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Responsible Investing
Values-Driven and Profit-Seeking (S)RI
Dr. Jeroen Derwall
November 20, 2012
Equity Analysis and Portfolio Management (EBC4112) – Week 4

 What is (S)RI and related concepts
 Equity RI: theory and evidence

“Values” and “social norms”: what are the effects of ethical exclusion on returns?

What do we need to know to obtain positive returns/alpha? Errors in expectations

Segmentation of the SRI movement solves “performance puzzle”  Both controversial and responsible stocks can have positive “alpha” - in short run

New evidence: is alpha-driven RI feasible in long run?

 Conclusion

What is (Socially) Responsible Investing [(S)RI]?

Financial Markets & Sustainable Development
 (S)RI is growing tremendously but is still not mainstream  Financial markets can perhaps promote sustainable
 But are responsible investments in line with investors’ return/risk objectives?
 Debates about conflict between social and financial objectives of investment

Is this a problem?

What do you think of these statements?
 “SRI is a dumb idea, screaming with contradictions, and yielding sub-optimal returns”
 “… we believe that, in the long run, an investment
approach that identifies and invests in companies with
sustainable business models serves shareholders best.
Towards that end, we have developed a process that
combines thorough financial analysis with another,
critically important set of factors that most investment
managers ignore…” (PAX World Investments, 2010)

View of the “mainstream” nowadays?
 Institutions increasingly justify responsible investment using the argument that CSR/ESG criteria positively
contribute to investment performance (alpha).
 More than 850 institutions have signed UN-backed
principles for responsible investing (PRI).

“as institutional investors, we have a duty to act in the best long-term interests of our beneficiaries. In this fiduciary
role, we believe that environmental, social, and corporate
governance issues can affect the performance of
investment portfolios...”

Origins: ethical and social investing

Pure Ethical Approach : No “sin” stocks

A More Positive Approach

On ethical grounds, NO INVESTMENT in

Active search for investment in firms with

• … tobacco

• … strong environmental policy

• … alcohol

• … strong employee satisaction

• … gambling

• … strong diversity policy

• … weapons & defense

• … etc.

Common approach
 Also known as (S)RI “filter” approach
Responsibility “filter”

 Different approaches exist

“Traditional” Analysis
Of Investable

Optimal Stock
& Weighing

Negative screening: excluding certain “sin”
 (motivation is usually “ethical”, not

Positive screens: in search of companies
that are leaders in environmental, social,
and corporate governance

Best-in-class: positive screens in search of
leaders relative to industry peers

Recent term for relevant criteria: “ESG”

Specialist in rating firms’ ESG practices



Interesting case:
What happened in Holland in 2007…

REUTERS (April 2007): “Dutch pension funds came under public and political pressure last month after Dutch TV programme ZEMBLA reported that the funds, which manage the pensions for millions of Dutch civil servants and health workers, had invested in the weapons industry.”

The early consequence: exclusion
 AMSTERDAM, April 6 (Reuters) – “Dutch pension fund ABP has divested its stakes in companies it described as land-mine producers and said it is considering selling its shares in other defence companies, such as Boeing Co. (BA.N) and Lockheed

Martin Corp. (LMT.N), in response to Dutch criticism”
“Dutch pension fund PGGM, which had 81 billion euros ($108 billion) of assets under management at the end of 2006, last month sold stakes in producers of land...
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