August 04, 2005
Book Review--Profitable Socially Responsible Investing?: An Institutional Investor's Guide
by William Baue
An invaluable tool for fiduciaries considering SRI, the book advances original research finding
competitive financial performance for positive screening.
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 applying SRI?"
Marc Lane's 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. Lane, who is
something of a Renaissance man as a lawyer, certified investment specialist, and university
professor who has authored more than 30 books. Mr. Lane 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).
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. Lane, noting however that Prof. Scott does not cite "binding legal authority for his view."
Mr. Lane cites 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 Mr. Lane uses at his investment firm, which help gauge investors' negative and
positive screening preferences as well as proxy voting priorities.
The question Mr. Lane
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. Lane's 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. Lane found.
Portfolios created through positive "best-in-class" screening,
which screens in companies with best practice on social and environmental responsibility,
all outperformed Mr. Lane's benchmark of 2884 stocks from the Russell 3000 during the period he studied.
Mr. Lane characterizes his findings as "provocative," and they certainly make an valuable
contribution to the body of empirical research on SRI financial performance. However, Mr. Lane's
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. Lane's methodology is proprietary, and of course Mr. Lane runs an investment business, so he
is no more impartial than those whose research he cautions his readers to view skeptically.
Mr. Lane 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
"A company known for its progressive social justice policies, for example,
might pollute and disrespect the environment," Mr. Lane writes. "Another company that is an
excellent steward of the environment might have a poor record on diversity, human rights, or
"The fund managers commend this or that aspect of their social or
environmental performance, while ignoring their bad behavior in others," he adds.
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. Lane. True
enough, but what Mr. Lane 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. Lane 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. Lane's 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.