Socially Responsible Investing SRI

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Socially Responsible Investing (SRI)

• Professor Doug Cerf
• Donald Bren Graduate School of Environmental
  Science and Management
• Environmental Accounting Financial Management
  (ESM 284)
• Spring 2007

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Goal SRI

• Provide competitive financial returns while
  fostering better social and environmental
  performance
• Support firms with a sustainable mission
• Example renewable energy
• Support firms that do not have a sustainable
  mission , but operate in a sustainable manner
• 2.3 trillion invested in SRI funds
• One in every 10 dollars in SRI investments

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Strategies to achieve objectives

• Investing in companies that meet certain social
  and/or environmental performance criteria,
• Using their rights as shareowners to encourage
  companies to be better corporate citizens, or
• Allocating some of the funds assets for
  investment in disadvantaged urban and rural
  communities.

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Social Initiatives

• Initiatives supported by various SRI mutual funds
• Financial performance
• Necessary but not sufficient condition
• Sustainability
• Equal opportunity employment
• Governance/Ethics issues
• Animal rights

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Initiatives avoided

• Subjective
• Depends on investors tolerance
• Avoid by association
• Do not invest in a company that uses a supplier
  that is not also socially responsible

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Initiatives Avoided

• Tobacco
• Alcohol
• Gaming
• Military weapons
• Nuclear power
• Produces products that are lethal
• Animal use for testing
• Does business with a country that has
  questionable human rights
• Industries with high pollution

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Screening to select companies to include in
mutual fund

• Involves setting specific standards that each
  potential investment must meet.
• Qualitative screens
• used to identify companies with positive social
  and environmental characteristics.
• Exclusionary screens
• set a minimum standard for company involvement in
  certain controversial business practices.
• Companies that do not meet the standard are
  excluded from the mutual funds portfolio

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Best-in-class strategy

• Evaluates groups of companies from the same
  industries to identify the companies with the
  best social and environmental performance.
• May include the best company in an otherwise
  avoided industry
• Include only the best companies in targeted
  industry

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SRI performance

• Broadly screened SRI mutual funds have performed
  as well as or better than similar mutual funds
  that do not consider social or environmental
  performance
• See SRI trends report 2005
• http//www.socialinvest.org/areas/research/trends/
  sri_trends_report_2005.pdf
• Student presentations on report

• Broadly screened SRI mutual funds have performed
  as well as or better than similar mutual funds
  that do not consider social or environmental
  performance
• See SRI trends report 2005
• http//www.socialinvest.org/areas/research/trends/
  sri_trends_report_2005.pdf
• Student presentations on report

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SRI Investment methodology

• Example
• Innovest research methodology
• Leading SRI mutual fund and research company
• http//www.innovestgroup.com/pdfs/Research_Rating_
  Methodology.pdf

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Firms access to SRI capital markets

• Firms with sustainable practices may have access
  to the 2.3 trillion dollars invested in SRI
  companies
• ABB Harvard case to be covered in week 8

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SRI as a signal of good management

• SRI standards are increasingly recognized as a
  measure of overall good management
• Study (Stuart Hart, Cornell University)
  Comparison of American firms operating
  internationally using
• US environmental standards
• (Lower) Environmental standards in country of
  operation
• Companies using US standards perform better
• Could be a surrogate for good management