A desire on the part of investors for their money to be invested in a socially responsible fashion has fuelled exceptional growth rates within the Socially Responsible Investment (SRI) industry in recent years.
But can we actually verify that SRI funds are as ‘responsible’ as they claim?
Potentially not, commentators such as Paul Hawken claim, due to a lack of transparency within the industry, which they see as a serious impediment to informed decision making from prospective investors.
What does my fund invest in?
One of the key problems, according to Hawken, is a failure on behalf of many SRI funds to provide adequate disclosure about specific holdings within their portfolio.
The majority of funds explain the broad principles which they follow in relation to how ethical issues are taken into account during the investment selection process. However, many fail to provide specific details in relation to individual companies which are included within the portfolio.
As a result, prospective investors are unable to determine for themselves which specific companies these funds invest in. This, in turn, results in two adverse consequences:
• it makes it difficult for investors to determine with any degree of certainly whether or not such investments are compatible with their personal values; and
• it means that prospective investors have no way by which to verify or substantiate claims made by fund managers in relation to the overall social responsibility of the portfolio.
This is particularly troublesome given industry criticisms that some funds are not as ethical as they claim. Such concerns have been heightened by the recent case of Pax World Management Corp., a well known SRI fund which was found by a recent SEC examination to have invested in ten securities which violated its own stated rules of avoiding firms in the defense, alcohol, gambling and tobacco industries.
Hawken’s Solution
In order to have sufficient information upon which to make informed decisions relating to the selection of SRI funds, Hawken believes that prospective investors should be able access the following information online:
• a complete listing of the entire holdings of the portfolio in question; and
• a thorough analysis of the strengths, impacts and weaknesses of each firm within the portfolio from an ethical perspective.
My viewpoint
With respect, the above recommendations go too far in my view.
I agree that SRI funds need to move toward greater transparency and accountability. I also agree that prospective investors need a greater degree of visibility in terms of the investment portfolio of SRI funds.
Nevertheless, the value of such information must be weighed against the cost involved in its provision. Furthermore, provision of the extensive information which Hawken proposes would be a costly exercise, particularly given the need to continually update such information on a very frequent basis to account for changes in holdings of the portfolio.
These expenses would be paid for by investors, and whilst I can appreciate the benefits of this level of disclosure, I do not believe that such benefits would be sufficient in order to justify the additional costs involved.
My alternative suggestion
In my view, a less extensive disclosure regime is appropriate, and SRI funds should not be required to disclose their entire holdings.
Instead, investors should be able to go online and view:
• a list of the thirty most significant firms within the portfolio; and
• a plain English summary of the strengths and weaknesses, from an ethical viewpoint, of the firms in question.
The list need not be up to the minute, but should be updated on a frequent, periodic basis.
The above disclosure, in my view, should be sufficient to enable investors to make informed choices about whether or not the fund in question satisfies their requirements from an ethical viewpoint, without imposing an excessive level of administrative requirements on behalf of the fund.
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