Much of the battle among political ideologies is fought over control of our common language and the popular meaning of words. Egalitarians typically use “fairness” and “equitable” to justify redistributing wealth from those who have earned it to those who have not. Since this usage generally goes unchallenged, proposals to lower taxes on higher incomes are typically judged unfair and inequitable in political and media discourse, despite the consequences for efficiency, productivity, technology, and growth.

Another example of how an ideology has preempted language involves U.S. corporate investment in South Africa. Thoughtful people differ on how best to improve the well-being of black South Africans, and many disagree that withdrawing U.S. business is beneficial. Proponents of mandatory withdrawal, however, claim this is the “socially responsible” course of action.

Most of us agree on generalities—a cleaner environment, more jobs, better education, cheaper medical—care but unanimity evaporates over what generalities mean and how best to achieve them. To be socially responsible, one must support animal rights, South African divestment, more corporate charity, employee rights, employer-paid maternity and paternity leave, child-care centers, command-and-control environmentalism, affirmative action, and the Sullivan, MacBride, and Valdez Principles. One also must oppose tobacco, alcohol, armaments, and nuclear weapons production. Those who fail these tests are socially irresponsible. Like “equity” and “fairness,” “social responsibility” has become the exclusive phrase of a movement that advocates a particular set of litmus tests for corporations, investors, and pension funds.

Apart from a claim to “ethical correctness,” socially responsible investing (SRI) is said to have a positive influence on corporate managements-an influence supplementary to taxation and regulation, which alone cannot accomplish everything that needs to be done for the common good.

SRI vs. Traditional Philanthropy

The standard view of investment holds that if you decide your personal or psychological welfare depends on more than financial performance, you have chosen to forego profit maximization for other considerations. A few real world investors believe that charts, computers, financial newsletters, horoscopes, gurus, chicken entrails, television commentators, brokerage house analysts, or darts thrown against pages of Wall Street Journal stock quotations can steer their portfolios to a soft landing in financial heaven. In an uncertain world, no one knows the “best” way of picking stocks and bonds. What harm can come if some believe that the gods will bestow financial success on them if they pay allegiance to selfless social goals?

When non-financial objectives are overwhelmingly important to someone, these ends are probably best served by direct philanthropy rather than by investment in securities. If you don’t expect your favorite charity to make a profit doing good deeds, you shouldn’t expect your investment portfolio to do any better. Maximize your investment wealth, and then make a charitable contribution from the proceeds.

Americans are generous and willing to share their assets with charities, but most prefer to be consulted about how much to give, when, and to what cause. Understandably, most bequeath wealth voluntarily through wills instead of through taxes and other involuntary transfers during their lifetimes. Most prefer to reap returns on assets for their own support, child-rearing, and retirement while they are alive, and are keenly interested in the return on their investments. Advertisements for stocks, bonds, and mutual funds invariably stress prior high returns and expected returns. No mutual fund or other investment prospectus ever boasted that its high social contribution compensated investors for low or zero private returns.

Rationales for SRI

SRI, conceived as a minor variation of the “Wall Street Rule” whereby investors who disapprove of corporate performance sell their shares, is consistent with the workings of a free and open society. In everyday life, consumers avoid shops that offer poor service or inferior goods just as they patronize and recommend those with better service and goods, thus encouraging competition and promoting efficiency.

The marvel of the free market system is that buyers and sellers don’t have to meet religious, political, or other tests to participate; anonymity protects everyone from arbitrary discrimination and requires only that sellers offer better prices or goods than competitors. Consumers typically have little or no knowledge of the character of producers of shampoo, tennis shoes, automobiles, and so on. If they did, they might despise the manufacturers for their beliefs and associations, and refuse to do business with them. Markets accommodate and peacefully harmonize the production and consumption activities of strangers who might dislike or even hate each other if they were to exchange views on ethics, politics, and so on.

The result is similar when shareholders invest in “socially responsible” companies. Some may invest in XYZ Inc. because it gives to the local Committee for the Free Exchange of Needles in Public Parks, while others invest in ABC Inc. because it believes needle distribution programs harm individuals or society. Investors with social criteria segregate themselves as do those seeking maximum financial returns.

Some SRI proponents believe that avoiding or selling stocks of socially irresponsible companies depresses share prices and raises capital costs, forcing those companies to restrict their “antisocial” activities. But economic values, not social goals, drive most investors: if the price of a boycotted stock falls, its risk-adjusted expected total return rises, making it more attractive to traditional investors.

Other SRI proponents seek to extend their views beyond their own portfolios to pension funds and other professionally managed investments. Indirect ownership of equities through mutual funds, insurance contracts, pension funds, trusts, estates, and other managed arrangements means several layers of investment managers may be interposed between corporate management and individual beneficiaries. While ultimate beneficiaries rely on these intermediaries to invest for growth and safety, some SRI proponents exploit this separation between corporations and beneficiaries to shift management’s focus from economic to subjective social goals. Once converted, investment intermediaries have the financial leverage to make corporate managers sit up and listen.

Managers of large publicly traded corporations are the prime targets of SRI proponents. Presumably, most corporate executives wish to conduct business without advice or interference from stockholders whom they regard as uninformed or unprofessional. So long as maximizing stockholder wealth is the fiduciary goal of managers, there is no ambiguity in executives’ minds. Problems arise when managers pursue ill-defined social missions as well. Corporate executives have no more claim to expertise in producing socially good deeds than do SRI activists.

When SRI philosophy metastasizes to envelop other people’s portfolios, opportunities for serious mischief are present. SRI proponents claim to know what is responsible fair and sound not only for their investments, but for others’ as well. Insofar as they succeed, they will politicize the corporation beyond that already begun by government regulation, diminishing the current wealth and future pensions of non-activist Americans too preoccupied with working, saving, and raising families to realize they have been victimized.

Defining Socially Responsible Investing

Vague notions such as the public interest, the common good, and social responsibility have often served as verbal cloaks to disguise special interests and are so broadly interpreted as to be almost devoid of meaning. One writer on socially responsible investing seeks to appeal to everyone: “And so this book was written to put this all in perspective and to make the case that socially responsible investing is an idea that all of us, whatever our other political inclinations might be, can wholeheartedly endorse.”[1]

Clearly, a claim of majoritarian agreement on socially responsible behavior is hollow. We are not of one mind about what is and is not socially appropriate. The National Audubon Society and the National Rifle Association hold irreconcilably different views of socially appropriate behavior when a pheasant is flushed from the bush. We are an increasingly diverse people, separated and fragmented by education, culture, income, tastes, and ambitions. We do not have identical views about politics, music, art, literature, and film.

SRI advocates seek to stake out the high moral ground as their own, reserving the “good” words for exclusive use. Who would admit to deliberately investing in socially irresponsible ventures? Whatever their investment philosophy, most traditional investors would likely claim that their behavior is socially responsible, or at least ethically neutral and certainly not irresponsible. Some might argue that their investments are socially responsible since they promote capital formation, job creation, innovation, and new technologies that benefit everyone.

Suppose the new jobs and innovations are in the tobacco or alcohol industries. Is it socially responsible to benefit from such investments? What about a gambling casino or company that makes sheets and hoods for the KKK? According to Boston College professor Ritchie P. Lowery, it is socially irresponsible to invest in U.S. government securities: “For most concerned investors, U.S. Treasury instruments are anathema, since the revenue . . . goes into the general treasury and may be used to fund such activities as CIA involvement around the world as well as the national war-making potential.”[2] Likewise, the Calvert Social Investment Managed Growth Fund’s “social criteria keep it from investing in Treasuries (because the government could use that money to finance defense).”[3]

By the same logic, corporate and personal income taxes, excise taxes, social security taxes, and estate taxes are unethical and anathema and no concerned citizen should pay them. My hunch is that most investors would disagree with Lowery’s and Calvert’s position and would not concede they are “unconcerned” investors.

“Pax World Fund, Inc. was the first social responsibility fund to stress investment in non war-related industries.”[4] According to its literature, it is committed to investing in life-supportive goods and services, non-war-related industries, firms with fair employment practices, companies with sound environmental policies, and some international development. It avoids liquor, tobacco, and gambling industries.

The Dreyfus Third Century Fund “was established as a positive way for socially minded investors to participate in supporting companies which demonstrate, through their management principles, a commitment to a better quality of life for succeeding generations.”[5] Its prospectus says that before purchasing shares, it considers a company’s record on the protection of the environment, the proper use of natural resources, occupational health and safety, consumer protection and product purity, and equal opportunity. It adds, however, that “There are few generally accepted measures of achievement in these areas. The development of suitable techniques, therefore, will be largely within the discretion and judgment of the management of the Fund.”[6]

The Calvert Social Investment Fund invests in “companies supporting your social values:” companies that sustain the environment, produce safe products and services, and provide equal employment opportunities. To avoid contributing to society’s problems, Calvert does not invest in companies that have direct or indirect investments in South Africa or other repressive regimes or that produce fluorocarbons and toxic pesticides.[7]

Calvert’s prospectus describes how social criteria are implemented: “companies that produce energy from renewable resources, show a sensitivity to animal rights issues, while avoiding consistent polluters . . . companies that offer employee stock ownership or profit sharing plans, and use quality circles or incentive production teams . . . companies with an active commitment to community affairs and charitable giving.”[8] Investments are first screened for financial soundness by an outside advisor and then evaluated by staff according to social criteria.[9]

Franklin Research & Development sought to identify the 50 most promising stocks, mutual funds, and cash investment that “met widely accepted social-investing criteria.”[10] All companies connected with alcohol, animal testing, gambling, nuclear power, South Africa, tobacco, and weapons were excluded. Remaining firms were ranked according to their environmental records, hazardous waste reduction, energy conservation, promotion of women and minorities, action on child care and AIDS, fringe benefits, commitment to job safety, fair bargaining with unions, and community involvement and charitable giving. Only firms with the best records were retained and subsequently measured against investment criteria (e.g., at least a B+ financial rating from Value Line Investment Survey).

Conclusion: “For mutual fund investors, the choices are limited, since only about a dozen mutual funds follow ethical investment principles.”[11] No doubt the thousands of mutual fund managers condemned as unethical would be surprised, even offended, by such remarks. Most mutual fund managers no doubt conduct their business conformably within their own ethical systems. They might well maintain their own notion of ethics superior to the “widely accepted social-investing criteria” of Franklin Research & Development.

The College Retirement Equities Fund (CREF) manages over $47 billion in pension money for employees of over 4,400 colleges, universities, research centers, museums, foundations, and independent elementary and secondary schools. With its sister organization, Teachers Insurance and Annuity Association (TIAA), CREF is the world’s largest retirement system with 1.4 million participants and almost $100 billion in assets.

In March 1990, CREF initiated an optional Social Choice Account. Described as a diversified stock, bond, and money fund, it does not invest in companies that produce nuclear energy, alcohol, or tobacco; that have ties to South Africa or significant involvement in manufacturing weapons; or that have not adopted the MacBride Principles or do not conduct business consistent with the Northern Ireland Fair Employment Act of 1989. In addition, CREF investment managers “are seeking ways to identify sound corporate environmental policies and practices for inclusion as a screen for this account.”[12] In less than 2 years, the Social Choice Account had assets of $162.8 million.

But how much is a “significant” portion of a firm’s business? Does the “weapons” criterion exclude manufacturers of targeting radars that seek out enemy aircraft to protect the lives of U.S. servicemen? Would firms providing flak jackets, clothing, and medical supplies for the military be exempted or classified along with purveyors of tanks, missiles, and Stealth bombers? The common stocks of Albertson’s, K-Mart, and Wal-Mart are among CREF’s Social Choice Account holdings. These retailers sell liquor and tobacco. Does the phrase “market alcohol or tobacco” have a special meaning to CREF investment managers? The criterion of “sound corporate environmental policies and practices” is no less ambiguous.

As vague as these abstractions are, many CREF investors are apparently willing to risk the size and health of their retirement pensions for the SRI cause; they delegate such decisions to an anonymous portfolio committee subject only to the vague nostrum, “Invest in a socially responsible manner.”

The Costs of SRI

Dedicated proponents claim that socially responsible investing is more profitable than traditional investing that seeks to maximize returns.[13] More zealous promoters believe “You Can Be Clean and Green by Investing in Ecology, Peace and Social Harmony and Still FINISH FIRST.”[14] Fund managers, however, are more guarded in their claims. Dreyfus Third Century concedes that “social responsibility” limits available investment opportunities. Calvert also admits that “the Fund’s social criteria tend to limit the availability of investment opportunities more than is customary with other investment companies.”[15]

Although constraints are conceivably irrelevant since one might choose the same stocks with or without the constraints, that seems unlikely unless you believe investment success is due to mere chance or luck. Adding non-financial considerations influences one’s choice of securities and, hence, adversely affects a portfolio’s performance. There is some empirical support for the argument that investors who seek both social and financial returns perform more poorly than do those who seek financial return only. CREF’s Social Choice Account in 1991 had a total return of 25 percent, lagging behind its Stock Account gain of 30 percent.[16]

Fund Watch examined the yearly returns of the Calvert Social Managed Growth, Dreyfus Third Century, and Pax World funds from 1982 to 1991. All 3 continuously under-performed the S&P 500. Only in 1990 did all 3 beat the market, and only in 1984 did 2 of the 3 beat the average. These were more than offset by lagging performances in the other 8 years. In fact, in 6 years, none surpassed the S&P 500.[17] Over the entire period, S&P’s 500 stock average rose 407 percent compared to 196 percent for Calvert, 265 for Dreyfus, and 310 for Pax World. Fund Watch notes that “Several other social responsibility funds have been formed in the last few years. Each of these has also under-performed the market . . . Thus, it appears that if you want to invest with a social conscience, you may have to accept a lower rate of return on your portfolio.”

Because of compounding, even small differences in rates of return are very costly over a period of years. If an SRI fund earns 8 percent and the market 10 percent, after 25 years the market fund is worth $10.83 and the SRI fund only $6.85 for each dollar initially invested.[18] Feel-good investing does have a cost.

SRI as Marketing Strategy

If one thinks of SRI as a marketing strategy and not a moral issue, the sales pitch for investment vehicles is rather typical. Given the thousands of mutual funds seeking investors’ attention and dollars, competition inevitably leads fund managers to differentiate their products from others. Different funds specialize in broad categories: aggressive growth, growth and income, income stocks, bonds, tax-exempts, internationals, precious metals, and so on.

The Fidelity Group offers investors approximately 3 dozen funds including air transport, environmental services, food and agriculture, and utilities. Theoretically, funds could be devoted to vegetarianism, global peace, Native Americans, and preserving furry animals; social responsibility, marketed broadly or narrowly, can sell.

Dreyfus and Calvert also offer other funds, none of which is represented as “socially responsible” in advertising or promotions; and judging from the stocks in these portfolios, they are not. Philip Morris, a cigarette manufacturer and bete noire of the SRI movement, is the largest individual stock holding in the portfolios of the Dreyfus Fund, the Dreyfus Appreciation Fund, and the Dreyfus Leverage Fund.[19] The Calvert Capital Value Fund also owns Philip Morris stock as its fourth largest holding.[20] Other stocks certain to raise the eyebrows of socially concerned investors are found throughout these funds, including Boeing, Caesars World, Exxon, General Electric, General Motors, and Nestle.

Is it contradictory for the same management group to invest in stocks that both are and are not socially responsible? Perhaps such managers themselves are not always socially responsible. Perhaps they invest in SRI stocks one day a week and engage in public-be-damned investing the rest of the time.

Nonetheless, SRI funds do represent a great marketing strategy: advertising to a category of potential investors willing to give up economic returns to feel good is a very low-risk strategy for the fund manager/advisor. If economic performance is not up to par with traditional funds, there is no problem since investors have been self-selected and expect poorer than average returns. Perhaps the truly ethical socially responsible investor is delighted by the lower return since he or she can feel the pain and pleasure of a sacrifice to make the world a better place.

Needed: Traditional Principles

Those who limit their investments to corporations that meet subjective social responsibility criteria bear the benefits and costs of their self-imposed restrictions. Free markets are the ideal means of harmonizing the disparate opinions and beliefs of consumers and investors. A danger arises, however, when SRI activists seek to impose their views on the investments of others.

Investment advisors, pension managers, and corporate executives have a fiduciary duty to maximize shareholders’ wealth. If they believe they also must promote “social welfare,” they will be pummeled by special interest groups just as politicians are; there is no single ethical compass to guide them. Moreover, if managers strive to be charitable with shareholders’ wealth, they are diverted from the already difficult task of maximizing wealth.

SRI activists have their Sullivan, MacBride, and Valdez Principles. The millions of individual investors who toil and save for the financial future of their families should likewise ask managers to adhere to a set of Corporate Responsibility Principles, which might read:

  • Management acknowledges its fiduciary duty to maximize wealth for beneficial owners, subject to the laws of the land.

  • Management acknowledges that charity is not the reason corporations exist; since shareholders differ on acceptable charity, management will not dissipate shareholder wealth through charitable contributions.

  • Management acknowledges that shareholders have not authorized the promotion of any version of social, political, or environmental change, improvement, or responsibility.

  • Management agrees not to use corporate assets to pay “hush money” to corporate critics.

Many corporate managers might welcome a clarification of their responsibilities. These principles would protect both them and stockholders from those seeking corporate funds to promote notions of social responsibility. Stockholders could then concentrate their attention on protecting their wealth and pensions from politicians.


  1. Alan J. Miller, Socially Responsible Investing: How to Invest With Your Conscience (NYIF Corp., 1991), p. xvi.
  2. Ritchie P. Lowery, Good Money: A Guide to Profitable Social Investing in the ’90s (W. W. Norton, 1991), p. 23.
  3. Morningstar Mutual Funds, February 21, 1992, p. 810.
  4. Questions and Answers About Pax World Fund, February 1991.
  5. Dreyfus Third Century Fund investment brochure, 1991.
  6. Dreyfus Third Century Fund prospectus, August 15, 1991, p. 3.
  7. Calvert Group brochure, What do University of California employees gain by investing in a socially responsible 403(b)(7) mutual fund?
  8. Calvert Social Investment Fund Prospectus, January 1, 1991, pp. 9–10.
  9. Ibid., p. 1.
  10. Baie Netzer, “The 50 Best Clean and Green Investments,” MONEY, June 1991, p. 132.
  11. Ibid.
  12. TIAA/CREF Annual Report, 1990, p. 23.
  13. Lowery, Good Money, Chapter 2.
  14. Penelope Wang, MONEY, June 1991, p. 130.
  15. Calvert Group prospectus, p. 10.
  16. The TIAA-CREF Participant, February 1992.
  17. “Funds with a Social Conscience,” Fund Watch, Mutual Fund Forecaster, Institute for Econometric Research, Fort Lauderdale, 1991.
  18. Ignoring taxes and assuming annual reinvestment and compounding of dividends.
  19. Morningstar Mutual Funds, Apri117, 1992, pp. 42, 160,402.
  20. Ibid., p. 145.