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Socially Responsible Investing (sri)

Are You a Socially Responsible Investor?

Plato's Republic, Maslow's Hierarchy of Needs, and Socially Responsible Investing

by Doug Hudson

In Plato's Republic, there is the story of Gyges, a shepherd in the service of the king of Lydia, who discovered a ring that made him invisible. He arranged to become a messenger to the King, and using his invisible ring, seduced the queen, murdered the king and seized the throne.

So the argument ensued amongst Plato's followers about the nature of man. Would a normally just man, given the opportunity, do what Gyges did? Glaucon, one of Plato's students argued this " For all men believe in their hearts that injustice is far more profitable to the individual than justice....."

Is Glaucon right? Let's look at more recent history:

  • Take for example a recent case where an automobile manufacturer knew of a deadly design flaw in one of their models. This flaw would have cost several hundred dollars to correct, but the company chose not to do so. They ended up paying one of the largest fines awarded by an American court as a result of a lawsuit brought against them by their victim's families.
  • A sports shoe manufacturer was accused of using child labour to make their shoes. A company can pay Michael Jordan millions of dollars to wear their shoes but if the general public discovers that his shoes were manufactured by children who should be in school, what happens to the corporate image?
  • What about the tobacco companies adding nicotine to cigarettes in order to make them more addictive? Consider the lawsuits that are being brought against the tobacco companies by many states and some provinces. Many of these companies, realizing that tobacco may not be the cash cow that it once was, are moving into more profitable sectors of the economy.

These are examples of where corporations have attempted to act like Plato's Gyges, got found out, and had a hefty bill to pay in terms of fines, loss of revenue, and loss of reputation. Men may believe in their hearts that injustice is more profitable than justice, but when justice finally catches up - ooh what a price to pay!

I don't think that the hearts of men have changed one bit since Plato's time. There have always been those who are incorruptible, those who are motivated by an insatiable thirst for greed and power, and the majority who are somewhere in between. I would wager that we are no better nor worse than society back then. It's just harder to be invisible.

There is one thing that has changed, we certainly are economically better off than most people were 2,000 years ago. Being economically better off, we are afforded the luxury of expanding in different directions. It's at this time that I would like to introduce Dr. Abraham Maslow who is no stranger to students of psychology.

Dr. Abraham Maslow (1908-1970) was a well-known psychologist, professor, and author whose research into the field of human motivation led to what is known as "Maslow's Hierarchy of Needs". Many consider him to be the founder of modern humanistic psychology.

Maslow's Hierarchy of Needs:

1) Physiological: hunger, thirst, bodily comforts, etc.;
2) Safety/security: out of danger;
3) Belonginess and Love: affiliate with others, be accepted; and
4) Esteem: to achieve, be competent, gain approval and recognition.

These needs can be summarized into two categories: 1) deficiency needs, and 2) growth needs. Essentially, according to Maslow, it is only when our deficiency needs are satisfied, that we can then begin to look at our growth needs.

For many of us, a comfortable retirement means firstly, looking after ourselves physically, and having enough money set aside so that we won't starve, freeze, or have to live off the general public. This is very important and has to be addressed by each and every one of us. As for items 3 and 4 on Maslow's hierarchy of needs, I'm not sure that money can buy you love and acceptance, but I'm convinced that the lack of money might cause some misery.

Investing means giving up current consumption for supposedly greater future consumption. We hope that by putting aside some money that might otherwise go into creature comforts today, we might just be in a position to look after ourselves at a later point in life.

As investors we find ourselves in a dilemma. As children we were told that the good guy always wins. As adults, we have seen too many cases where the opposite was true. Our experience tells us that Glaucon is right - ' injustice is more profitable than justice'. For many years, the most profitable corporations were the ones that acted like Plato's Gyges.

On the other hand, this little thing inside us called a conscience starts to itch. You tie up your runners to go for your morning jog and you can't help wondering what tiny little hands, so much like your own children's, may have stitched these shoes together. Or you think about Uncle Joe, who tried so hard all of his life to quit smoking and who died of respiratory problems.

Then you open up your mutual fund financial statements, only to see that companies involved in child labour, the tobacco industry, the arms trade, etc., all figure predominantly in the top ten fund holdings.

What do you do?

Well the good news is that it is getting harder and harder for corporations to act irresponsibly with regards to the environment, working conditions and other areas of social concern. The corporate ring of invisibility doesn't work any more. Corporate directors are being hauled into court and in some cases thrown in jail for things that they could have gotten away with 30 years ago.

Many investors want to look after their physical, security, safety and comfort needs but not at the expense of the environment or as the result of child labour. They have made a conscious decision to avoid investing in companies that sell firearms, tobacco, alcohol, promote gambling, have a poor environmental record, unsafe working conditions or make use of child labour.

Is it possible to invest in mutual funds that avoid these industries and still have a decent return on investment? Let's look at some examples. Before I do that, I have to add that there are not a lot of mutual fund companies that use socially responsible investing as a criteria for selection in their funds in Canada. Unfortunately we do not have many examples to choose from. In fact, I believe that there is only one fund family in Canada that uses such criteria for all of their funds.

The Ethical Funds family of funds is one such example. If we look at their North American fund, like many funds, as at December 31st, 2000, it is down 19.39% from where it was 12 months ago. Despite this, the 3year return is 14.99%, the 5year return is 21.19%, and the 10 year return is 17.14%. This fund has out-performed the S&P 500 composite index over several reporting periods. Wouldn't you agree that a 17.14% return goes a long way towards satisfying Maslow's deficiency needs? There is an RRSP eligible version of this fund as well.

Many investors are not so much concerned about fantastic returns as they are about preservation of capital. The Ethical Growth Fund has 1, 3, 5, and 10 year returns that do not out-perform the TSE 300 composite index. However over the last 6 months, when the TSE dropped 11.88%, this fund only dropped 2.92%. It has still has a five year return of 10.14% and a beta (measure of risk) that is almost half that of the TSE.

In all fairness to other Canadian Mutual Fund companies, there are many funds where socially responsible investing isn't necessarily the focus the fund, but where the fund manager simply doesn't invest in companies with poor social and environmental records. Some fund companies have one or more socially responsible funds in their fund family. In this group you will find funds that have done very well proving that you don't have to sacrifice your ideals to get a decent return.

 The use of child labour is a concern for socially responsible investors.

A boy in Mexico digs clay for a brick factory with a pickaxe that is as big as himself. The use of child labour is a concern for socially responsible investors.

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