Socially Responsible Funds Drawing Lines in the Sand

How thorough do screens need to be?

By SHARE

How socially responsible is socially responsible enough? That's the awkward question that managers across the country are grappling with as they balance the need to be profitable against their investors' demands for funds that follow strict guidelines. Think of it in terms of vegetarianism versus veganism.

In the investing world, the debate plays out like this: Do fund providers merely need to employ rudimentary screens? If that's not enough, how thorough do the screens need to be before they are sufficient? These questions are important for two reasons. First, they are impossible to resolve. And second, they are being asked more and more as social, environmental, and religious funds proliferate. Last month, FaithShares Trust introduced the world's first Christian exchange-traded funds. Four of its ETFs represent specific denominations—Lutheran, Methodist, Baptist, and Roman Catholic—and one is a catch-all Christian fund. Each of the first four tracks a different proprietary large-cap index that is molded around the given denomination's guidelines as to what constitutes an acceptable investment. The Christian fund's index is a hybrid of the other four.

[See The World's First Christian ETFs Debut.]

In its attempts to cater to narrow groups, FaithShares has inevitably run afoul of some religious investors who feel that the company is moving in the right direction but that it hasn't adequately purged its indexes of objectionable stocks. One common example of this dynamic is the distinction between industries and behaviors. FaithShares eliminates various industries such as alcohol and tobacco from its funds, but its screens don't account for companies that may support (whether through their business models, through charitable contributions, or through the public statements of their executives) things like gay marriage. U.S. News asked FaithShares President Thompson Phillips about the give-and-take involved in running a fund for religious shareholders. Excerpts:

Have you received any complaints about the way your indexes are structured?

We've gotten phone calls from pretty conservative Christian groups, and they want to know things like, "We appreciate what you're doing, but what are you doing about companies that support homosexuality, for instance?" And those aren't really relevant to us. Because what we're excluding are objectionable industries as defined by the denominations themselves. So we've had some interesting philosophical discussions with folks on this.

Why doesn't a company's support for gay marriage, for example, make it into your screens?

Basically when we structured these, we did it from the perspective of what industries are objectionable. And there's not a same-sex industry … or [anything] like that. And it's pretty tough, because where do you draw the line? How far down do you drill on this in terms of what companies are not OK or are OK? And when you get into individual human behavior, you're really going into a different arena than what we have structured these for.

If you took into consideration all possible concerns, wouldn't your choice of companies also become prohibitively small?

It could. To just use a wild exaggeration, should you not have Eastman Kodak in there? Because they make film, and film is used to take pictures. Playboy uses the film to take pictures of nude women. So you've got to draw the line at some point. And not everybody is going to be happy. But we have learned that when it comes to religion, not only does one size not fit all—one size usually fits just one. And so it's been an interesting process in that respect.