J. Lane, RFC
E. Grable, Ph.D., RFC
The thought of socially responsible investing (SRI) usually
conjures up images of financial left-wing activists or little
old ladies heading off to a church social. The general impression
is that SRI may serve the emotional side of one's life, but
when it comes to making money, SRI is less effective than
other forms of investing. The debate regarding the merits
of SRI has raged for over twenty years. Finally, someone has
entered the discussion with quantifiable evidence to suggest
that SRI can be both altruistic and profitable. Marc Lane,
who is a Registered Financial Consultant, has written a book
based on his original research that deals with the advantages
and disadvantages of SRI. Mr. Lane provides practical advice
on how SRI can be adapted into a fiduciarily sound investment
policy. This is a commendable achievement.
The book consists of 10 chapters separated into three sections.
An outstanding SRI glossary is included, as is one of the
most complete and authoritative reference lists currently
available. The first section of the book provides a historical
perspective on SRI. It is this section that Lane describes
both the extent and definition of SRI. SRI has three components:
(a) securities screening, (b) shareholder advocacy, and (c)
community investing. The majority of readers will be most
interested in Lane's perspective of SRI in securities screening
and investment outcomes. Combined, approximately $2 trillion
is invested in these three components.
According to Lane, SRI can be traced back to the 17th Century.
It was during this time that the Quakers (Society of Friends)
first introduced the concept of shunning certain industries
involved in unethical activities (e.g., slave trade). Lane
points out that SRI is widely applied in Judaism, Christianity,
Islam, and other religions. One of the most refreshing aspects
of this book is its broad review of SRI applications. Rather
than focusing in on one religion or social issue, Lane provides
examples of how SRI is used and applied throughout institutional
settings. This is, in fact, the first book this reviewer has
seen that references diverse religious perspectives in a non-condemning
fashion. For example, examples of how SRI is used by the American
Friends Service Committee, Unitarian Universalists, Christian
Scientists, and other non-profit organizations are all discussed.
The second section of the book deals with how security screening
(i.e., negative screening) impacts portfolio returns. Generally,
proponents of SRI tend to screen out from portfolio investments
associated with the tobacco, defense, alcohol, and gambling
sectors of the economy. Sometimes stocks in these four industries
are known as 'sin stocks.' Skeptics of SRI claim that excluding
sin stocks reduces portfolio returns and increases portfolio
risks. Interestingly, Lane concludes that this is true! He
"Excluding the four controversial industries caused
the efficient frontier of portfolio combinations to shift
to the right, thus demonstrating greater volatility (or
risk) for each given level of expected return. The result
is consistent with the general consensus that systematically
excluding certain industries makes a portfolio less diverse
and, consequently, riskier" (p. 49).
In simple terms, sin stocks tend to be less volatile than
other stocks. This may be due to the inherent profitability
of the industries in which they operate. Excluding sin stocks,
then, tends to increase the systematic risk in a portfolio.
Does this mean that SRI, as a portfolio management tool,
is dead? According to Lane, not at all. Lane concludes that
negative screening (i.e., removing stocks from a portfolio)
often leads to lower levels of diversification and increased
risk. However, he asserts, with ample evidence to support
hi argument, that 'positive screening' can be used to increase
diversification, reduce risks, and increase returns. So what
is positive screening? Positive screening is the process of
selecting, rather than excluding, securities based on established
SRI criteria. Specifically, positive screening looks for companies
that provide social justice and environmental accountability.
Lane lays out the argument for positive screening this way:
"For those seeeking to identify and promote higher
standards of corporate conduct, a careful examination of
management behavior may empower the investor, more effectively
than negative screening by industry could ever have done,
to deploy capital in a way that gives voice to the investor's
principles and beliefs" (p. 51).
Positive screening, then, involves selecting securities for
a portfolio based on behavioral social screening techniques.
Lane defines behavioral screening as follows:
"'Behavioral social screening' is defined here as
the social screening of portfolio based on three specific
value-based corporate behavioral criteria involving company
practices in the areas of (1) diversity and employee relations,
(2) human rights, and (3) the environment. The areas of
diversity and employee relations and human rights can be
combined into a single category which will be referred to
as 'social justice'" (p. 51).
Section two of the book concludes by quantitatively showing
how using positive screening - seeking out companies that
promote diversity, improved employee relations, human rights,
and respect for the environment - tends to deliver superior
absolute risk-adjusted returns compared tom portfolios developed
using negative screens and portfolios created using modern
portfolio techniques with no restrictions.
Skeptics of SRI may take Lane to task for showing few actual
portfolios that match behavioral social screening techniques.
Only a small number of specific companies are mentioned, and
the narrative is limited to general descriptions of 'why'
positive screening works in Chapters 6, 7, and 8. In general,
one would hope for more specific guidance on what a behaviorally
screened portfolio might look like. Given this constraint,
however, Lane does provide readers with extensive detail on
how one might go about actually positively screening a company.
This is the focus of the book's third section.
Chapter 9 provides guidance on how negative and positive
screens can be used. Examples of negative screens include
excluding firms engaged in:
* Adult entertainment
* Alcoholic beverages
* Contraceptive devices
* Nuclear power
Behavioral (positive) screens include finding firms that
* Respect for the environment through -
* Pollution control
* Reduced environment hazards
* Alternative fuels
* Environmental disclosure
* Reduced toxic emissions
Diversity and emploee relations by -
* Employing disabled
* Gay and lesbian policies
* Affirmative action
Social justice through -
* Charitable giving
* Educational support
* Human rights
A perusal of the differences between negative and positive
screens will undoubtedly cause controversy among advocates
and skeptics of SRI. It appears that someone who employs behavioral
social screens could, in fact, include securities of firms
that operate in traditionally SRI excluded industries. This
is a conflict that Lane does not address. For instance, ownership
of a firm such as Disney may meet behavioral screens based
on the firm's gay and lesbian benefits stance, charitable
giving policy, and respect for the environment. However, these
same firm specific actions may subject Disney to negative
screens for investors that use SRI policies based on traditional
Christian values. One is left wondering, after reading Lane's
book, how an SRI investor - either individual or institution
- should deal with these type of conflicting issues.
Overall, however, this book is one of the best written, most
comprehensive, and well-documented treatises on SRI available
today. Advocates of SRI will find Lane's analyses comforting
as they develop portfolios based on positive social screens.
Critics of SRI should also find the book worthwhile. It may
be possible to use what is presented in the book as a catalyst
for helping guide a new discussion about the boundaries surrounding
SRI. If, for example, SRI is not constrained to negative screening
of tobacco, alcohol, gambling, and defense stocks, then SRI
may become more widely supported, especially if other studies
can show a positive relationship between portfolio returns
and positive screening techniques. Academicians would be well
served to follow Lane's lead and study this important topic.
Purchase Information: Lane, M.J. (2005). Profitable Socially
Responsible Investing? An Institutional Investor's Guide.
London: Institutional Investor Books (an imprint of Euromoney
Books). ISBN: 1-84374-136-9; the book may be purchased at
Author information: Marc J. Lane is President of Marc J.
Lane Investment Management, Inc. He is a practicing Chicago
attorney and financial advisor; an Adjunct Professor of Business
at the University of Illinois; and the author of 32 books.