Has social investing lost its way?

Many ethically minded investors would think twice before funding an industry known for misleading ads, scant environmental accomplishments, and boardrooms where just about everyone is white.

So what happens when such charges are directed at socially responsible investing? A host of SRI mutual-fund managers are fuming in the wake of a scathing report on their industry. At the heart of the controversy lies a concern as stinging as it is sweeping: Has the term "socially responsible" become meaningless in a fast-growing industry that invests in just about anything?

"To put it plainly, if the SRI industry were a corporation, it wouldn't qualify in a rigorously screened portfolio," says the Oct. 15 report from the Natural Capital Institute (NCI) in San Francisco. "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."

What's more, the report charges, pressure to beat such mainstream performance benchmarks as Standard & Poor's 500 has led SRI funds to own shares in 90 percent of firms on the Fortune 500 list. When Wal-Mart, McDonald's, Pfizer, and Microsoft are all deemed socially responsible, who's left to screen out? These criticisms are especially notable because they come from Paul Hawken, an icon of the sustainability movement and founder of the NCI.

Those charges aren't entirely fair, argue professionals whose fortunes rise and fall by the integrity of their investment decisions. The report relies on a crude methodology of lumping together funds from across the globe to paint an unfair picture of the industry for American investors, they say. And it overlooks how funds have used their clout as stakeholders to improve mainstream corporate practices across a range of industries. Still, it has lifted the lid off a hot discussion that's been simmering privately on the investment world's back burner for years. That means change may be brewing in the SRI industry.

"No one likes to have this kind of discussion in public," says Doug Wheat, director of SRI World Group, an information clearinghouse for ethical investors. "But just because people may be defensive, that doesn't mean they're not trying to take seriously what they believe are good points."

Case in point: the Sierra Club Mutual Funds. Billed as an opportunity to "invest in our planet's future," these funds took a beating in Hawken's report for owning no alternative-energy companies and no companies "that address the environment in an innovative or proactive way." Instead, the report alleges, portfolios include steakhouses and companies that make such inconsequential items as surge protectors or in other cases contribute to urban sprawl.

"Mr. Hawken is missing the concept," says Garvin Jabusch, director of the Sierra Club fund family. The funds invest in Starbucks, for instance, in part because the company measures its environmental footprint by tracking its water output. Dell Computer also wins his praise for its recycling programs. As a matter of practice, Sierra Club funds avoid risky "microcaps" that are long on ideals and short on track records. They instead reward major corporations that make consistent improvements.

Still, Mr. Jabusch concurs with Hawken's core critique. "We disagree with his tenor and his method, but we do agree there's a need for standards," he says.

Sierra Club funds already hold themselves to a higher than average standard by screening out all mining, gas, oil, and timber firms, Jabusch says. Such eco-friendly funds might prefer an "ERI" label, for environmentally responsible investing. Such a brand might be more meaningful than SRI, he suggests, especially if ERI funds could agree on specific screening standards that set them apart from the pack.

More than 600 funds worldwide claim the SRI label, according to the report, but investors can't be sure what it means, since the definition varies from case to case. Hawken's solution is to reclassify funds according to the approaches they use.

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