William F. Buckley Jr., the conservative commentator, unsurprisingly wrote, “Idealism is fine, but as it approaches reality, the costs become prohibitive.”  Of all the topics that this show has received requests to cover over the years, Socially Responsible Investing, or SRI, tops the list.  People seem to think that I, as a professional investment advisor with a socially conscious radio show, have the answers for where they can put their money and keep their conscience.  And while I have some ideas, I must confess publicly that I don’t have all the answers.
 
Socially Responsible Investing or SRI, is a type of stock market investing that follows practices indicative of its name, screening for socially responsible companies to invest in, and screening out socially irresponsible ones.  And who makes the decision of which constitutes which?  SRI mutual fund firms are presumed to perform rigorous investigations of their portfolios, assuring an investor that their investees are both solid financial performers and also hold true to the SRI principles.
 
Some attribute the origins of Socially Responsible Investing with the early American Quakers, who forbid members from buying or selling humans.  Religious institutions have been at the forefront of social investing ever since.  John Wesley, a founder of the Methodist Church, gave a sermon entitled “The Use of Money,” outlining the basic tenets of social investing; mainly “do not harm your neighbor through your business practices” and thereby refusing to invest in “sinful” industries such as distilleries and weaponry.
 
Modern day SRI funds follow the “Sullivan Principles,” created by Rev. Leon Sullivan in 1977.  He developed the Global Sullivan Principles of Social Responsibility, which called for equal pay, fair employment practices, and affirmative training and promotion of people of color in all communities.  Even before the Sullivan principals, the Pax World Funds were created in 1971 by members of the United Methodist Church, and screened out companies involved in the Vietnam War.
 
Still, in 2003, Halliburton was held by 23 SRI funds, Dow Chemical by 43, Exxon Mobil by 40.
How is it that some of these funds, with SRI principles, could invest in such apparent offenders of the inherent philosophy?  Is SRI for real, or is it a marketing fad, a kind of investment equivalent of the watered down way “organic” is now used for many food products?
 
A few years back Paul Hawken, the founder of the Smith & Hawken furniture chain, and who now heads the Natural Capital Institute, delivered a searing critique of the SRI industry with an essay entitled, “The Truth about SRI Mutual Funds,” which exposed the schizophrenic nature of some SRI funds.
 
McDonald’s waste management practices, Hawken notes, were deemed socially responsible and therefore garnered the company entry into several SRI mutual funds.  But McDonald’s also spends $2 billion a year marketing junk food to young children while we are in the midst of an obesity and type-2 diabetes epidemic.  How can an SRI fund possibly hold McDonalds and still be true to its philosophical tenets?
 
Hawken terms this phenomenon “Portfolio Creep.”  He argues that when people invest they want the highest return they can get, and some SRI firms may fudge their principles reaching for higher returns.  Hawken, and others like him, ask us to take a deeper look at who should and who should not be included in an SRI portfolio.
 
Some analysts in the SRI field would argue with Hawken and would credit companies for making changes and taking a path toward greater social responsibility.  We’re faced with the question: “Is social responsibility a destination or a journey?” 
 
Lloyd Kurtz of Nelson Capital Management also notes that “avoiding corporate America wholesale introduces significant risk into portfolios.  It’s fine if you’re rich and can afford a lot of risk, but most of us aren’t.”  This, to my ears, is the George W. Bush argument that responsibility harms the economy.  Can you do well by doing good?
 
SRI funds continue to grow.  In addition, there are offshoots of SRI funds now - funds that invest in green technology, or clean technology, or clean energy.  The New York Times yesterday describes how Silicon Valley entrepreneurs have a new fever, this time for clean energy.  The proposed buyout of TXU by presumably both money and environmentally minded capitalists is yet another data point of a burgeoning mentality towards social responsibility.
 
I started this show five years ago with the belief that it would not be long before our nation would change and see that any honest capitalist enterprise must necessarily take account of its true costs, of all of its costs.  In today’s reality, we are beginning to see irresponsible corporations find that the costs of ongoing neglect are approaching prohibitive levels.  Perhaps, as investors, we may all be finding that idealism, just might, at long last, be a profitable endeavor after all. 
 
I’m Leo Gold.  This is the New Capital Show.