OP-EDS

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April 18, 2006

Benjamins aren’t band-aids; Socially responsible investing is, though

It has recently come to my attention that the aspiring investment bankers and economic policy makers that matriculate at this University are woefully unaware of an important fact. I found it hard to believe that they had no idea that almost 10 percent of assets under financial management in the U.S. ($2.29 trillion) are invested in socially responsible investments. The truth is that many economics majors and Graduate School of Business (GSB) students don’t even know what Socially Responsible Investing (SRI) is.

SRI uses certain screens to filter out investments that may have unethical social, environmental, or governance factors. Some people derive utility simply by putting their money into an SRI fund, even if that means sacrificing potentially greater returns by not investing in a more traditional fund. However, 10 percent of all U.S. assets wouldn’t be in socially responsible investments if it were just about feeling better about oneself. There is also financial rationale behind SRI.

Poor corporate governance is a well understood risk when it comes to choosing a company to invest in. The same is true for companies with poor environmental and social practices. Corporate disregard, whether for shareholders, employees, communities, or the environment, puts the unethical company at risk for lawsuits, fines, and criminal charges,none of which bodes well for a company’s stock price.

SRI assets have grown faster than all other investments in the U.S. over the past decade, according to a report that was recently publicized by Forbes magazine. One of the factors the report cites to explain the increased interest in SRIs is the growth in the number of shareholder resolutions filed on social, environmental, and corporate-governance issues. Clearly, people are realizing that irresponsible investments are a risk.

Last year, Royal Dutch Shell reported record profits of $22.94 billion. Shell, the largest corporate presence in Nigeria, has recently developed exploratory wells throughout the country. Last November, they began pumping oil from a massive field off the Nigerian coast. Shell has been asked by locals to stay and create jobs and provide aid. However, the $80 million of aid from Shell has come in the form of unfinished hospitals, a fish-processing facility that was never used for production, and an artesian well was dug but is now abandoned due to contaminated water.

Aid projects launched by international corporations have done little to foster feelings of goodwill in developing countries. Instead, most end up feeling cheated by the businesses whose dollars were supposed to eventually quell conflicts and provide basic necessities. In Nigeria, such resentment has led to rebel groups kidnapping foreign workers and stealing oil. In communities around the world, locals see natural resources being taken from their land while armed groups working in cahoots with corrupt governments create conflict for profit.

On February 24 it was reported that a Nigerian court ordered Shell to pay $1.5 billion to the Ijaw people as compensation for environmental degradation in the delta region. Ijaw leader Ngo Nac-Eteli has indicated that if Shell chooses to appeal, the oil company would not be allowed to drill in the delta until the case was closed.

While Shell may get away with never having to pay out this massive fine, cases like this are one of the reasons why many investors and firms are now beginning to understand that social irresponsibility can lead to decreased profitability in the long run. On February 27, The New York Times reported that oil production in Nigeria had fallen by 20 percent in the last week due to arson against pipelines and offshore platforms. This should not come as a surprise, given oil companies longstanding indifference to inequity and environmental damage.

A few months ago, I went to the National Council on Science and the Environment’s Conference on Energy for a Sustainable and Secure Future in Washington, D.C. The conference was attended by academics, politicians, business leaders, and social activists from around the world. It was there that I met the Global Business Director for Energy at Dow Chemical. While talking about his work, I mentioned green roofs, radiant floor heating, passive solar design and other innovative ways of reducing energy use. Despite having received his MBA from Harvard, he had never considered looking into these alternatives because he had not been taught to do so. It would be ideal to think that if he had attended our University, this would not be the case. However, the U of C’s Economics department and the GSB are doing a great disservice to students by not teaching them to think about sustainability.

There is no question that some of the hottest years on record have been in the last 20 years, or that glaciers are melting earlier and re-freezing later than they have in the past. The precautionary principle tells us that we must acknowledge the impact of a given event, whether or not we are certain of the extent of that impact.

I challenge our students and faculty to learn more about socially responsible investing and sustainability. By investing responsibly, investors can ensure low risk and competitive returns and in doing so, ensure that their investments actually improve communities.

That the lack of education at the U of C about sustainability is disheartening and indicates that we are falling behind our peers. As an institution that prides itself on educating tomorrow’s leaders and being a leader itself, we must begin to teach responsibility and sustainability today.