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| Feature |
Portfolios With Purpose
Catherine Curan
03/01/2008
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Fringe No More
SRI has deep roots in traditional religious tenets linking
money and ethics. Since the 1970s, this strategy has been known primarily for
its exclusion of "sin stocks," such as tobacco companies or firms that do
business with oppressive regimes.
In the Internet era, however, technologically advanced
screening and scoring techniques allow investors to select companies with
relatively positive track records on favored issues, from good governance to
gay-friendly benefits. Investors have three options: screening out, screening in
or choosing "best in class" to keep, for instance, oil stocks in a portfolio but
select—and try to reward—the company that pollutes least. The ESG factors,
therefore, become one more step in analyzing the risks of owning stock in a
given company, rather than the use of a broad investment style.
Growing interest from investors is prompting deeper and more
sophisticated analyses of SRI’s effect on the bottom line. This, in turn, has
undermined the conventional wisdom that SRI equals poor returns. Late last fall,
the United Nations Environment Program and Mercer Consulting released a report
of 20 academic studies overturning that old notion, with half of the studies
correlating SRI with positive performance. Of the remaining 10 studies, seven
reported that the effect was neutral, and the other three showed it as negative.
Among mutual funds, the academic research reveals that SRI
funds slightly outperformed conventional funds on average returns, with a
difference that was so small as to be statistically insignificant, according to
Meir Statman, a finance professor at Santa Clara University in California. The
key factor denting returns was the cost of the funds—not the incorporation of
ESG concerns—which lends credence to the indexing approach that the Jubitz
family favors. Meanwhile, the Domini 400 Social Index slightly outpaced the
S&P 500 in the overall span from its debut in May 1990 to June 2006. "The
fair statement is that those two indexes and the funds perform about the same,"
Statman says.
"It’s an evolving capital market, and what’s really interesting
to me are the new vehicles being created, moving well beyond the negative
screens," says Stuart Davidson, a board member for the philanthropic social
venture fund Acumen who allocates a portion of his personal wealth to SRI. "It’s
much more toward defining particular sets of transactions, like microfinance."
The recent proliferation of investment vehicles with socially
responsible elements reflects a huge new wave of demand. Affluent individuals
poured $17.3 billion into separately managed accounts with social screens in
2005, contributing to a tenfold leap in assets in these accounts since 1995,
according to the Social Investment Forum. In North America, 6 percent of wealthy
individuals requested social screens in 2006, allocating 8 percent of their
portfolios to this strategy, according to Merrill Lynch/Capgemini’s
2007 World Wealth
Report.
With 9.4 percent of the $24.4 trillion under professional
management now allocated to SRI, money managers expect social and environmental
concerns to play an ever-larger role in mainstream investment management,
suggests research by Mercer cited in the Social Investment Forum’s report.
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