In the context of managed social investment products, this paper identifies and reflects on antagonisms arising between economic interests and the exercise of claimed moral considerations. Marking an innovation in the accounting literature, the paper uses Foucault’s adoption and development of Nietzsche’s work on aestheticism to illustrate the deployment of moral values as investment criteria. Empirical contributions to the fledgling research on the social responsiveness of financial services are a series of interviews of Australian investment managers and examinations of the composition of a sample of investment portfolios that were tailored along social considerations. A final contribution, inspired by the pragmatism evident in fund managers who seek to combine economic and social considerations, is a set of policy recommendations.

The paper divides into four sections. The remainder of this section introduces social funds and outlines the research. Section 2 reflects on investment managers’ fiduciary obligations to pursue economic wealth for clients and constructive obligations to deploy claimed moral considerations in portfolio construction. Theoreticians working in post-modern accounting are invited to use Foucault’s response to Nietzsche’s treatment of moral values, as found in The Genealogy of Morals, to examine the relations. As such, this paper provides a fresh analytical paradigm with potential application to a variety of settings. Section 3 presents insights into practice. Antagonism between moral values and fiduciary responsibilities emerges in interviews with managers of Australian social funds, comparisons of socially screened investment portfolios with unscreened counterparts and market indexes, and comparisons of selected investment decisions with the social considerations these funds claimed as investment criteria. Vulnerabilities produced from operationalising moralities alongside economic concerns – the ‘hard sell’ – are apparent. A Neitzschean resignation in fund managers is observed. In an attempt at a suitably pragmatic response, the final section makes several suggestions that might ameliorate restraints on the deployment of expressed moral values in financial services.

The term social managed (US: mutual) fund denotes a unit trust that markets its use of social, environmental or moral considerations in portfolio construction.1 Social funds distinguish themselves by (i) maintaining that they invest/avoid investing in organizations that exhibit/do not exhibit practices thought to promote positive environmental, social and internal governance outcomes and (ii) promising eventual superior economic returns to unit holders as a result of such strategy (see the appendix to Haigh & Hazelton, 2004). Other social funds do not explicitly avoid industry sectors but seek instead to consult organizations on issues on which they have identified scope for social improvements. Most social portfolios concentrate on equities, the social assessments of stocks often being outsourced to specialised researchers. The use of qualitative investment criteria is claimed to promote such as lowered carbon emissions, efficiency gains to mass transportation and equitable labour sourcing practices.

The US launched the first publicly mandated social open-ended mutual fund in the early 1970s, with the UK and Australia following by the mid-1980s. Most Western and Islamic financial institutions today offer socially screened investment products. In 2004, social investment products accounted for approximately €14.4 billion in the EU; in the US, $US15.7 billion; in Australia, $A2.35 billion. Although significant amounts, in terms of market share, public social funds represent less than half of 1% (0.5%) of accumulative funds under management (Haigh & Hazelton, 2004).

At a gloss, the economically instrumental argument of social investment is that investors stand to benefit economically by holding stocks in corporations whose cost accounting systems recognise the production of negative/positive economic externalities. Given a minimum yet necessary level of government intervention, economic benefits are expected in the form of increased capital gains and positive dividend policies. Expected economic benefits of such policy are expected to accrue to investment managers, unit holders, invested corporations, relevant stakeholder groups and presumably also benefit the fiscal abilities of national governments (Statman, 2000).2 The line of argument is used to persuade corporations to adjust their operations. Varying belief in its potency is found in research (Bruyn, 1987, pp. 1–11; Cowton, 2004 and Harte et al., 1991) and is championed in marketing material emanating from social funds. Investors are reassured, for example, that social investment portfolios will exhibit economically important characteristics such as “quality, style diversification and balanced exposure [across industry sectors]” (Corporate Monitor, 2003a).

Most of the research fixates on the economically instrumental argument. More than 20 studies compare economic performance of equity portfolios in social funds with those in conventionally screened (economic only) managed funds and with general benchmark indexes such as Standard & Poor’s. All seek to answer the question: do qualitative constraints (viz., social considerations), if imposed on asset allocation, compromise portfolio performance? Cummings (2000) is the single published Australian study to date. More recent studies note similar risk-adjusted economic performance between socially screened and unscreened investment portfolios. Bauer, Otten and Rad (working paper) suggest that a recognisably distinct management bias in Australian socially screened investment products may have diffused into the investment styles adopted by managers of conventional unscreened products. This paper investigates if observed performance convergence might also be attributable to similar stock holdings in screened and unscreened products.3

To close this section, legislation relevant to social investment products is outlined. Marking an innovation in financial services, regulations attached to the Australian Financial Services Reform Act (Cth) 2002 require marketers of Australian consumer financial products with an investment component (pension, life assurance and managed funds) to make certain disclosures about the expected financial risks and characteristics of such products. Information disclosures are to include “the extent to which labour standards or environmental, social or ethical considerations are taken into account in the selection, retention or realisation of the investment” (Corporations Act (Cth), 2001). In December 2003, the Australian financial services regulator (the Australian Securities and Investment Commission) issued a set of legally binding guidelines that attaches to these regulations ASIC (2003). Precedents for the Australian legislation are found in Europe: a British counterpart of smaller scope is found in an amendment to the Pensions Act 1995; France and Germany have also issued similar, albeit optional, legislation.

2. Moral naïveté

The Genealogy of Morals (2003), written by an ailing Nietzsche in 1887, establishes the philosopher’s scepticism and cynicism towards the social construction of morals. With reference to the works of his teacher Schopenhauer, Nietzsche singles out as naïvely complacent “[…] the value of the “unegoistic” instincts, the instincts of pity, self-denial, and self-sacrifice which [Schopenhauer had hitherto] painted in golden colours, deified and etherealised … as “intrinsic values in themselves” (Nietzsche, 2003, p. 5). Nietzsche finds contemptuous and rails against “the morality of pity” (2003, p. 5) as practised in his contemporary Europe. His most savage criticism is reserved for the emotions of pity and compassion, and in particular, for their preservation of, as it were, the objects of such moral expression in perpetuity. He does not view the expression of such emotions as making any possible advance to social welfare. Nietzsche argues that pity and compassion reduce the extent to which individuals consider others’ welfare (he refers to such as a human “noble conscience”) to a poverty of spirit deserving more of derision than moral elevation. He views the resultant daily war of attrition between instinct and morality (the “gnawing of conscience”: Nietzsche, 2003, p. 37) as a weakness masking a fundamental malaise in contemporary society (his, at any rate).