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April 25, 2005
Study Argues Less is More in Socially Responsible Investment Research
    by William Baue

The proposed method may correlate environmental sustainability to financial performance well, but the radical reductionism seems ill-suited to a field that thrives on diversity of approaches.


In his latest polemic, provocateur Christoph Butz of Geneva-based private bank Pictet & Cie takes aim at what he considers the bloating of socially responsible investment (SRI) research, and recommends a Slim-Fast diet. One result of the increasing number of criteria SRI researcher firms use to assess corporate sustainability is "questionnaire fatigue," which exhausts companies' actual and metaphorical resources, Mr. Butz points out. His beef centers not on this problem, though, but on the contention that increasing quantities of data may lead to information overload and decreasing quality of analysis. Trim the fat for a leaner cut, he suggests.

"We would like to make the case for taking a break and focus on what is really important and relevant to sustainable development," states Mr. Butz for the Pictet sustainable investment team. "We will make the case for retaining only a few relevant indicators and suggest that we get rid of all the 'dead weight' that has accumulated over the years and has paradoxically become a major obstacle to real progress in sustainable investment."

"We are fully aware that such a 'reductionist' view of environmental sustainability will immediately draw a lot of criticism," he continues in the paper, entitled Less Can Be More…A New Approach to SRI Research.

The paper is broken into two sections: the first defines the problem as Mr.Butz sees it, the second proposes a solution. One component of the problem: SRI research firms need to differentiate themselves in a competitive marketplace, hence the proliferation of indicators. However, each new criterion gains its significance by stripping the significance from existing criteria, thereby spreading the relevance of the overall assessment thinner and thinner. Furthermore, many criteria address the "vague concept" of corporate responsibility instead of honing in on the more scientifically measurable goal of sustainable development: "being nice" to employees is not necessarily going to save the planet, Mr. Butz suggests.

The solution: focus on "key impact factors." Mr. Butz posits two such factors for measuring environmental sustainability (fleet fuel efficiency in the automobile sector and fleet age in the airline sector) and one for measuring social sustainability (job creation).

At this point, the philosophical side of Mr. Butz's argument takes a back seat to the "quant" side, as the Pictet team devises sophisticated quantification strategies, looking at 12 car manufacturers, 38 airline companies, and about 1000 cross-sector companies. The stratagems compare financial performance against various measures of sustainability performance. Higher car fleet fuel efficiency correlates with slight financial underperformance, while increased job creation correlates loosely to better financial performance, though not statistically significantly.

The approach Mr.Butz advocates seems to ignore the fact that investors have a variety of reasons and goals regarding sustainability investing and SRI. Take, for example, faith-based investors. Some spurn companies that produce birth control, while some conduct shareowner action encouraging companies to support condom distribution in developing nations to curb the spread of HIV/AIDS. SRI research spans across this spectrum. While Mr. Butz anticipates criticism, he does not take into account how his radical reductionism contravenes the diversity of SRI.

 

 
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