Social investment: Subjectivism, sublation and the moral elevation of success

Critical Perspectives on Accounting 17 (2006) 989–1005

Social investment: Subjectivism, sublation and the moral elevation of success Matthew Haigh University of Amsterdam Business School, University of Amsterdam, Roetersstraat 11, 1018GW Amsterdam, The Netherlands Received 1 June 2004; received in revised form 1 May 2005; accepted 1 August 2005

Abstract Investment products that deploy ethical values and social considerations in portfolio construction have persisted since the 1980s. Pitting Habermasian discourse ethics against Foucauldian power relations and radical institutionalism, the paper argues that socially directed mutual funds ascribe capital markets with validities of high moral magnitude, work up extant tendencies toward financial hegemony and stymie criticism of the political–economic order. Institutional pressures do not permit the exercise of an ethic stronger than an aesthetic care of the self. The balance struck between economic and social priorities is investigated by interviewing investment managers, reviewing archival material and surveying the attitudes of unit holders in retail social mutual funds. © 2005 Elsevier Ltd. All rights reserved. Keywords: Foucault; Habermas; Capital markets; Ethics; Mutual funds; Non-governmental organizations; Shareholder activism

Investment managers claiming to deploy social considerations in mutual fund portfolios describe their practices variously as ‘ethical’, ‘green’, ‘mission-directed’, ‘sustainable’ and ‘socially responsible’. It is as convenient to use the term social funds. Social funds claim four objectives: to reform corporate behaviour by influencing corporations’ cost of capital, thus affecting their capital expenditure plans; to outperform mainstream investments by pre-empting the pricing of economic externalities (Abelson, 2002Abelson, 2002, p. 159)1 ; E-mail address: [email protected]. Abelson defines economic externalities as “any positive (beneficial) or negative (harmful) effect that market exchanges have on firms or individuals who do not participate directly in those exchanges”. Although social funds 1

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to supply evidence that practitioners can use to lobby for self-regulation; and, loudest of all, to provide a mechanism by which unit holders can connect financial objectives with moral principles (Haigh and Hazelton, 2004). The latter objective demands an examination of the methods by which these mutual funds select and apply social considerations, and in particular on the influence of institutional pressures. The contribution of this paper is its investigation of moral and practical challenges encountered in this style of managed investment. The paper divides into five sections. Section 1 outlines relevant literature and the distinguishing characteristics of social funds. An ‘ideal’ social investment portfolio is described. Section 2, using radical institutional theory and Foucauldian power relations, argues that social funds collectively prop up the political–economic status of financial institutions. Section 3 examines institutional pressures that constrain the meaningful application of ethics in equity investment portfolios. The interplay between economic and social considerations is investigated by analysing the discourses of social funds. Three discursive sources are used: semi-structured interviews with managers of selected Australian social funds, a survey of unit holders and interested consumers in North American, European and Australasian markets, and archival marketing material appearing in those markets. Section 4 identifies meta-ethical positions from which managers of social funds would select and apply social considerations. The paper offers an alternate account of practical moral reasoning that, while impartial on ethical content, would require managers to justify investment decisions on moral grounds. When prevailing institutional forces are considered, however, the model appears infeasible. Finally, Section 5 considers if social funds, despite their manifest inabilities to adopt strong forms of ethics, might be valuable to unit holders from a subjectivist perspective.

1. Social investment research and practice Empirical studies comparing the economic performance of social and mainstream mutual funds dominate the literature on social investment. These studies find the economic performance, management styles and portfolio stocks of mainstream and social mutual funds to be similar (Bauer et al., in press).2 Others examine methodological issues relating to portfolio construction (Kreander, 2001; Perks et al., 1992; Rockness and Williams, 1988). Although some writers question the methods used by social funds to assess corporations (Schwartz, 2003), the influence of institutional pressures on managers of social funds remains largely unexamined. The unannounced launches of social investment products by most mainstream investment banks over the period 1999–2003 would imply that communitarian frameworks as suggested by Kapur (1999) and Mackenzie (1997) do not inform current practice. cannot predict that governments will recognise and price economic externalities, the claim is that investors stand to reap an eventual benefit. 2 The results of these studies would suggest that social mutual funds investing in equities are an attractive economic prospect, at least compared to other investments thought appropriate for social investors, such as ‘styleneutral’ government bonds and money market funds.

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Table 1 Portfolio allocation criteria as used in social funds Social impacts. Responses to armed conflicts, involvement with repressive regimes, bribery and corruption, use of child labor, equal opportunities, occupational health and safety, supply chain management, human rights, community giving, community initiatives, alcohol, tobacco, animal testing and fur, gambling, pornography and adult entertainment, genetic engineering, military, nuclear power. Environmental impacts. Generation, use and management of physical waste, ozone-depleting chemicals, pesticides, toxic chemicals and water; explicit responses to biodiversity, climate change and resource productivity; involvement with energy, mining, quarrying, nuclear power, transport and tropical hardwood. Social and environmental monitoring. Risk management, policies, objectives, procedures, functional performance, indicators, data collection, disclosure and reporting lines; operational systems certified to recognised performance standards: as examples, those of the International Standards Organization, the International Labor Organization and the Eco-Management and Audit Scheme. Employee social pension fund options. Corporate governance. Compliance to stock exchange and trade association guidelines, disclosure of consulting fees paid to external auditors. Investor/customer relations. Frequency of investor meetings, published communications on sustainability issues, stakeholder engagement and philanthropic activities. Sources: UKSIF (2005), SAM (2003).

Extant exploratory experimental and survey work finds, unsurprisingly, that moral considerations are associated with consumer interest in social funds (Haigh, in press-a; Webley et al., 2001). Despite interesting correlations between social investors’ psychological variables (attitudes and values) and traditional demographic variables (Anand and Cowton, 1993; Lewis and Mackenzie, 2000; Tippet, 2002; Tippet and Leung, 2001; Woodward, 2000), a clear picture of the social investor has not emerged. 1.1. Management practices Most retail financial markets have offered socially directed unit trusts since 1986. The terrain changed in 2000 when most mainstream financial institutions found cause to launch retail, wholesale or pension fund social investment products. Practitioners could not lay serious claim to three of the four objectives of social funds (outlined at the start of this paper). First, the proliferation of investment products has not led to changes in market shares. At less than one-third of one percent (0.3%) of funds under management in any market (Haigh and Hazelton, 2004), the abilities of social funds to influence corporate behaviour are limited.3 Second, the literature does not give credence to the outperformance claim. Third, social funds in the EU and Australia have attracted rather than repelled regulatory attention (Haigh, in press-b; Just Pensions, 2004). The claim of connecting unit holders to moral principles is intact, although it too has been challenged. Haigh (in press-a) finds a self-selected sample of unit holders and interested consumers in Australasia, Europe and North America dissatisfied with the choice and application of social investment criteria. Table 1 provides typical exam3 Over 2001–2004, retail social funds in the US accounted for US$15.7B (billion); in the continental EU, D 14.4B; in the UK, £4.3B; and in Australia, A$3.4B. All accounted for less than 0.3 of one percent of total funds under management.

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ples of social investment criteria. The material is drawn from European and Australian sources. Social funds use any or all of the material in Table 1. One can see that most of the listed items relate to matters of community welfare, labour relations and ecological sustainability (Norton and Toman, 1997). Negative screening refers to a policy of avoiding stocks that fall short on such criteria (light green). Positive screening refers to a policy of seeking out corporations seen as leaders in terms of their ‘social performance’ (dark green). Best-ofsector and social overlay are variants of the latter in that they would allow investment in all industrial sectors. In addition to passive investment portfolios, some managers consult with invested corporations and certain activist non-governmental organizations in areas in which they seek improvements. On occasion, managers have exercised (most often, threatened to exercise) their proxy voting rights to bring issues of concern to the attention of boards. The choice of such investment criteria depends on clients and founding members. Using Table 1 as a guide, a manager would construct an ideal positive investment screen by seeking investments in corporations that might generate positive economic externalities (example, a mining corporation involved in developing renewable energy sources). Ideally, invested corporations would identify and consult relevant stakeholders as they address risks relating to ecologies, communities, governmental regulations, business plans and corporate reputation. Corporations would disclose incentive payments and political contributions; employ ‘integrated’ risk management systems,4 link managers’ remuneration to risk-based initiatives, and adopt policies which promote fair hiring, fair promotion, high retention rates, flexible working arrangements and that recognise employees as capital. Such characteristics would extend to subsidiaries, partly owned entities, suppliers, sub-contractors and business customers. All such matters would be disclosed in investor communications and Internet corporate websites. A negative investment screen, in its ideal, would list industrial sectors thought to generate negative economic externalities and prevent investments in corporations not conforming to the criteria listed above. In practice, managers of social funds are more prosaic. The best-of-sector index-hugging approach is popular, as is using simple investment screens that exclude a few industries. Most screens do not extend to subsidiaries and suppliers of invested corporations. Claims that portfolios are designed according to social investment screens are hard to justify. Haigh (working paper) compares the 2003–2004 portfolios of a sample of Australian social funds with mainstream counterparts, noting close similarities and breaches of social funds’ negative investment screens. Moreover, information disclosures emanating from social funds are generally poor in quality and not verified externally. Recent EU and Australian laws mandating social reports from investment managers have been met with lacklustre responses, with few attempts to present audited information (Haigh, in press-b; Just Pensions, 2004). 4 Relevant criteria would differ between industries. In the resources sector, for example, ecological management indicators would include monitoring greenhouse gas emissions according to protocol standards, monitoring waste generation, measuring biodiversity impacts from site rehabilitation and auditing tailing dams. Indirect indicators would include certifying to ISO 14001, EMAS and other schemes.

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2. Financial hegemony This section argues that social funds constrain the objectives of non-governmental organizations (NGOs) and legitimise those of capitalist institutions. The effect is likely to be unintentional, given the motivations of investment managers to maximise the economic performance of their products, but nonetheless real. The constraining effect arises from the nature of power relations between financial institutions and social activist organizations (which on occasion advise social funds on asset allocation and other matters). Foucault argues that power dominates by seeking resistance: “there are no relations of power without resistances . . . like power, resistance can be integrated in global strategies [of domination]” (Foucault, 1980Foucault, 1980, p. 142). The insight of Foucault central to this section is that power-wielding ideologies are effective because they infiltrate social resistance. Most of Foucault’s critics (there are many) gloss his work on institutional and interpersonal relations (Armstrong, 1994; Neimark, 1994; others in Hoy, 1986, p. 7). Foucault uses extrinsic/intrinsic and explicit/implicit distinctions to explain how relations form and are constituted. ‘Micro-power’ works at an implicit level by disguising itself as a form of domination (Hoy, 2004, p. 76).5 Micro-power operates at two levels in social funds. This section addresses micro-power at the level of managers and NGOs. The next section addresses the effects of micro-power on the personal ethics of unit holders. Social funds and NGOs can claim some common origins and, often, reciprocal membership. Collaborating would offer potential advantages to each. Investment managers often seek the advice of NGOs on portfolio allocation and shareholder actions.6 Some managers whose governance policies extend to mounting extraordinary voting resolutions in invested corporations have thought it necessary to form collaborations with NGOs such as Friends of the Earth (see, FOE, 2005). The US-based Calvert, the largest and most diverse social fund, usually withdraws resolutions after gaining access to management (Calvert, 2003). The California Public Employees’ Retirement System, managing US$153 billion in December 2003, also reports numerous voting resolutions.7 The 2002 conference of Australia’s Ethical Investment Association presented a representative of Friends of the Earth USA as a keynote speaker and hosted a panel discussion between ecologist NGOs and managers of mutual funds. Such meetings have on 5 Foucault explains the familiar sovereign power of juridicial systems as extrinsically disseminated explicit power. An intrinsic dimension operates by infiltrating public consciousness. 6 Shareholder activism colloquially describes the exercise of voting rights that attach to securities held by minority institutional and private shareholders. Extraordinary voting actions would describe the actions of minority shareholders to requisition members to meet and vote on resolutions drafted by requisitioners. Routine voting actions relate to matters scheduled in regular corporation meetings of members. The broad objectives of shareholder activists are described by a proponent (Viederman, 2005): “Shareholder activity is an effort on the part of . . . shareholders to change the policies and/or the behavior of companies through a variety of means, including meetings with corporate officials, letter writing, proxy voting, co-filing of shareholder resolutions initiated by others, and/or initiating a shareholder resolution. Initiation of a resolution is usually the end of an unsuccessful effort to obtain satisfaction from the corporation on issues raised through meetings and letter writing.” 7 Other advocates of voting actions are Innovest, based in New York City, and Friends Provident and Hermes, both based in the UK. The UK Pension Investment Research Consultants lobbies trustees to exercise their proxy voting rights. Minority resolutions in Australia, to date, are limited to a few individuals and The Wilderness Society.

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occasion produced new NGOs. Examples are the Coalition for Environmentally Responsible Economies, the Interfaith Center on Corporate Responsibility and the Shareholder Action Network. The objectives of such groups are summarised by the following quotation: A project of the Social Investment Forum and Co-op America, we seek to link institutional investors and financial advisors with faith-based groups, and social justice, labour, and environmental organizations to encourage greater corporate responsibility. (Shareholder Action Network, 2005) 2.1. The drafting of NGOs into the operations of financial markets Arguing the merits of ecological sustainability by co-opting scientific methods and economic parlance earns the admiration of Habermas (1981) and Foucault (1997, p. 275). Both consider organizations such as Friends of the Earth to represent a special case of effective resistance, important for creating social networks. Foucault did not witness their re-cooptation. By inverting the language of the ecological movement, financial institutions assert their political credentials and curtail the force of social activism. Practitioners would no doubt protest. Of the tactics of power, Foucault states: “the logic is perfectly clear, the aims decipherable and yet it is often the case that no one is there to have invented them” (1978, p. 95). In relations between NGOs and mutual funds, outcomes are always going to favour the objectives of capital investors (Honneth, 1991, p. 156). Radical institutional theory provides three accounts of how this might happen. Radical institutionalism explains how a dominant institution inculcates its values in other institutions that it seeks to control. Dugger (1989), who describes the colonising effect of the corporate form on such as universities, families and public healthcare, develops radical institutional theory in terms of four processes: emulation, contamination, subordination and mystification. In terms of the claim of co-optation made above, contamination, subordination and mystification are relevant. (i) Contamination replaces one set of meanings and motives in one institutional sphere with those originating in another sphere (Dugger, 1989, p. 144). By using social considerations as investment criteria, social funds contaminate the objectives of NGOs. By design or not, when managers consult NGOs on portfolio policy and voting positions, issues of common interest will narrow to those which can be expressed in the discourse of capital investment. Mintz and Schwartz (1990) examine capital markets’ dominating power over industrial corporations. In the signatory sense they describe (pp. 203–226), social funds act as a type of ideological intermediary by according economic utility to resistance movements. Issues such as repression of communities and the systemic destruction of large parts of ecological systems (if not entire: global warming), would be difficult for social funds to translate into value propositions, and on most occasions are overlooked. (ii) Subordination describes processes whereby a dominant institution consolidates its position by linking to it the objectives of weakened institutions (Dugger, 1989, p. 140). In NGO-social fund relations, subordination would describe the relegation of NGOs’ objectives and the privileging of those of social funds. Social considerations

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accepted as valid are destined to operate within the “machinery of the established order” (Marcuse, in Held, 1980, p. 161) and be subordinated to purposes that serve capital. Contemporary societies interpolate and coordinate power using three controlling techniques (Foucault, 1977, p. 68). Social funds exhibit them all. The declarative distinction between social and mainstream investment, the market insignificance of social funds, and the uncontested presentation of financial markets as a proper place for social protest, all promote the capacity of the capital apparatus to control forces that might oppose it. (iii) Mystification refers to processes by which a dominant organization or form of organization manipulates others by enlisting their support (Dugger, 1989, p. 46). Mystification coheres with Foucault’s account of micro-power. As investment managers turn to consider, as examples, matters of human rights and renewable energy, NGOs assist by finding innovative ways to add economic value to investment portfolios. The disabling effects of mystification echo Butler’s use of the psychoanalytic term foreclosure, a condition which refers to the predicament of a subjugated individual, such as a prisoner, who seeks her own subjection (Hoy, 2004, p. 97). By contamination, subordination and mystification, social funds “solidify, intensify, optimise and incorporate” (Foucault, 1978, p. 42) the political–economic status of the fiscal order. In Hegelian philosophy, to sublate is to supersede while retaining something of the nature of what is superseded. Social funds sublate ethics by valuing them instrumentally. Validities ascribed to economic success assume positions of high moral magnitude, dissent is ‘disciplined’ and transformed (Honneth, 1991, p. 166), and the choices of the best methods to promote social welfare are implicitly delivered to capital markets. The outcome imputes the expansion of capital with a ‘social imaginary’ (Laclau, 1990) which unfortunately leaves most social problems unaddressed.

3. Balancing economic prudence with social considerations This section examines social investment discourse to gauge priorities placed on economic and social considerations. The discourse was taken from three sources: interviews of managers, marketing material and a survey of unit holders. The examination is followed by a reflection on implications for practised ethics. The interviews were conducted in Sydney and Melbourne in October and November of 2003. Thirteen practitioners were invited for interview; twelve accepted and another self-nominated. Interviewees included eight chief executive officers, principals and senior managers drawn from six social funds, which at the time of interview collectively represented approximately 70 percent of the Australian social funds market. Remaining interviewees were the principals of two financial planning practices, the principal of an institution that issued ‘green’ debentures to retail investors, an individual who invested in the stock market for the purpose of raising voting resolutions, and the chief policy officer of an association representing Australian private sector pension funds. Four interviewees were female. The average duration of each interview was 90 minutes and most were

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tape-recorded in the head offices of represented organizations, confidentiality being promised as a condition of interview.8 Archival marketing material was taken from prospectuses and Internet websites of 19 Australian, North American and UK social funds, and from the Internet websites of three social investment clubs in Asia, the US and the UK. Prospectuses examined were issued in 2003 and 2004 by pioneer social funds (circa 1986) and mainstream investment banks. Proprietary sources are not named. The investment clubs are named below where appropriate. As expected, managers accorded priorities to economic considerations. One interviewee, a company secretary, reflected on pressures to meet financial targets: “At the end of the day we are a mainstream fund manager, competing against other mainstream funds.” In the same interview, the fund’s chief executive officer underlined the operating focus: “We live and die by our investment returns . . . I would assess that ten percent of our unit holders are here because of the SRI overlay. SRI is a nice addition but is of secondary importance because we are at the light green end of the spectrum with our negative screen.” (emphasis added) The general manager of a ‘dark green’ fund deemed that to survive in an economically competitive market, social funds needed to “. . . soften the edges of rigid ethical stances. They have to go out and demonstrate a hard, sound quality investment rationale or you will never get past the asset consultants and researchers out there.”9 The shareholder activist interviewed for this paper had gained access to senior management in a number of Australian corporations engaged in forestry operations. Avoiding a confrontational approach, she advocated a “business case model based on educating management” of economic and public relations benefits generated by improving waste management and developing alternate markets. The archival material (websites and prospectuses) echoed the economically instrumental importance of social considerations. “The objective . . . is to incorporate investors’ values into their long-term investment objectives without compromising investment returns.” “A careful consideration of environmental and social factors adds value to existing financial analysis.” (ASRIA, 2005) “Responding to social concerns should not only avoid the liability that may be incurred when a product or service is determined to have a negative social impact . . . but . . . better position [a corporation] to develop opportunities . . .” 8 Notes, tape recordings and a copy of the general form of the questions asked are available on request from the author. 9 On reflection, interviewees’ responses were probably tainted. For various reasons, it is thought that interviewees imagined the interviewer would be impressed with economic performance.

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“By screening companies . . . by standards of social responsibility, [the manager] challenges companies to reach for a higher ‘bottom line’ and offers investors the opportunity to do good while doing well.” Unit holders were repeatedly reminded of the economic benefits that could be expected from government-assisted market pricing of negative and positive economic externalities. “The best long term, stable returns will come from the support of sustainable businesses [because] society will require business to meet the full ecological costs of production and will . . . pay for those goods . . . which have lower ecological costs.” “Long term rewards will come from those organizations whose products, services and methods enhance the human condition and the traditional American values of individual initiative, equality of opportunity and cooperative effort.” Guarantees of eventual economic outperformance were described in general terms. “Companies taking a lead in [sustainable] development will gain a competitive edge and outperform their industry peers . . . The best long term, stable returns will come from the support of sustainable businesses because society will require business to meet the full ecological costs of production and will pay for those goods which have lower ecological costs.” “Relative outperformance comes from investing in quality companies [that] will be re-rated to their true valuation at a later date.” “Reducing negative externalities are seen as consistent with long term profit maximisation . . . environmental efficiency attracts a return premium.” An interview with a manager of a US social fund appeared on the Internet website of SRI World Group (2004). An opinion given in the interview summarises the material above: “Corporate governance reform is a secondary objective, a means of achieving the primary objective . . . to earn money for its investors.” The importance of normative concerns to social investors is already known (Webley et al., 2001) as is their reluctance to direct more than a small portion of their discretionary wealth to social funds (Lewis and Mackenzie, 2000). However, some recent evidence suggests that unit holders would not prioritise economic and social considerations any differently to the statements given above. An Internet questionnaire conducted by Haigh (in press-a) examined the relative pull of economic and social considerations in retail social funds. The survey attracted approximately 400 respondents from North America, Australasia and Europe. As expected, most respondents accorded high priority to economic performance. One in two respondents had considered social funds but not invested due, in part, to social funds’ mixed economic performance. Respondents who had invested in social funds held most of their discretionary wealth in mainstream investments. However, this group sought to reflect their ethical values in their investment choices. Typical responses to a question on motivations to invest were:

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“[I prefer] to invest in individual companies that reflect my values, rather than invest in managed funds that have a lowest common denominator ethical rating.” “It’s difficult to find a fund that applies the same screen that I would like.” “Ethical Funds offer a ‘like it or leave it’ choice. I screen the companies I invest in myself.” 3.1. The possibilities of ethics in social funds The material given above provides some evidence that unit holders expect social fund managers to carefully choose, apply and report social considerations.10 Such expectations collectively present a problem to managers accustomed to assuring clients that social funds need not mean that economic performance will be compromised. Institutional pressures impoverish the other-directedness that social funds might practice in three ways. One, possibilities for free-willed debate are negated when ethics are restricted to those that reify the institution of investing. Debate between affected parties forms the cornerstone of most recognised moral decision-making models. In practice, debate is often the first casualty. Habermas (1990) recognises the danger when distinguishing between strategic and communicative actions: “(I)n strategic action one actor seeks to influence the behaviour of another by means of the threat of sanctions or the prospect of gratification in order to cause the interaction to continue as the first actor desires.” (Habermas, 1990, p. 58, original emphasis) The absence of argumentation in social funds is typical of strategic action. Managers do not make it a rule to debate with clients and corporations how they should select and apply social considerations. Any suggestion from a client is accepted providing it is economically feasible and within the law. Two, by conflating finance capital with social responsibilities, social funds present the pursuit of economic return on capital as a universal interest. Such an instrumentalist construction of social responsibility excludes all those who for one reason or another do not own property. Disguising fractional interests as universal reflects the dominance of ideology more than it recognises normative obligations. Three, a commitment to generating economic wealth effectively restricts managers’ strongest ethic to upholding fiduciary obligations. The virtue of self-interest cannot be countenanced as representing a plausible model of ethics. The possibilities of ethics (and religions and social protest) erode when they are bracketed within structures that make possible commodity production, as ethics are converted into matters of discretion. 4. A meta-ethical critique This section examines the struggle between economic and other-directed moral principles, as introduced in the previous section, by identifying the meta-ethical positions of 10 As expected, statistically significant associations appeared between respondents’ purchase/hold intentions and their attitudes towards managers’ investment methods (Haigh, in press-a).

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managers of social funds. Meta-ethics describes the assumptions a moral actor would rely on to determine the acceptability of moral norms (Williams, 1985, p. 73). Different meta-ethical stances would suggest different approaches to choosing and applying investment criteria, which in turn would lead to different portfolio decisions. Managers’ meta-ethical positions are gauged from the interviews and archival marketing material described in the previous section. Section 4.1 considers the possibilities for an alternate meta-ethical position. Social funds are yet to articulate the normative bases of their choice of investment criteria, and where relevant, their voting actions. Mackenzie (1997), grappling to identify the moral principles used in a UK social fund, refers to ‘deliberative’ and ‘investor-led’ social funds. The former refer to the ethical values or articulated social missions of founding organizations. Most social funds are ‘investor-led’ in that their investment criteria are informed by members’ suggestions. The meta-ethical stances of investor-led social funds are thought to be egoism and subjectivism. Egoism is likely to direct the use of subjectively chosen non-economic investment criteria: the following justifies the argument. 4.1. Egoism An egoist stance describes an approach to ethics motivated by arbitrary self-interest. Its doctrine holds that all human actions when properly understood are, and should be, motivated by selfish desires (Feinberg, 1995, p. 70). A counter-example is the observed willingness of some human beings to sacrifice their selfish concerns to live in accordance with other-directed moral principles. The egoist’s response would be that prudence motivated these individuals (Mackie, 1977, p. 190).11 Markets, competitors and peers remind managers that prudence is the dominant ethical value. What are morally relevant, Rawls reminds us, are gains and losses made on types of interests such as wealth and prestige (Reed, 1999, p. 464). As an egoist cannot prove that providing for private desires is more objectively desirable than doing the same for others, an egoist’s moral norms will always be subjective (Mackie, 1977, p. 143). 4.2. Subjectivism Ethical subjectivists would maintain that the feeling or emotion one has towards any action is sufficient to judge its rightness or wrongness. A statement such as ‘It is wrong to invest in industries of type XYZ’ would be viewed as an expression of moral intuition more than as a statement supplied by moral reason. Radical subjectivism, also known as decisionism, expresses a belief that any normative position is impossible. In radical subjectivist models, “[w]hat is important is that one simply decide, since the normative basis of the decision can only be arbitrary” (Wolin, 1985, p. 75, original emphasis). Moral debate is meaningless as only private individual preferences can adjudicate between competing values. The discourse of social investment suggests a radical subjectivist ethic. The findings of the interviews conducted for this paper support Schwartz, who concludes that investment 11 Prudence, or enlightened self-interest, refers to a doctrine that the welfare of others is best promoted by preserving one’s own interests: ‘If you want X, do Y’.

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“methods of social funds . . . reflect investors’ particular social, religious, or political attitudes or beliefs and nothing more” (2003, p. 212). In interviews, managers justified their use of social considerations by referring to religious principles, ad hoc suggestions received from clients or to prevailing social norms. None believed it was his/her proper role to adjudicate on clients’ ethical values. One interviewee, the principal of a social research firm engaged by several Australian social funds, was reluctant to define the ethics that social funds have adopted or should adopt: “You tell me what ethical is. Ethical means something different to everybody.” The Ethical Investment Association (2002), subscribed to by most Australian social fund managers and by many Australian financial planners, states in a government submission that it “has no position on what ethics should be or what issues should be considered ethical . . . the market will drive the scope and nature of ethical considerations”. Managers do not apprise investors of the meta-ethical bases by which they choose investment criteria. Prospectuses list negative and positive screens as another piece of information for consideration alongside management expense ratios and other economic information. The meta-ethical basis that would allow a fund manager to assess the ‘social performance’ of another organization is overlooked. The 2004 prospectus of one social fund baldly stated the basis of its investment approach. ANALYTICAL APPROACH AND ETHICAL POLICY. In simple terms, research is directed at discovering ‘good’ shares in ‘good’ companies which own ‘good’ businesses. Another prospectus explicitly denied the manager’s ability to adjudicate on ethical values and moral principles. INVESTMENT APPROACH. [The manager] will assess potential investments based on their potential environmental impact, social benefit, ethical considerations or labour standards to the extent that they are consistent with our . . . values. We do not have a predetermined view about what constitutes these factors or impose predetermined screens or weightings to these factors. We also do not set fixed levels for holdings of particular investments based on these criteria. 4.3. Implications The discursive examples given above reveal a common belief that a subjectivist approach is a sufficient basis from which to select one’s ethical values and make moral decisions. The assumption emerges as much in what is not said; managers will not dispute an ethical value or moral principle for fear of losing a client’s account. In various forums, investment organizations have raised questions over the legality of such an approach, expressing doubts that an ad hoc investment policy would be legally sufficient to acquit managers’ fiduciary responsibilities. In the words of an interviewee working in a pension funds association: “The process [portfolio construction] is reactionary, not coherent or systematic. The process is based on fads, there’s no reasoning. And where’s the investment focus in that too?”

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The practical effect is that a subjectivist approach does not promote sound decisionmaking. Some examples illustrate. Several of the managers interviewed had issued prospectuses claiming they avoided investments in the tobacco industry. Those managers were queried as to their investments in a certain large publicly listed Australian corporation that sold packaging materials to tobacco manufacturers. None of the interviewees considered that a moral question arose. Questioned further, managers appealed to their clients’ concerns, claiming they would extend only to corporations ‘directly involved’ in producing tobacco products.12 Some managers did recognise their moral accountability. One social fund held its largest investment in November 2003 in a corporation whose primary product was soap. Animal fats are used as a production material in most commercially available soap. The ‘Ethical Policy’ attached to that fund’s 2003 and 2004 prospectuses stated that the manager would avoid investments in corporations seen as “harmful to people, animals or the environment [and] involved in activities such as . . . cruelty to animals”. The fund’s chief executive officer was interviewed and asked what the term ‘involvement’ meant in practice. He replied: “Effectively, a sort of a second derivative is acceptable. So for example, we have a very successful investment in a company that makes soap. So we sort of deem that to be a bit of a second derivative.” Questioned further, the officer admitted that this arbitrary choice did not justify the decision on moral grounds, but that, pragmatically, he “had to draw the line somewhere”. The lasting consequence of subjectivism, and perhaps providing reason for its adoption in social funds, is that it disallows standards “by which one could possible judge one answer to be better than another” (Singer, 1994, p. 7). Consequently, prudence loads the ‘bottom line’, as it were, and dominates decision-making (Williams, 1972, p. 37). 4.4. Towards robust moral decision-making If corporations are to be assessed using moral criteria, those who conduct such assessments are as equally assessable (Graham, 2001).13 To wit, moral responsibilities arise when managers advertise that they use social considerations as investment criteria. Accordingly, an onus falls on managers to debate investment criteria with directly affected parties; namely, with clients and invested corporations. Three characteristics of moral judgments might provide a reasonable foundation to judge the acceptability of corporate actions (Reed, 1999). Adapted to suit social funds, managers should be able to

12 Most interviewees admitted that they had not asked their clients if the particular investment would be of moral concern. 13 The moral realm applies to a collective entity (such as a mutual fund and corporation) on account of what it does or on account of what happens to it. Graham’s concern is not with whether a collective entity can be held morally responsible for what it does – that status is generally accepted – but considers moral status on account of actions brought on an entity.

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(i) describe and justify the bases of normative obligations and judgments; (ii) clarify their responsibilities and those of their investments and clients; (iii) establish and justify priority rules capable of resolving conflicting valid claims. In a search for a mechanism that would empower social funds with such abilities, a neoKantian model is considered. The choice is made to accommodate investment managers’ manifest aversion to deliberating on moral norms. A Kantian model would not stipulate, for example, how social funds should best answer matters of an applied nature (such as determining the permissible extent of investment in an industry listed in a negative investment screen). Instead of stipulating ethical content and moral principles, Kantian models call attention to processes used to select and apply moral norms. What becomes at issue is whether or not moral norms deserve to be recognised. The model chosen for consideration here is Habermas’ discourse ethics. Habermas shares with the Kantian tradition a premise that ethical ideals differ to such an extent that ethics cannot normatively recommend particular values at all, but can only provide a specific procedure of conflict resolution. In Moral Consciousness and Communicative Action, Habermas (1990) assumes that individuals can reach advanced stages of practical reasoning by using processes of discursive argumentation, which, is argued, represent the best possible method for resolving moral questions (Habermas, 1990, p. 144). Discourse ethics uses Kant’s injunction (1997, p. 31) that an action is permitted only as far as all affected by the action would be willing for it to happen. Advancing Kant, discourse ethics presents argumentation as the single criterion for moral, principled decision-making. However, such arguments must follow some ground rules. Habermas describes three levels of possible participation in argumentation: the speaker, the listener and the watcher (see, Kant, 1994, p. 12314 ). In an ‘ideal speech situation’, individuals adopt all three perspectives. The model overcomes subjectivity by addressing and resolving conflict, where everyone’s interests are preserved without compromise (Habermas, 1990, p. 12), at least in theory. It is an open question whether managers could operationalise discourse ethics or any reasonably sophisticated moral decision-making model. Habermas acknowledges the context-bound application of his model (1993, p. 14). In a competitive market environment, discursive rules of reversible position-taking and non-coercion would be almost impossible to apply. In a legal environment where fiduciary interests are interpreted as financial benefits (Whincop, 2003), moral principles are destined to remain secondary. In summary, a subjectivist approach to assessing investments on social grounds is high on rhetoric and low on maintenance, which would not be significant if there were no consequences. A subjectivist basis for decision making, set against prudence, threatens to compromise the motivation for the decision (Mackie, 1977, p. 34). In the case of social funds, that motivation is, surely, a concern for the welfare of others. Social considerations are informed by clients’ suggestions, media attention paid to matters of corporate malfeasance and little else. Such ‘methods’ permit economic interests as the single value worthy of sustained commitment. Institutional pressures to demonstrate economically justifiable outcomes reify that ethic. 14

Habermas sources the structure from the Kantian device of the ‘rational impartial observer’.

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5. A subjectivist ethic This paper does not deny the inventiveness of social funds. Compared to other forms of social protest, the allocative power of finance capital lends productivity and organising force, at least in the abstract, to designing solutions to social problems. Without agreed methods of arriving at common, basic moral principles, however, social investment is unlikely to offer any real alternative to the current economic and social order. The conundrum between economic and social considerations discussed above justifies a call for work on initiatives that would promote the meaningful exercise of social considerations in capital markets. Lobbying governments for structural changes, industry sectoral reviews (see, UKSIF, 2005) and mounting voting resolutions with parent and other institutions are examples of institutional actions that might more successfully lead to observable social improvements. When considering the claimed objectives of social investment, it is difficult to ignore the cynicism of McGoun et al. (2003) and Roberts (2003) towards the uneasy marriage of institutional social activism and profitable business enterprise. Yet, the material above suggests that at least some managers and unit holders of social investment funds experience frustration that their funds do not exercise ethical values more strongly. In an institutional setting where the single universally binding norm is prudence, an aesthetically derived moral awareness might have some currency. Nietzsche’s concept of ressentiment refers to “a resentment of oneself that arises because one is not powerful enough . . . to generate one’s own values” (Hoy, 2004, p. 3). Foucault is thinking of this when he describes individuals’ capacities to exercise ethical relations with themselves. Drawing from the aesthetics of the Stoics, Foucault’s reading of ressentiment is an individual’s search for a meaningful life in contemporary materialist societies (Foucault, 1997, p. 282). The social investors in Haighin (press-a) and Webley et al. (2001) had directed the bulk of their discretionary assets to mainstream investments. Even so, respondents’ attitudes, comments and the fact that they had self-selected for the studies all indicate that they considered social funds important. ‘Connecting’ personal moral principles and financial objectives appears an aesthetic one, in the sense of a proper relation to oneself and one’s capacities (Patton, 1994). Even respondents who had considered but not purchased social funds valued social investment for allowing them to link their awareness of the need to consider social welfare when making economic decisions. Knowing that managers used social considerations to select portfolio stocks had become significant in itself (ressentiment), independent of personal investment decisions. Some responses in Haigh (press-a) illustrate this attitude. “[Social funds] bring an added ‘moral’ dividend.” “I wanted peace of mind. I am passionate on environmental issues. . . . Socially responsible investing is simply the right thing to do.” “We need to try to educate more [financial intermediaries] . . . to realize that investors can care about our environment . . .” From this lens, it would be of little moral significance to social investors if social funds do not defend their methods and voting policies. For social investors, what becomes morally sig-

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