Mossavar-Rahmani Center for Business and Government Senior Fellows Research Workshop 11 May 2011

Social norms, market prices, and civil society: a critical redefinition of socially responsible investing Robert E. Kiernan III

Socially responsible investing (SRI) is a method of investment that seeks to incorporate social and environmental variables alongside the traditional investment decision variables of risk and return. As such, it aspires to measure investment returns with metrics including social impact, environmental impact, labor regime impact, community impact, governance impact, and sustainability, in addition to risk-adjusted return. According to the Social Investment Forum, more than $3 trillion, or over 12% of all US assets under management, are invested consistent with SRI principles. The purpose of this research project is to discover if it is possible to produce a coherent, operable definition of SRI that is philosophically consistent, empirically verifiable, and normatively prescriptive. The broad finding of the research is that it is indeed possible to so define SRI, but only by fundamentally challenging many of its current principal assumptions. We find that current SRI definitions of what constitutes social responsibility are vague, incomplete, inconsistent, and monopolistic. They are sometimes neither compatible with the major themes of liberal political philosophy, nor with the manifestations of those themes in the contending literature of political economy. Moreover, we find strong evidence that social norms are, in many cases, reflected in securities prices in the form of excess risk premia, thereby making the principal SRI investment technique screening securities in the potential investment universe redundant at best and counterproductive at worst. Finally, we argue that SRI investing, as it is currently practiced, ignores the potential power of civil society in advancing its larger mission by denying markets, commerce, and the economy a place in civil society itself. Paradoxically, while SRI advocates hold that social objectives are legitimate investment decision variables, they simultaneously exclude markets from the structure of civil society, thereby establishing a false dichotomy between markets and society (that can only be remediated by SRI). Unwittingly (and perhaps ironically), Porter and Kramer assume the same false dichotomy when they advocate a reinvention of capitalism through the adoption of creating shared value (CSV).