance.
"The Microsoft issue is incredibly
relevant as we struggle with these new and emerging issues that are not simple," said Lickerman.
"We feel that it is incumbent on us to look at these industry challenges, delve deep into how this
industry is developing, and see if social investment analysts have a role to play in that process."
Social investors may not agree on how to respond to controversial companies like WalMart,
Microsoft, and many others, and even within a mutual fund firm the issues are dynamic and far from
resolved. But as long as they continue to be engaged in the process of finding effective tools for
socially responsible investing, there is always room for more social issues.
©
SRI World Group, Inc. All Rights Reserved.
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