This post from Conglomerate (a blog I generally like) is an articulate rendition of an appallingly conventional line of thinking:
This Sunday’s Washington Post featured a story on the increase in socially responsible investing over the last decade…. According to the Washington Post, over the past decade the number of socially responsible investment funds has increased by 39% while the amount of assets in such funds has nearly tripled. But the thrust of the Post article seemed to be pondering the point of such investing.
Certainly many advocates of socially responsible investing have attempted to argue that investment in socially responsible funds allows shareholders to “do well and do good.” However, research suggests that socially responsible investing requires some sacrifice in profits. Thus, one study by professors at Wharton revealed that the annual average returns for actively managed socially responsible investment funds lag behind comparable traditional funds by about 3.5 percentage points. While socially responsible index funds apparently perform better, existing research makes it relatively clear that shareholders who want their investments to “do good,” should not count on their investments doing as “well” as more traditional funds.
In addition, it does not appear that socially responsible investing has any significant impact on corporate policy. Thus, aside from a few anecdotes, there is nothing to suggest that the increase in socially responsible investing has pressured corporations to alter their corporate policies….In my study on socially responsible investment funds, I found that there were many corporations that were screened out of some funds, but included in others. In this regard, socially responsible investing may not serve as a good signaling device. These kinds of issues help explain why socially responsible investing has not served as a vehicle for altering corporate policies.
So what is the point? The point appears to be the investment itself. More and more people apparently want their investment decisions to better reflect their social values, and are wiling to sacrifice profits (at least within reason). Thus, socially responsible investing appears to be an end in itself. However, the fact that some people find such investing gratifying for its own sake suggest that corporations interested in attracting such investors need not promote the perhaps unrealistic notion that they can do well and do good. Instead, there is a market for corporations that do good while doing well enough.
The most important point the author, Lisa Fairfax, makes is that the SR funds may take so many forms as to be diluting their impact. Fair enough. And she does acknowledge, but does not take seriously enough, that these funds in aggregate do not have enough assets to have much (if any) sway. If concerns about the environment continue to grow, these funds would presumably attract more investors and gain ore clout.
Consider takeover artists in the 1980s. Initially, they were dismissed as peripheral players, disruptive to corporate processes, pursuing objectives not regarded as legitimate, annoying but not important except perhaps to small firms who had to contend with them. But as they became successful, they gained respectability, and more funding, and more power. Now their path was eased by Mike Milken who formed a symbiotic and highly profitable relationship with raiders (and later LBO firms). Had Milken not been there, the highly-leveraged-transaction crowd would have taken much longer to get established. If a force as unlikely as raiders can gain legitimacy and go mainstream, why not SR funds?
But Fairfax and the Post fail to consider that SR funds are going against the grain on another dimension: investment horizon. The average New York Stock Exchange stock is held only 7 months (down from 11 months during the day-trading days of the dot-com era). The socially responsible investor time frame is well beyond a year, a big disconnect from the quarterly focus of most funds.
Now this short-termism may be an irreversible trend. I hope not; it’s a terrible way to run a business and I believe is a major impetus for going-private transactions. But if we see some deleveraging of the economy (which seems inevitable), there will also be less hot money chasing short-term trading strategies. A longer term perspective may never be fashionable, but it may become more viable.
