Filed under: Corporate Citizenship | Tags: Corporate Citizenship, CSR, Ethical Investment, SRI
Good – and surprising – news that Socially Responsible Investment is growing faster than ever. Does this mean that good companies are good investments? I did a bit of digging around.
Good company = bad investment
- In the UK, Observer Money’s Sindex shows that the bad guys outperform the good guys: it’s beaten the saintly FTSE4Good, returning 38% over the past year, against 17% for the saints.
- In the US, the Vice Fund invests specifically in alcohol, gaming, tobacco and defence. It’s beaten the S&P 500 since its launch, returning almost 70%, against 50% for the index.
Good company = good investment
- It’s all about risk. Kevin Parker, global head of Deutsche Asset Management, recently told Reuters that investors in longer-term debt including bonds will increasingly avoid unsustainable companies. This means bad companies will see rising borrowing costs: “What this boils down to be risk in capital markets, and capital markets know how to price risk once they understand it.”
- Don’t turn, just tilt. In other words, don’t shun the bad guys entirely, just tilt away from them. That’s the conclusion of Meir Statman and Denys Glushkov of Barclays Global Investors in The Wages of Social Responsibility published in 2008: “We analyze returns during 1992-2007 of stocks rated on social responsibility by KLD and find that this tilt gave socially responsible portfolios a return advantage relative to conventional portfolios.”
Good company = no different
A couple of meta analysis show that investing in good companies is no better, but no worse either.
- A 2007 report from the UN and Mercer Global Consulting reviewed 20 academic studies and concluded that there, “does not appear to be a performance penalty from taking wider factors into account in the investment management process”
- A 2008 report from the European Centre for Corporate Engagement conducted a meta analysis of studies on SRI and financial returns and found that “even though they do not present irrefutable evidence that SRI generates higher returns than ‘normal’ investments, most studies have found that they do not result in worse performance either, while, at the same time, they might actually decrease risk exposure.”
The trouble with money
We all know that equity investors are driven by a short-term return, whilst corporates need to make long term plans. Hence the whipping that PepsiCo recently got from the Wall Street Journal – asking for more performance and less purpose. Tomorrow I’m going to see a company with no investors – Arup, a private partnership, and one of the most successful engineering firms in the world. Here’s what the founder said about his financial model:
The trouble with money is that it is a dividing force, not a uniting force, as is the quest for quality or a humanitarian outlook. If we let it divide us, we are sunk as an organisation – at least as a force for good.
Figuring out how to reconcile that high-mindedness with the realities of the capital markets – that’s got to be the hardest question…
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