March 03, 2005

Nice Update on the Performance Debate

No author is credited, but there is a concise and balanced review of recent evidence on SRI performance at the website of Phillips, Hager & North, a Canadian investment firm. In addition to the more widely-known evidence, they cite several Canadian studies I hadn't seen, and reach the usual conclusion that no cost to SRI has been observed. But the anonymous writer finishes with an important point:
"The question of whether or not SRI reduces investment returns will never be laid to rest. One reason is that this is a difficult empirical question and there will always be legitimate disputes over the quality of the data and the most appropriate methodology to use. Perhaps more importantly, this question will never be answered to everyone's satisfaction because many of the people engaged in this debate carry with them strong ideological baggage. Opponents of SRI are so against the notion of anything other than financial factors affecting the value of a security that, in their view, 'hell will freeze over' before they accept that this is not the case. Likewise, some proponents of SRI are so steeped in their own moral superiority that they cannot fathom the possibility that the integration of social and environmental factors does not have a beneficial effect on investment returns. The challenge for the rest of us is to ignore the rhetorical noise emanating from these extreme views and focus on the facts."
There's one other reason why we'll never have a final answer - the social screens themselves change over time. When the Domini Index was first developed in the late 1980s, South Africa was a key issue. In the early 1990s the emphasis shifted to the environment. Later on international labor standards moved to the forefront, and then corporate governance. So even if the ideological noise could be set entirely aside, we still would never have a final answer. This is a familiar problem in finance. A physicist friend once told me that physicists tend to have a hard time on Wall Street. "Gravity has worked the same way for millions of years," he explained, but the markets are not so cooperative.


Blogger Jeff MacDonagh said...

I would propose an alternative to the generic "until hell will freeze over" argument explaining resistance to non-traditional factors – self-interest.

First, let’s do some common sense checks on the resistance to incorporating non-traditional criteria. Why is it that many SRI critics have an embarrassingly poor understanding of the body of knowledge legitimizing SRI strategies? Or such a poor awareness of CSR/financial performance link studies such as the Orlitzky paper? Why do SRI critics set up a straw man argument by making it look like social investors only look at non-traditional factors, as if we’ve never heard of the price-to-earnings ratio? Or another straw man argument that CSR is some kind of catastrophic distraction from corporate management’s attention, again, as if profit is of no concern?

My common sense tells me something else is going on – smart people don’t make dumb arguments for generic reasons. One guess is that SRI's non-finanical goals represents a major diversion from their neat and tidy world of finance, hence incurring a cost on their time and energy. Just a few examples: social responsibility issues make client relationships more complicated, SRI adds another layer of complexity onto the process of stock selection, perhaps even more troublesome to the mainstream investment manager is the thought that politics and morality play a role in the corporate “principal and agent” relationship.

3:55 PM  

Post a Comment

<< Home