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GreenMoney Journal - publishing since 1992
Fall 2010 issue
Socially Responsible Investing – Better Companies, Better Communities
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Ethical Corporation Magazine Funds International - September 30, 2001
The responsible thing
Denny Coote examines the growth of socially responsible investing
as it becomes an increasingly important industry trend
While investing ethically you can make
money and do good at the same time. Socially responsible funds have outperformed, or will
outperform, their 'less social' counterparts in the long term.
Socially responsible
investing (SRI) compels fund managers to consider a company's social and ethical stance before
deciding whether to invest in its shares. In the past, SRI was typically undertaken by those with
alternative lifestyles, or by churches and charities. But recently there has been a boom in SRI -
also referred to as sustainability investment - among a far wider spectrum of investors, prompting
some industry analysts to argue that ethical investing is now entering the mainstream. In the US,
for example, from 1997 to 1999 assets in all segments of social investing grew 82 percent to U$2.16
trillion, representing about 13 percent of the U$16.3 trillion under professional management in the
country.
According to new research on SRI by UBS Warburg*, the UK also witnessed strong
growth in the area, with the universe of retail ethical funds doubling in size every three years
during the 1990s. Assets under management in the sector rose from #321 million in 1990 to #3.197
billion in 1999.
In Germany too, ethical funds have grown in popularity. SEB Invest,
which started Germany's first ethical fund in 1998, saw inflows from retail and institutional
investors rise 10-fold last year, despite the market downturn, the UBS report points out.
The performance arguments
The growth in SRI can be attributed in part to government
legislation, which for example, forces pension funds to disclose their stance on SRI. But more
significantly there has been a growing feeling among investors that companies that identify and
manage social risk tend to outperform less social ones.
The UBS report highlights the
strong performance of socially screened universes such as the Domini Social Equity and Citizens
Index as evidence that superior corporate social performance translates directly into strong stock
price appreciation.
UBS Warburg also cites Wisenberger's 1999 study of 183 socially
screened funds across 41 different investment categories. It was found that, on average, socially
screened funds outperformed their non-social counterparts over the previous three-, five- and
ten-year periods. Additionally, separate research in the UK, compiled in the CIS Ethical Investors
Guide for August 2001, has indicated that ethical funds have been showing above-average performance
over the long-term, with the average fund providing 45 percent growth in the last five years. That
compares to 42.6 percent for unit trusts and OEICS as a whole.
The bottom line
UBS Warburg cites a number of reasons why socially responsible industries appear to perform
well, with quality management being just one factor. Another important consideration is that a
company's socially responsible practices serve as another avenue to promote the brand. A company
with a strong brand name attracts better employees and can charge a premium for its products and
services, which in turn filters through to the bottom line. Additionally, ethical firms may already
be prosperous and their social stance may be a result of their prosperity. A prosperous company has
more incentive to treat its stakeholders well, and invest in the environment and in the communities
in which it operates.
While adaptation of an SRI program may be costly to begin with,
there is some evidence to suggest that SRI programmes, particularly in the environmental area, can
stimulate operating efficiencies by generating greater capital turnover and innovation.
Also, a firm's commitment to spending money on socially responsible practices, rather than
other things, provides signals of management's confidence in the future prospects of the firm, the
UBS Warburg report notes.
Despite these positives, UBS Warburg points out that claims that
ethical funds outperform should be treated with care. Its report states that although it can be
argued that SRI-aware corporate managements are good managements, the exclusion of a large number
of stocks on ethical grounds may seriously restrict investment universes for SRI funds.
The report explains further that outperforming SRI results may have had less to do with the
rewards of ethical corporate management than they did with the kinds of stocks that have recently
been hot. For example, the Domini Social Index and the Citizens index are both tilted towards large
capitalisation growth stocks, and in particular overweight the technology stocks that dominated the
performance of the market up until last year, after which technology growth stocks collapsed.
European growth
Looking ahead, UBS Warburg expects growth in SRI to accelerate
across Europe, citing forecasts by Barchester Green Investment which state that the retail market
for SRI products could reach #10 billion by 2003 in the UK. In continental Europe, new German
pension reforms will require new occupational schemes and private pension schemes to disclose their
stance on SRI, as in the UK system. German pension funds are forecast to grow to 500 billion euros
by 2008 and pressure from trade unions and other groups will mean that increasingly SRI schemes are
likely to be adopted (see FI 80).
Reflecting the demand for SRI, the FTSE4Good UK,
European, US and global indices were launched in July. The indices are designed to track the
performance of companies with a good record of social responsibility and screen out those that do
not come up to standard on social, ethical and human rights policies. UBS Warburg sees the
FTSE4Good index family as having "a real chance of evolving into the benchmark of choice for
socially responsible investors."
The FTSE4GoodUK is not the first group of such indices to
be introduced. Dow Jones Index launched its Sustainability Group Index two years ago and there is
now U$2.2 billion benchmarked against it globally.
* Sustainability Investment: The
Merits of Socially Responsible Investing, UBS Warburg, August 2001
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