An invaluable tool for fiduciaries
considering SRI, the book advances original research finding
competitive financial performance for positive screening.
SocialFunds.com -- Sitting down to lunch at this year's Green
Mountain Summit on Investor Responsibility in Stowe, Vermont,
a socially responsible investing (SRI) conference, the woman
in the next seat introduced herself as Maya Gladstern, a Marin
County Employees Retirement Association (MCERA) trustee. As
a fiduciary responsible for county pension fund investments,
she asked, "Are there any resources available explaining
all the issues we trustees have to take into account to consider
Soon thereafter, book
Profitable Socially Responsible
Investing?: An Institutional Investor's Guide arrived
in the mail. The book is a vital tool for institutional investors
looking to conduct prudent and comprehensive due diligence
in considering SRI, as it systematically addresses the most
Does fiduciary duty preclude SRI? No, according to Mr. ,
who is something of a Renaissance man as a lawyer, certified
investment specialist, and university professor who has authored
more than 30 books. Mr. surveys
the legal landscape, a "crazy quilt of Federal and state
statutes, common law precepts, and judicial opinions"
including Employee Retirement Income Security Act (ERISA)
and the Uniform Management of Institutional Funds Act (UMIFA).
"Professor Austin Wakeman Scott famously observed that
it is 'well settled' that trustees are permitted to take the
social behavior of corporations into account when they made
investment decisions," writes Mr. ,
noting however that Prof. Scott does not cite "binding
legal authority for his view."
the US Department of Labor (DOL) 1998 ERISA letter to Calvert
sanctioning SRI for corporate pension funds, but he does not
cite the 1989 Board of Trustees v. Mayor of Baltimore City
case allowing consideration of "the social consequences
of investment decisions."
Helpfully, the book reprints several SRI investment policy
statements, including 2 Quaker groups--American Friends Service
Committee (AFSC) and Canadian Yearly Meeting (CYM)--and the
Jessie Smith Noyes Foundation. It also reprints several questionnaires
uses at his investment firm, which help gauge investors' negative
and positive screening preferences as well as proxy voting
The question Mr.
spends the most time addressing, as the interrogative title
suggests, is the issue of SRI returns. He surveys the literature
of academic and professional empirical research, pointing
out some "serious methodological flaws," such as
the use of linear regression or the misattribution of causation
to mere correlation where other factors could impact performance.
The bulk of the book advances Mr.
original research, which examines the financial impacts first
of negative screening and then of positive screening.
His findings? Portfolios of alcohol, tobacco, and gaming
industries all outperformed the S&P 500 (and the defense
industry kept pace) during the period studied (January 1995
through December 2003, which included a full economic cycle).
So negative screening (which excludes these industries from
portfolios) drags on risk-adjusted returns, Mr.
Portfolios created through positive "best-in-class"
screening, which screens in companies with best practice on
social and environmental responsibility, all outperformed
benchmark of 2884 stocks from the Russell 3000 during the
period he studied.
characterizes his findings as "provocative," and
they certainly make an valuable contribution to the body of
empirical research on SRI financial performance. However,
cautionary words about many of the existing studies (which
are "funded or prepared by partisans who seek to promote
corporate social responsibility, SRI, or both") can be
applied to his work. Some of Mr.
methodology is proprietary, and of course Mr.
runs an investment business, so he is no more impartial than
those whose research he cautions his readers to view skeptically.
reveals a bias early on. He focuses his research on stocks
and explains that mutual funds are outside the purview of
his study, a fair enough limitation from a methodological
perspective. However, he adds to his methodological rationale
for this exclusion a practical (or perhaps philosophical)
bias against mutual funds: needing to appeal to a broad range
of investors, fund managers include companies in their portfolios
with tarnished social and environmental records.
"A company known for its progressive social justice
policies, for example, might pollute and disrespect the environment,"
writes. "Another company that is an excellent steward
of the environment might have a poor record on diversity,
human rights, or employee relations."
"The fund managers commend this or that aspect of their
social or environmental performance, while ignoring their
bad behavior in others," he adds.
Hence separately managed accounts are superior SRI vehicles
compared to SRI mutual funds, because the former can tailor
portfolios to meet investors' idiosyncratic values, according
to Mr. .
True enough, but what Mr.
elides is the fact that the very same dilemma facing fund
managers faces separate account managers--that their portfolios
inevitably contain less-than-perfect companies.
A more primary factor distinguishing mutual funds from separate
accounts is the economic class of the client, as separate
accounts are geared toward high net-worth individuals and
institutional investors while mutual funds are geared to everyday
investors. It is perfectly legitimate for Mr.
to focus on separate accounts because his book is geared toward
institutional investors. It is quite another thing, unfortunately,
that he introduces an unnecessary and spurious distinction
to discredit mutual funds.
This is not to say that Mr.
findings are necessarily faulty--indeed, presenting his results
in book form gives him plenty of space to stretch out and
explain methodological details and potentially confounding
factors in depth, enhancing the robustness of his conclusions.
Simply put, however, we readers must take his findings with
the same grain of salt as he sprinkles on others' research.
To learn more about and/or order Mr. Lane's book, "PROFITABLE
SOCIALLY RESPONSIBLE INVESTING? AN INSTITUTIONAL INVESTOR'S