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I had the good fortune to see an interesting presentation this week
on
Socially Responsible (SR) Investing. The idea behind SR
investing is
that investors are concerned with where they put their money and not
just
the returns they receive. SR investors therefore either do not
hold
certain stocks (called a negative screen) or if they do hold the stock,
they would like to influence the behavior of the firm (active ownership).
The most common form of SR activity is negative screening. In
this
strategy, SR investors hope to put the firm at a competitive disadvantage
by raising the firm’s cost of capital by not buying the shares.
To
leverage their impact, many of these SR investors collaborate and form
networks. These networks then try to exert pressure on the firm
collectively.
If this negative screen does not work, the investors may decide that
the
best way to be heard is through shareholder referendums (active
ownership). The problem is that to do this, one must be
a shareholder.
Hence the fact that some SR funds own stock in firms that may go against
their viewpoint.
http://www.socialinvest.org/areas/research/trends/1999-Trends.htm
Academic research into SRI is rather difficult and the results somewhat
conflicting due to the multitude of causes which can fall under the
SRI
umbrella. For example some investors are concerned with only
the
environment while others are concerned with health care issue and still
others only concerned about violence and military issues. Thus
under the
SR roof can be a bizarre amalgamation of causes.
A further reason why research into the performance of SRI is difficult
is
because a socially responsible investor can either screen certain stocks
out of the portfolio, or if (s) she owns the stock can be a very active
monitor and try to influence the behavior of the firm.
Thus, the
portfolio of an investor who calls himself a SR may actually look
surprisingly like a Non-SR investor. Thus it should not be surprising
that the academic research is quite mixed.
The earlier work in the field suggested that by truncating their universe
of available investments, socially responsible investors gave up return
for their cause. This was both understandable and predictable.
(As
Bodie, Kane, and Merton suggest think of it as a linear programming
problem and you have just added another constraint.)
http://papers.ssrn.com/sol3/delivery.cfm/SSRN_ID259238_code010407630.pdf?cfid=686217&cftoken=99960701&abstractid=259238
However more recent work suggests that there is no real difference in
returns from SRI and standard investments. However, a partial
explanation into this no abnormal return is that in recent years (prior
to
this year), most SRI funds invested heavily in technology stocks.
The
bear market in tech stocks may influence future studies.
An important thing that is often overlooked when discussing SRI is that
investors invest to maximize utility and not expected returns.
Thus, all
studies are inherently flawed that look only at returns and then try
to
say that SRI is either good or bad. All that can be said is whether
the
SRI approach performed better or worse than a traditional approach.
(for
example suppose that non-SRI funds outperform SRI funds. This
could be
interpreted as investors demanding a premium for holding the non-socially
responsible assets.)
Regardless of any performance issues, SRI has gained in popularity.
While
it has been around for years (depending on how you define SRI you may
say
the early Jews or minimally the Quakers have been engaging in SRI for
hundreds of years), it has picked up momentum in the past decade.
According to studies that are often cited but seem difficult to believe
upwards of 13% of funds are now in one way or the other invested with
social responsibility in mind. Many SR mutual funds (over 200
according
to Socialfunds.com) as well indices to track socially responsible firms
have been launched to satisfy demand for this type of investing.
The
oldest of these funds is the Pax World fund that got its start in 1971.
http://www.socialfunds.com/page.cgi/article1.html
http://www.socialinvest.org/Areas/Research/Other/CDA-GoodGreen.htm
http://www.socialinvest.org/areas/research/trends/1999-Trends.htm
Sources:
http://www.socialfunds.com
http://www.socialinvest.org/
http://news.morningstar.com/news/Wire/0,1230,1786,00.html
http://www.greenmoney.com/gmj/feb_march01/newartic.htm
Working paper by Plantinga and Scholtens
http://papers.ssrn.com/sol3/papers.cfm?cfid=686217&cftoken=99960701&abstract_id=259238
Investments by Bodie, Kane, and Marcus, Third edition, P 214
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