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January 31, 2006
Two Sides of the Same Coin: Surveys Track Growth of Interest in SRI and CSR
    by Bill Baue

Part one of this two-part article focuses on a survey by Mercer Investment Consulting on increasing interest from institutional investors in socially responsible investing.

There is a growing body of evidence of rising interest in social responsibility in the marketplace. On the one hand, a survey by Mercer Investment Consulting of US institutional investors finds increasing interest in socially responsible investing (SRI). On the other hand, a McKinsey Quarterly survey of corporate executives globally finds mounting commitment to corporate social responsibility (CSR). The fact that these surveys find essentially the same pulse for SRI and CSR should come as no surprise, as the two are like twins, separate entities with distinct identities but common origins and parallel paths.

Focusing on the cascade of survey numbers can blur the eyesight, but stepping back to see the interrelationships between statistics can clarify the significance of the results. For example, three-quarters of the 183 US institutional investors canvassed in the Mercer survey believe that environmental, social, and governance (ESG) factors can be material to investment performance.

"But overall, less than half of the survey participants have assessed or intend to assess the ESG capabilities of their internal or external investment managers," states the survey report, written by Jane Ambactsheer, global head of Mercer's Responsible Investment consulting division.

In other words, more than a quarter of respondents who think ESG factors can impact financial performance have no intentions to gauge the ESG analysis capacity of their money managers. Similarly, almost three quarters of respondents (72 percent) do not practice SRI and do not have any plans to do so, despite the fact that SRI encompasses the analysis of ESG factors. How do these fiduciaries intend to harness the material opportunities or guard against the material risks presented by environmental, social, and governance issues? The survey does not answer this question.

However, the survey does identify rationalizations for not practicing SRI. More than 80 percent of respondents believe it would reduce returns or increase risk to incorporate an investment approach that factors in ESG issues. Presumably, at least some of these respondents must have also been amongst those who felt ESG issues can have a material impact on performance. It defies explanation how fiduciaries can hold such seemingly contradictory beliefs--that ESG factors can impair financial performance and that addressing ESG factors can impair financial performance.

"Respondents' views about socially responsible investing are clearly polarized, with SRI's potential impact on risk and returns seen as both a driver and a barrier," says Ms. Ambachtsheer. "This may be because, in its early stages, SRI decision making centered on negative screening techniques that reduced the universe of investments under consideration."

"Reducing, on nonfinancial grounds, the eligible number of securities in the investible universe is generally not viewed as an optimal solution by institutional fiduciaries," she adds.

Two SRI strategies that do not require negative screening--namely, active proxy voting and shareowner engagement with companies--appear poised to grow. About a quarter of respondents indicated intentions to increase their involvement in each of these activities in the next two years.

Another survey finding that is difficult to explain is the ranking of climate change as the least important of 12 ESG issues enumerated in the question, with corporate governance ranking first.

"Given that institutional investors around the world have rallied around climate change as a relevant investment risk, this may come as a risk, but securities prices have been immediately impacted by corporate governance scandals, while climate change has yet to have as profound an effect on securities prices," Ms. Ambactsheer explains.

The final survey questions address minority and female-owned or emerging (MFOE) managers (with "emerging" referring to managers with less than $500 million in assets under management.) While a majority of respondents consider allocations to MFOE managers to fall under the SRI umbrella, respondents commit scant assets (17 percent to minorities and 14 percent to women) to these managers. Even more surprisingly, almost three quarters of respondents have no intention of considering either minority or women managers. While these fiduciaries firmly believe in portfolio diversification, they seem less committed to portfolio manager diversity.

Part two of this two-part article focuses on a McKinsey Quarterly survey of corporate executive globally that finds increasing commitment to corporate social responsibility.


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