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3/11/2003
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Book Review: Socially Responsible Investment: A Global Revolution
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A new book is generous in its history of socially responsible investing, but it shortchanges readers with its definition of SRI and its coverage of SRI's globalization.
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SocialFunds.com -- Socially Responsible Investment: A Global Revolution by Russell Sparkes lives up to its title by encompassing the incredibly broad subject of socially responsible investment (SRI) quite admirably. Mr. Sparkes, who participated in the development of SRI in the U.K. as a member of the Methodist Church's Central Finance Board (CFB) and as a member of the U.K. Social Investment Forum (UKSIF), encapsulates the history of SRI comprehensively.
The most enlightening aspect of this history is the series of "firsts" Mr. Sparkes documents.
The first example of shareowner advocacy dates back to 1967 when the social justice group FIGHT attended the annual meeting at Eastman Kodak (ticker: EK) to promote better treatment of black workers.
The first socially responsible shareowner resolution, filed in 1969, questioned the morality of napalm and Agent Orange production by Dow Chemical (DOW).
The first "modern" SRI mutual fund, the Pax World Fund (PAXWX), was established on August 8, 1971.
The first analysis of the public's concerns regarding social responsibility was published in 1992. Chris Cowton, now a professor of accounting at the Huddersfield Business School, published this multi-variance factor analysis that identified one quarter of social investors as motivated by religious concerns and one quarter by political issues, with some overlap between them. The remaining half did not fall into an identifiable category.
Mr. Sparkes identifies himself as one of the first people to link corporate governance with SRI, which he did in his 1994 book, The Ethical Investor. (Mr. Sparkes explains that the term "ethical investment" has been replaced by "SRI.") This link is now commonly acknowledged, and many definitions of SRI include corporate governance as one of its pillars.
However, the definition of SRI is where the book's usefulness falters some. In attempting to update his definition of SRI from his earlier text, which Mr. Sparkes admits had its limitations, he imposes new limitations on the term.
In the U.S., community investment is considered one of the pillars of SRI.
"I beg to differ," writes Mr. Sparkes. "I would argue that such activity should be clearly distinguished from SRI for two reasons."
"Firstly, one of the key attributes of socially responsible investment is to affect corporate behaviour by using the power and influence of shareholders," Mr. Sparkes states. "This means that it must be centered upon holding stocks and shares in companies, i.e. equities."
Indeed, Mr. Sparkes later specifies equity portfolios as the vehicles for socially responsible investment. This distinction leaves bond portfolios out of the definition. SRI investors and firms may be surprised to find out that their bond investments may not qualify as socially responsible investments, according to Mr. Sparkes's definition.
Mr. Sparkes's explanation for the exclusion of community investment from his definition of SRI continues: "The second difference relates to financial returns. The essence of [community investment] is that savers deliberately accept below-market returns in order to help others, which is not the intention in SRI."
In response to his perception of an overemphasis on social and environmental returns in many definitions of SRI, Mr. Sparkes's revised definition of SRI gives equal weight to financial returns. However, his inclusion of equity investment in his new definition and the exclusion of community investment and bond investment assumes that equities generate better financial returns.
Readers might wonder where Mr. Sparkes has been for the last three years, when community investments and bonds have generally been generating positive financial returns, while many equity investments have been generating negative financial returns.
Instead of trying to compress his definition of socially responsible investment, Mr. Sparkes might have been better advised to devise a broader definition that would encompass SRI practice throughout the world.
Finally, the book lives up to its subtitle in the strictest sense in that Mr. Sparkes does discuss the globalization of SRI, though he saves this discussion until the third and final section of the book. Even then, he remains preoccupied with SRI in the U.S. and the U.K. and gives short shrift to the SRI movements in Canada, Australia, Asia, and Scandinavia. Readers buying this book on the promise of its subtitle should be aware of these limitations.
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