Body Shop Flap Reveals Challenges of Socially Responsible Investing : Stocks: Analysts point out that there may be no such thing as a totally ethical company.

If ever there were a politically correct company, the Body Shop should have fit the bill.

The London-based company made a name for itself scouring the Earth for non-polluting, environmentally sound cosmetics. It shuns animal testing and tries as much as possible to patronize vendors from economically needy nations.

But the Body Shop, virtually synonymous with socially conscious investment, has found itself in the middle of a tempest over claims that it fudged its record.

The scandal points out some of the pitfalls of “pure” investing, say experts in the field. Indeed, some say, there may be no such thing as a totally ethical company.

For those investors who choose stocks on the basis of the company’s environmental record, promotion of women and minorities or involvement in the underdeveloped world, selecting is a very subjective activity.

The controversy surrounding the Body Shop stems from an article in the September/October issue of a small Minneapolis-based magazine, Business Ethics, that alleged the company falls short of its stated goals as a socially responsible business.

The article questioned the quality of the Body Shop’s products, its relations with its franchisees and its role as a corporate philanthropist.

The Body Shop, with numerous stores dotting the United States, has launched an offensive, threatening to sue the article’s author for libel and questioning the veracity of just about every judgment the article makes.

For investment advisers who specialize in socially conscious investment, the claims have created a quandary.

“This is the perennial problem that any social investor has to face,” said John Shultz of Ethical Investments in Minneapolis.

“Some social situation changes. . . . Some good and green (company) throws stuff in the river or locks out the work force,” he said, leading to re-evaluations of a stock’s worth to politically correct investment funds.

To avoid value judgments that are too subjective, the experts rate the companies versus each other. That’s one approach. Another is to look for honest efforts at improvement--an overall responsiveness to a given problem.

“Regarding the Body Shop, any recommendation wouldn’t be positive or negative. But we would say that relative to other companies, they score well,” said Steve Doyott of the Council on Economic Priorities. To his group, which provides research services to politically motivated investors, a socially responsible company is rated for investment purposes only relative to other companies in the same industry.

While some worry that the Body Shop may have slipped up, it remains a favorite of some fund managers. Within the networks of “socially responsible entrepreneurs,” there were no dark rumors about the company, said Amy Domini, founder of the Domini Social Equity Fund in Boston.

“I feel as though any problems were more a result of sloppiness and highhandedness” than a concerted attempt to mislead the public, the investment community and consumers, she said.

Still, the Body Shop’s aggressive response to the article’s claims also raised some eyebrows in the ethical investment community.

“I read the article,” said Carla Mortonson of the Social Investment Fund. “I’m really sorry (the Body Shop) felt they couldn’t act with a kind of openness. . . . Maybe it’s more appropriate in the U.K. than in the U.S.”

Indeed, companies--even unpopular ones--that have responded well to mishaps get high marks from fund advisers. Union Carbide Corp. hit a low mark for corporate America with its Bhopal, India, disaster in the 1980s, but it has shown concern in the aftermath.

“Union Carbide is a (expletive deleted) company, but Union Carbide is making efforts, great pains with its P.R. people, maybe because it wants to right past wrongs,” said Shultz.

“When a former bad guy becomes a good person,” the company finds a place on ethical investors’ lists, he said.

While small in comparison to the vast world of stock investing, so-called socially responsible investing accounted for more than $600 million in 1992, according to the trade organization Social Investment Forum. The backer of socially responsible investing hopes cases like the Body Shop highlight the need for a review process.

“Socially responsible investing” is not an oxymoron, said the trade group’s executive director, Carla Mortonson.

“Our goal is a just and sustainable society--to do this through the use of capital,” she said from the group’s Boston office. “We don’t look at socially responsible investing as black and white. Everyone is on a continuum.”

In the case of the Body Shop, which is traded in Britain, questions surrounding the company could lead some investors away but be irrelevant to others. The London Times reported that the ethical investment group Eiris supported the Body Shop despite the flap over the Business Ethics article.

“Body Shop has been compared with perfection, rather than with other companies,” Eiris said. “The practical question for both ethical investors and consumers remains ‘If not Body Shop, then who?’ ”