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.

For some conscientious investors who deploy capital in part to tackle thorny social and environmental problems, the time may have come to adopt a new goal: lowering expectations for financial returns.

That idea represents heresy at mutual fund companies committed to socially re­­sponsible investing (SRI). For decades, they have insisted that investors can "do well by doing good" – that is, address moral issues and still grow wealth at competitive rates.

But now some observers, including a pioneer of SRI, are convinced that Americans need to rethink – for the sake of Earth and humanity – whether investors must always strive to keep pace with such standard market benchmarks as the S&P 500 Index.

Among those making the case for a new investor mind-set is Wayne Silby, who in the mid-1970s founded Calvert, which is now the nation's largest family of SRI mutual funds. At a November meeting of private equity investors in Boston, he argued that socially motivated businesses too often struggle without sufficient capital because would-be investors think too narrowly about risk-adjusted returns.

"Our society more and more needs to … be OK about saying, 'We're not going to get the same rate of return as we used to under the "do well, do good" kind of thing,' " Mr. Silby said at the Investors Circle conference at the Boston Harbor Hotel. "We want to create a cultural meme that says, 'Gee, you're still into getting double-digit returns when all these things are more interesting [and] could be done on the planet? Are you so poor a person that you need that kind of money?' "

Other leaders have echoed Silby's call for investors to examine just how much of a return they really need. Among them is Lisa Wise, executive director of the Center for a New American Dream, a Washington, D.C., think tank that encourages conscientious uses for money. She says companies could do more for social causes if they could attract affinity investors who live simple, ecofriendly lives and in turn don't look for benchmark-­beating returns every quarter. Another voice in the effort comes from Investors Circle CEO Woody Tasch.

"A piece of insanity is a culture that has accumulated so much wealth and yet still cannot stop to ask the question, 'Can I find a way to do less harm and not worry about whether it makes as much money as in the doing of harm?' " Mr. Tasch said at the November conference. "We haven't even asked that question yet. We're still fighting defensively against it."

Many retail SRI investors are getting used to accepting below-market returns, though it hasn't been by choice. Over the past five years, SRI mutual funds have lagged behind 61 percent of the funds in their respective categories, according to data from fund tracker Morningstar. SRI's first benchmark, the Domini 400 Social Index, lags behind the S&P 500 over intervals of one, three, five, and 10 years.

SRI boosters say performance is cyclical. Tech-heavy SRI funds soared past the S&P 500 in the late 1990s. More recently, SRI funds have paid a price for being heavy on financial stocks and light on energy. Still, cleaner consciences are often coming at a financial cost. That's helping fuel conversation about whether investors must always try to exceed market benchmarks – or if their capital could possibly do more good in the world in the absence of that arbitrary goal post.

John Fullerton, a Rye, N.Y., venture capitalist who's writing a book about the purpose of capital, sees situations where investors can help save the planet if they'll accept lower returns and act soon. One example: buying farmland or old-growth rain forest for preservation. Such an investment could generate modest income, perhaps from ecotourism, but not as much as one would get from selling off the timber to logging interests.

"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.

of stories this month > Get unlimited stories
You've read  of 5 free articles. Subscribe to continue.

Only $1 for your first month.

Get unlimited Monitor journalism.