On Oct 8, 2007, at 7:34 PM, bitch at pulpculture.org wrote:
> Anyway, first up was an article at socially responsible investing
> (SRI).
> I'd always thought these were mainly about investing in outfits
> like Ben &
> Jerry's. Turns out that the top three criteria for which companies are
> screened are tobacco, alcohol, and gambling. According to the
> author, Henry
> Blodget, the Social Investment Forum, which promotes SRI, says that
> the
> roots of the practice go back to the colonial-era Quakers and
> Methodists.
> It was slightly refreshing to read the author point out that SRI
> includes
> things like labor practices, but apparently SRIs tend to be more
> concerned
> with things like environmentalism before they worry themselves about
> whether a company has stellar labor practices.
Here's what I wrote about that in Wall Street, ten years ago.
Doug
----
excerpt from Doug Henwood's WALL STREET (c) Copyright 1997 Doug Henwood. All rights reserved.
INVESTING SOCIALLY
Over the last decade - essentially since the campaign to purge stock portfolios of companies doing business in South Africa started in the early 1980s - we've seen an explosion in investment funds devoted to goals beyond mere profit-maximization. One can trace the movement's history back further - to the early 1970s, when some Methodist clergy founded the Pax World Fund, and two portfolio managers, Robert Schwartz in New York and Robert Zevin in Boston, started managing money for a few individuals and institutions concerned about where their profits came from (Kinder et al. 1992).
Besides South Africa, the principal concerns motivating social investors in the early days were nuclear power and weapons-making. That is, the founding impulses were to avoid the noxious. In more recent years, there's been a growth in the desire to do active good with one's investments - to foster development in poor communities, for example, or fund environmentally friendly technologies. The unifying feature of social investing (SI) is the desire to accomplish some social goals along with making a return on one's money.
screens
As might be expected, the field is populated by a full range of people, from cynics looking for a market niche to some fine people looking to transform the world. The mainstream of the SI industry is characterized by some form of social screening. The flavor of that screening can be sampled in an ad in the May-June 1995 issue of the Utne Reader for Working Assets, the SI mutual fund giant. Working Assets touted its No-Load Citizens Index Fund thus: "Unlike the S&P 500, however, we have a low concentration in dirty, dying industries like heavy equipment, oil and chemicals, weapons, utilities, alcohol and tobacco. Instead, we've concentrated on clean industries of the future, such as communications, consumer products and services, business equipment, high-tech, finance, healthcare and food production." While every individual company is socially screened, the economic analysis underlying this portfolio selection remains happily unexamined. Forget that the "dying industries" are generally high- wage, and the "clean industries" often less so. And where would communications, business equipment, and other high-tech industries be without the chemicals used in the manufacture of computer hardware, and the low-wage labor exploited in the process? Don't the products of the high-tech industries contribute to the constant cheapening of labor and the much-lamented globalization of the assembly line? Where would any of these glistening industries be without the electricity produced by the nasty oil-powered utilities, or the earth moved and the concrete poured by the products of the heavy equipment industry? Would upper-middle-class Americans, Working Assets' target population, have incomes 50 times the Third World average if it weren't for all those nasty weapons? Doesn't food production profit nicely from the constant cheapening of raw agricultural commodities, a trend that has savaged Third World exporting nations and indigenous producers?1 Isn't it the cheapest sort of moral bombast to get exercised by tobacco production, one that induces a warm glow in the weed-o-phobe, but involves no significant challenge to the social order? And what service does finance offer except the multiplication of riches for those already blessed with plenty?
But the social investors are, in large measure, part of that financial industry one that skims the cream, from both the moral and niche marketing points of view, but one that nonetheless never troubles itself with the larger questions of why some have financial assets while most don't, or, more radically, how that translates into the power of creditor over debtor, and why some should profit from the disguised labor of others.
In an interview broadcast on May 9, 1995 on CNBC, the cable TV business news channel, Sophia Collier, the big cheese at Working Assets, said that 40% of the S&P stocks are "socially responsible." That assumes, of course, that you have no problem with the giant multinational corporation itself, just some of the individual malefactors. The leading index of socially responsible stocks, that published by Kinder Lyndenberg and Domini, includes about half the S&P 500, presumably the same firms Collier had in mind.
The political thinking of mainstream SI is underdeveloped, to put it gently. In its pragmatic faith in individual action, it's classically American. Social Investors also make some strange alliances. An issue of The Greenmoney Journal (1995) approvingly quoted mutual fund kingpin (Sir) John Templeton reflecting on ethics, either unaware of or indifferent to the fact that his Templeton Prize for Progress in Religion in 1994 went to Michael Novak, famous for his various theological apologias for Reaganomics, Argentina's dirty war against dissidents, and nuclear weapons (Henwood 1994b) - a prize awarded by a board that included that distinguished ethicist, Margaret "Lady" Thatcher.
A contradiction no social screen can address is that investment profits originate ultimately, no matter how you dress them up, in the uncompensated labor of workers, and that they depend on a social order in which some people have money to spare and others don't. When asked to comment on this, the former radical academic turned social broker Michael Moffitt conceded that, "It's a problem." Moffitt's intellectual past makes him aware of "the problem," but most social investors don't even think about it.2
With South Africa no longer an issue, the most popular social screens reflect the concerns of upscale liberals: tobacco, women in the boardroom, animal testing, and the grosser environmental crimes. Concerns like women on the assembly line, unionization, and workplace injuries rarely appear. One of the favorite stocks of mainstream SI has been that of the Washington Post Co., a fiercely anti-union firm that publishes the daily journal of record for the D.C. branch of the status quo.
alternative lending modes
But the SI universe is not all so conventional, and some aspects are experimenting with the actual transformation of property relations. Let's start with the conventional and move gradually away from it. Along with the growth in SI has come an increasing interest in "alternative" financial institutions, like community development banks (CDBs) and loan funds. The most prominent of the CDBs is the South Shore Bank of Chicago, whose promoters say it has revived a declining urban neighborhood while turning in a sterling financial performance. It is touted by some as a model for the free-market era, a private-sector alternative to discredited old social programs, though Lyndon Comstock, founder of Brooklyn's Community Capital Bank, quickly conceded in an interview that a bank, even one with social goals, is still no substitute for public sector spending.
South Shore, founded in 1973, is the oldest and richest of its kind. It has attracted talented bankers and lots of outside depositors. If you read its press, it's done wonderfully well. In what appears to be the first outside effort to audit its claims, Benjamin Esty (1995) of the Harvard Business School found that South Shore's actual record is less impressive than its PR. When measured against nearby banks of comparable size, its financial performance has been fairly underwhelming. That would be fine if it were accomplishing its social goals, but it appears not to be. When Esty compared social indicators for the South Shore neighborhood with contiguous communities using Census data from 1970, 1980, and 1990, he found the results to be "decidedly mixed at best." While unemployment in the South Shore neighborhood was lower, incomes have fallen more rapidly than in the neighboring communities; overall, concluded Esty, "South Shore's relative performance has been worse than the contiguous neighborhoods." Now there may be all kinds of problems, methodological and conceptual, with this comparison, Esty admits, but these results are nonetheless very damaging to the CDB cause.
Closely related to the South Shore model are various nonbank forms of local lending like community development funds. Though not strictly commercial banks, they too accept money from socially minded investors and then make loans to fund housing rehabilitation, nonprofit housing development, and small businesses. The industry is still quite small. According to the National Association of Community Development Loan Funds (1996), as of the end of 1995, the industry had $108 million in loans outstanding, and $204 million in capital, a third of it ($60 million) permanent and the rest ($145 million) borrowed. In their history, which began in 1986, NACDLF member funds had financed 56,243 housing units, 73% of them permanently affordable for low-income residents, and created or preserved 11,313 jobs, 59% of them for "low-income people," 51% for women, and 37% for minorities. (The percentages for the poor and minorities were down fairly significantly from 1993's.) Their loan loss experience is an impressive 0.92%.
Of course all these numbers are better than nothing. But so far they barely register on the national screen. The total number of jobs "created or preserved" over the entire ten year history represents less than two days of normal U.S. employment growth; of houses financed, about ten days of normal U.S. housing production.3
And some loans extended under the name of community development look rather odd indeed. In its 1995 annual report, the Northern California Community Loan Fund bragged about a $25,000 loan to establish a Ben and Jerry's ice cream store in San Francisco "that will train and provide employment for low income youth from San Francisco's Tenderloin neighborhood." A sidebar, illustrated with a picture of smiling, freshly employed teens, claims that "the business supports youth programs in several ways: job training takes place in the ice cream parlor, while the profits go towards creating new business enterprises to benefit homeless youth."
Ben & Jerry's is a favorite of the soulful capitalism crowd. Unfortunately, as its own social auditor, the soulful catalog merchant Paul Hawken, admitted in the firm's 1994 annual report, that reality didn't support the claims that the Brazil nuts used in B&J's Rainforest Crunch were harvested by indigenous people for their benefit:
The label on Ben & Jerry's Rainforest Crunch Ice Cream gives the impression that the harvest of the nuts benefits indigenous forest peoples. In fact, the nuts are not harvested or sold by indigenous peoples but by the rubber tappers of Brazilian and Portuguese ancestry who have worked the forests for a century. One might ask what constitutes indigenous status and this might be a minor point if not for the fact that some experts on indigenous peoples believe that the flow of money to these projects has had a damaging effect on tribal cultures. The influx of cash has created inequities, rivalries, and an appetite for western goods while reducing the attention paid to the real issue; land ownership. Quoting Indian Unity: "The 'rainforest harvest'...[weakens]... campaigns in support of our struggles for our rights. People think that by consuming some product they are guaranteeing our protection. Our communities' independence is also weakened as our well-being is made dependent on western markets.... Selling products is meaningless if we ourselves do not control the marketing projects and the natural resources, if we ourselves do not control our lands and have the right to say what we want...." A second point regarding label accuracy is that the bulk of the nuts used in Rainforest Crunch have been commercially rather than alternatively sourced. From January 1991 until March 1994, only 9% of the Brazil nuts used in Rainforest Crunch were purchased from the Xapuri Co-op....4
These failings are emblematic of the weakness of SI in general: it too easily becomes just another marketing gimmick, while doing little to address inequities of wealth or the nature of power and property relations.
In the Third World, similar small-scale lending schemes are proffered as cures for poverty in places where conventional development has failed.5 The favorite example, the South Shore of the alternative development crowd, is the Grameen Bank of Bangladesh, which offers tiny loans only to women, who supposedly build businesses with the proceeds and exit poverty. Grameen has earned glowing reviews, based mainly on its own testimony and citation of previously published glowing reviews; in fact, I've never read a negative word about the Bank anywhere in the popular or specialty press, until Gina Neff investigated Grameen for Left Business Observer (Neff 1996). Despite claims of poverty reduction, over half of Grameen's long-term borrowers are unable to meet basic nutritional needs. Despite claims of commercial viability, the enterprise is kept going only by philanthropists' subsidies. Despite claims of "empowering" women, Grameen loans basically formalize women's informal household labor (while blocking their entry into potentially more liberating - with all the appropriate qualifications - waged work), typically without increasing their autonomy within the household (well under half have significant control over the businesses held in their names). By contrast, the Self-Employed Women's Association of India (SEWA) offers credit, but as part of a package of education and political organizing. With Grameen, male lending officers really call the shots.
The appeal of microcredit schemes like Grameen - which have been adopted enthusiastically by the likes of the World Bank, Hillary Clinton, and Citibank - is that they are a low-cost, nonthreatening substitute for real self-organization, like SEWA, and for expensive public programs like education, health care, and infrastructure investment.
It may be that the lesson of the World Bank's experience over the last 50 years is of near-universal applicability: it's very difficult, maybe even impossible, to borrow your way out of poverty.
pressuring the establishment
Aside from setting up new banks and loan funds, there are a number of strategies for forcing existing institutions to be more friendly. The federal Community Reinvestment Act, passed in 1977, requires banks to provide credit and other services to their local communities. In fact, banks discriminate all the time, both by location and race (which, given the degree of geographic segregation in America, is often the same thing). In 1992, Boston Fed researchers, skeptical about anecdotal claims of discrimination, examined Boston-area home mortgage loan applications, and found that black and Hispanic applicants were over one and a half times as likely to be rejected as whites, even after correcting for income, savings, credit history, and other financial details (Munnell et al. 1992; Munnell et al. 1996).6
The industry and its politicians and pundits went to work discrediting the data; right-wing bitterness against Munnell, who moved from the Boston Fed to the Clinton administration in 1993, doomed her candidacy for a governor's seat on the Fed, forcing her to settle for the Council of Economic Advisors instead. David Horne of the FDIC reviewed the data, as did Ted Day and Stan Liebowitz of the University of Texas-Dallas, and found allegedly serious statistical problems. Writing on the Wall Street Journal editorial page (of course), Liebowitz doubted Munnell's motives: "Before any study is considered definitive, it should be checked far more than this study was checked. Unless of course, truth is not the goal" (quoted in Passell 1996a).
The original study was circulated as an unpublished paper (Munnell et al. 1992), which was the target of all the apologists; in preparing it for publication in the American Economic Review (Munnell et al. 1996), they reviewed Horne's critique and found it seriously lacking. When queried by the authors, "Horne was unable to replicate" his data, a phrase that New York Times reporter Peter Passell helpfully translated as "a thinly veiled charge that he had fudged his research." Some 17% of the "errors" Horne attributed to Munnell et al. were "programming errors on his part"; another 10% were "suspicious in that they violate an adding-up constraint or are directly contradicted by the FDIC examiners' write-up provided to us before the publication" of Horne's critique. Munnell and her colleagues also reported that Horne's reclassification of mortgage applications from rejections to acceptances were "groundless," as were his redefinition of several rejections as withdrawn applications. In sum, Horne's critique was baseless. Since Munnell et al.'s self-defense had to pass the scrutiny of the AER editors and reviewers, it seems safe to take this as the final word on the subject.
While the evidence that race in itself is a significant factor in the fate of a mortgage application is of political interest, it also should be of interest to economic theoreticians as well. Market theory argues that purely racial discrimination is irrational; if lenders reject applications purely on prejudicial grounds, then they're foregoing profit opportunities. Since that theory of foregone profits can't be denied, market fundamentalists often conclude from that that reports of discrimination are ludicrous on their face; no banker in his or her right mind would reject an otherwise qualified application on the basis of the applicant's melanin status. But it's quite clear now that bankers do forego profit opportunities on irrational, not to mention offensive, grounds - another blow to the myth of market rationality.
Of course, laws against discrimination in lending should be enforced vigorously, but it's doubtful that ending redlining would end poverty. The real problem of the American poor is the lack of income, jobs, education, and other basic services. Fairer lending officers might take the edge off this, but not profoundly so.
rethinking property
More promising than New Age banks and anti-redlining campaigns are strategies that alter the nature of property relations. For example, community land trusts (CLTs) "are democratically controlled non-profit corporations, with open membership and elected boards. The purpose of a CLT is to acquire land and hold it permanently for the benefit of the community. The land is then made available through long-term leases to individual families, cooperatives, and other organizations who may own buildings on the land. Resale restrictions in the ground lease keep the property available for future purposes" (Community Investment Monitor 1995). CLTs were developed by the founders of the Massachusetts-based Institute for Community Economics (ICE), Ralph Borsodi and Bob Swann, in the 1960s. Lessors on CLT land can be compensated for improvements they make to their building, but they cannot sell it on the open market; the idea is to remove the parcel of land from the property market forever. A similar concept, limited equity co-ops, can be used in cities; residents can buy apartments from the co-op, and sell it back when they leave - with appropriate compensation for any improvements they might have made and general inflation, but with no possibility of significant trading profits.
A former director of the ICE, Charles Matthei (personal communcation) makes the point that increases in property values are claimed by individuals, but, aside from improvements made by the occupant, are typically the result of social action like public infrastructure development or general economic growth. It's fundamentally unfair, Matthei argues, that these social gains should be captured mainly by private individuals - especially unfair if they contributed little or nothing to their neighborhood's upscaling except having been there at the right time.
Still, CLTs are a speck on the horizon; as of late 1995, there were only 90 of them in the U.S. The ICE, "a leader among leaders," according to the newsletter of the National Association of Community Development Loan Funds (Community Investment Monitor 1995) had equity capital of $531,000 and had lent a total of $26 million between its founding in 1979 and 1995. With the total value of land, buildings, and other tangible assets in the U.S. nearly $20 trillion in 1994, according to the Fed's flow of funds accounts, CLTs have a long long way to go.
One of the reasons to be skeptical about institutions that don't alter property relations is that institutions and people that start out with noble goals often end up reproducing the ills they were meant to correct. The U.S. is full of community organizations and nonprofit housing developers that now seem indistinguishable, except maybe in matters of style, from conventional real estate developers and banks. It is no accident that the Ford Foundation has embraced community development schemes; no institution in America is better at spotting potential troublemakers and domesticating them.
1 This is not to argue that modernization is necessarily bad and that indigenous production methods should remain unchanged for all time. But those willing to profit off the trend while basking in moral superiority should take some notice of the contradiction.
2 Moffit's wife, Ronni, was blown up along with Orlando Letelier, who was ambassador to the U.S. during the Allende years, by the Chilean secret service on a Washington street in 1976.
3 The NACDLF began lending in 1986. Between the end of 1985 and the end of 1995, there was a net growth of 19.6 million jobs in the U.S., an average of 164,000 per month, or about 8,000 per business day. Over the same period, housing starts averaged 1.4 million a year, or 5,700 per business day.
4 For more on Ben & Jerry's, and the failings of socially responsible business in general, see the fine series of articles by Jon Entine cited in the bibliography. Entine's first claim to fame was his exposure of the fraud behind the Body Shop, another darling of the tender commerce crowd.
5 Failed, that is, if you think the goal of development is the emergence of poor countries from poverty. If the goal of "development" is to extract resources, money, and labor from the world's poor, then development has been quite successful.
6 Obviously, because of discrimination, blacks and Hispanics have a lower average social status than whites, so correcting for income and other financial and personal variables isolates yet another form of discrimination, an insult added to a rich history of injury.