Regular readers of this column might conclude that I am obsessed with the Gates Foundation (see previous posts, More On Gates Foundation and Social Investing and An Open Letter to Bill Gates). The controversy has raised the level of dialogue about socially responsible investing such that it is still worthwhile. Nonetheless, this will be my last post on the topic.
I would never want to be accused of being so myopic about my beliefs that I never take into account opposing viewpoints. The Wall Street Journal posted an op-ed piece praising the anti-SRI position of foundation head, Patty Stonesipher (because WSJ is behind a firewall, I link to a PDF). In fact, author John Entine, trashes the whole notion of socially responsible investing.
Fair enough. However, to rebut his position, one needs to take into account, a much more expansive definition of SRI. Entine sticks to the antiquated notion that SRI is all about what we call negative screening. This means that a portfolio manager filters the available universe of instruments according to some narrow social criteria. The classic strategy of weeding out companies engaged in alcohol, tobacco, or gambling falls into this category.
Entine uses some dubious studies to support his position. I have evaluated all of the studies, and most of them have a fatal flaw: looking at a limited timeframe. For example, Entine claims that SRI-screened investments under-perform their non-screened peers by .31%, which is admittedly a sizable chunk. Furthermore, it is true that SRI investments have underperformed non-screened investments FOR THE LAST THREE YEARS. This is easily explained. SRI screens typically filter out heavy cyclical industries. Why? They tend to be polluters, like oil companies. It would follow that over the last three years, with an upward economic cycle and increasing oil prices, that these cyclical stocks would outperform. However, for the previous seven years prior to 2003, the situation was reversed. With a heavier concentration in technology and health care, SRI portfolios outperformed their non-screened brethren. My best guess, after evaluating the best academic studies out there, is that there is a negligible difference over the long term between screened and non-screened portfolios.
I can partially concede one point in Entine’s piece. We do not know if divestment campaigns truly make a difference. The SRI crowd is quick to take credit for the fall of Apartheid, thanks to divestment campaigns. Even I am hesitant to take that much credit. However, I am not willing to say that they make NO difference, either.
The real shortcoming of Entine’s (and Stonesipher’s) thinking is that he fails to take into account PROACTIVE screening. This involves seeking out the companies that are positioning themselves for the macro-economic megatrend of the 21st century, preparing and capitalizing on a carbon-constrained world. Businesses and economies are discovering all over the world how resource efficiency and sustainability are not only saving money, but presenting new business opportunities on a massive scale. This aspect of SRI excites me the most. Sustainability principles have the potential to upend our most pervasive industries, including automotive, energy, real estate, and finance. Seeking out the companies that lead this charge will indeed be rewarding.
Mark Brandon runs First Sustainable, a socially responsible investment advisory and financial planning firm. He also authors the Sustainable Log blog and newsletter.
