November 21, 2005
Citigroup Smith Barney Report Seeks to Bridge Divide Between SRI and Traditional Analysis
by William Baue
The report seeks to cross the metaphorical river dividing socially responsible investing analysts,
who assess sustainability, from traditional analysts, who examine financial fundamentals.
A Citigroup Smith
Barney socially responsible investing (SRI) report published in the summer seeks to encapsulate
the trend of mainstreaming SRI in its metaphorical title, Crossing the River. The report
conceptualizes SRI analysts standing on one side of the investment river focusing on social and
environmental sustainability issues, and traditional analysts standing on the opposite banks
applying quantitative valuation techniques. Predictably, the report latches onto the notion of
"bridging" the river as a means of integrating sustainability into financial analysis.
"Much effort has already been expended to bridge this river; most of which has taken the
form of quantitative academic research that has hunted for a ratio that can retrospectively link
sustainability governance ratings with stock price performance," write Mike Tyrrell and Meg Brown,
sell-side analysts in Smith Barney's London office. "However, attempts to construct one single
bridge between sustainability performance and financial performance has yielded little that can be
used on a forward looking basis."
"[W]e are skeptical that any single bridge can ever be
found," they add. "Accordingly, our preference is to throw lots of stepping stones into the
water--some nearer the SRI analysts' bank and others nearer the financial analysts' bank."
Shifting to the stepping stones image introduces a less expected, and therefore more useful,
metaphor. The analysts settle on five "stones" advancing Smith Barney's "SRI proposition;" in
other words, SB's plan for utilizing SRI strategies.
The first is "platform research" to
provide the necessary foundation for understanding sustainability. Second, SB will keep investors
current with "sustainability newsflow." Third, SB will frame sustainability issues in
company-specific research. Fourth, SB has developed a seven-stage sustainability governance
analysis model that examines how companies address sustainability, for example through senior
management commitment, environmental and social risk management, and transparency.
and "most importantly," according to the authors, SB will devote the lion's share of its energies
to generating written research on "sustainable investable themes." As evidence of this, concurrent
with the release of this 60-page report, SB released a 112-page report outlining the principal
sustainability issues currently facing 28 sectors listing other relevant SB research and
referencing third party reports. The authors acknowledge that SB is taking a decidedly qualitative
approach, noting that sustainability issues do not lend themselves to quantification.
Tyrrell and Ms. Brown go to lengths to assure that "integrated analysis" does not leave ethics on
the cutting room floor.
"[W]e would stress that we do not intend to turn our backs on the
'moral or 'ethical' questions," they write. "Although it is tempting to write off some of these
off on the grounds that they do not affect valuation it is important to remember two things: First,
there is a growing body of investors for whom social and environmental considerations are an
important aspect of their share-buying decisions; Second, the 'moral' can quickly become the
While this formulation notes the inextricability of moral and financial
issues, they frame it otherwise elsewhere.
"Creating shareholder value within the context
of the sustainable development agenda will require companies to balance their economic,
environmental and social responsibilities," Mr. Tyrrell and Ms. Brown write. "SRI investors will
expect companies to avoid breaching basic minimum standards, to exploit synergies between
sustainability performance and shareholder value wherever possible and, where conflicts arise, to
seek creative solutions to reduce negative impacts on any stakeholder group."
where conflicts cannot be resolved, SRI investors, like all other investors, require companies to
prioritize shareholder interests over competing demands--albeit they may be inclined to take a
longer view of a situation than some other investors," they continue.
In this formulation,
ethics clearly take a back seat to financials, suggesting that the integration "bridge" or
"stepping stones" do not seek to meet in the middle between SRI and traditional analysis, but to
prioritize the latter. For some investors, this prioritization scheme may seem appropriate, while
for others, the subjugation of ethics to economics may seem too high a price to pay for the
"mainstreaming" of SRI.