Maybe SRI investors should settle for lower returns – and more satisfaction

Most socially responsible mutual funds struggle to meet market benchmarks. Some wonder if investors should look for other positive outcomes.

from the January 28, 2008 edition

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"In an ideal world, you'd have public policy addressing quota issues [for preserving finite resources], but that's impractical and in my judgment, it's unlikely to happen quick enough," Mr. Fullerton says. "So now what do you do if you conclude the implications of that are unacceptable for humanity and for the planet as a whole?... The most promising actors are the beneficiaries of the capitalist system." And since capital is for sustaining life, he argues, investors with enough capital to feel prosperous should be able to focus less on returns and more on supporting ecological sustainability.

In practice, Fullerton admits, barriers to such a shift in mind-set are many. He notes that not everyone is in a position to choose investments that forgo market rates of return. "If you're a working-class family, you shouldn't feel guilty about trying to get ahead and making a market rate of return," he says.

Even when investors feel comfortable financially, they would be hard-pressed in today's marketplace to find investment vehicles that prioritize social issues ahead of market rates of return. That's because investment managers, even at SRI funds, seldom if ever feel at liberty to prioritize social issues over financial returns.

"There are some institutions that have the freedom to make these choices and others that are bound [by law] to compete with the benchmarks," says Timothy Smith, president of the Social Investment Forum, a network of SRI organizations. "Bound" entities, he says, include those charged with mana­ging retirement assets. Plus, in his view, "there is lots and lots of opportunity" to have a social impact while pursuing market returns through such techniques as shareholder advocacy.

The investment industry may not have its hands tied to the degree that industry players assume. Contrary to popular belief, neither mutual funds nor public companies bear an inherent legal responsibility to compete with market benchmarks, says Margaret Blair, a law professor at Vanderbilt University Law School in Nashville, Tenn.

In terms of setting financial expections, "a fund can do whatever it wants as long as it makes it clear to its investors what it's doing," Ms. Blair says. "All of securities law in this country … [is] built on the notion of transparency. You tell people what they're getting, and you let them decide. Nowhere in the history of securities law have the courts or any kind of government agency gotten involved in [mandating] what kind of return they had to have."

If she's right, then niche funds with strict emphases on social or environmental impacts could theoretically emerge. But some in SRI doubt there would ever be a demand for them. What's more, at least one fund executive says a fund has an obligation to pursue market-competitive returns.

"Social investors by and large are ordinary people – teachers, family members, workers, 401(k) investors," says Calvert CEO Barbara Krumsiek. "We have an obligation to help them earn the returns they need.… I would say it's a moral obligation."

Nonetheless, Ms. Wise sees potential for investors to make a bigger difference by worrying less about beating benchmarks. Some Americans wouldn't need a market-competitive portfolio every year, she says, if they chose to live simpler lifestyles that cost less to sustain, allow more time with family, and put less strain on the planet's resources. Such a shift, she says, can lead to greater individual happiness and support the common good at the same time. "Fifty years ago, we weren't living a consumer lifestyle like the one we're living now. So it's not as if something different isn't achievable," she says.

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