March 23, 2006
Book Review--Responsible Investment
by Bill Baue
An impressive and wide-ranging list of contributing writers advance a balance between elucidating
the strengths of socially responsible investing while also exposing its weaknesses.
On first glance, the most impressive aspect of Responsible Investment
(Greenleaf 2006) is its list of
contributors--"a 'who's who' of leading UK SRI thinkers and practitioners, together with a savory
salting of other EU and US experts," according to SustainAbility founder John Elkington. They include
Sarah Forrest and Tony Ling of Goldman Sachs, Matthew Kiernan of
Innovest, The Rise of Fiduciary Capitalism authors Jim Hawley and Andrew
Williams, Bob Monks of Lens, Emma Whitaker
of Mercer, and Raj Thamotheram of
Universities Superannuation Scheme (USS).
Editors Rory Sullivan and Craig Mackenzie of Insight Investment are to be applauded
not only for corralling such a wide-ranging, intelligent, and experienced group of writers, but
also for a more subtle aspect of this indispensable volume on socially responsible investing (SRI).
Messrs. Sullivan and Mackenzie frame the book with a set of questions, including whether SRI
actually improves corporate governance, social, ethical, and environmental (GSEE) performance, and
whether SRI enhances financial performance for investors. While the second question has received
much attention, the first question, which really gets at the fundamental foundation of SRI, has
slipped under the radar.
Also framing the book's structure is a dual focus on SRI
strategies, first on enhanced analysis (the term emerging to describe the integration of GSEE
factors into financial analysis) and engagement (a euphemism for the more charged term of
shareowner activism). The authors state that enhanced analysis can identify opportunities to boost
financial performance. The diverging lines charting the aggregate financial performance from 1994
to 2004 of companies that qualify for SRI at Morley Fund Management (which climbed) and those that do not
(which descended) illustrate this strikingly.
However, Messrs. Sullivan and Mackenzie
temper the implicit assumption advanced by many of the contributors correlating enhanced analytics
with enhanced financial performance by pointing out that corporate irresponsibility can also boost
financial performance in the short term. They also point out that enhanced analytics are by no
means cheap, begging the question of whether any financial benefit they bring is counterbalanced by
More importantly, Messrs. Sullivan and Mackenzie ask the less-oft posed
question: what impact does enhanced analysis have on actually bringing about more responsible
corporate behavior? Ostensibly this is the goal of SRI.
"There is considerable support in
Chapters 4-12 that SEE risks may be inaccurately priced and that enhanced analysis may allow
investors to exploit this inefficiency," they write. "However, there is very little discussion of
whether or how this will have an effect on the behavior of corporate management."
generally assumed by the authors of these chapters that enhanced analysis will be socially useful,
although it is not clear that the various authors have a clear view on why this might be the case;
the evidence presented in the various chapters for or against this view is correspondingly weak,"
they continue. "Further research is needed to cast light on this question."
documents many ways in which engagement can lead to more responsible corporate behavior (as well as
citing evidence correlating active ownership with financial outperformance.) Messrs. Sullivan and
Mackenzie do not content themselves with patting SRI on the back, however; their choice of
contributors ensures critical commentary on engagement.
For example, Peter Frankental of
Amnesty International praises SRI
engagement as a necessary conduit between business and activists, but he also points out the
limitations of engagement, such as its reliance on framing issues in financial terms or its
skittishness of threatening divestment. In the very next chapter, Ralph Edmondson and Adrian Payne
of British American
Tobacco express frustration that SRI analysts (those using a best-in-class approach that does
not preclude tobacco) fail to engage the company more actively. And Raj Thamotheram presents a
"critical perspective on activism," outlining the structural and self-imposed constraints
institutional investors experience, such as the lack of capacity for engagement and lack of
coordination between shareowner activists.
"If the objective is to make the kind of
responsible investment strategies described in this book the norm, rather than the exception, it is
important that pension funds and other institutional asset owners ensure that their long-term,
broadly based interests are fully reflected in the way their assets are invested in practice,"
conclude Messrs. Sullivan and Mackenzie. "The mainstreaming of responsible investment still has a
long way to go."