December 18, 2008
Book Review: Investing for Change: Profit from Responsible Investment
by Robert Kropp
Authors Augustin Landier and Vinay B. Nair trace the history of SRI and suggest modifications to
traditional screening methods in order to increase profitability.
"Investing for Change: Profit from Responsible Investment" is a study of SRI that can be
appreciated by both novice and expert. As academics, Augustin Landier and Vinay B. Nair have
authored a work that provides the reader with valuable historical perspective and a lucid analysis
of the complexities of the investment universe. As the founders of Ada Investment Management, a New
York-based asset management firm, they have authored a guide for the decision-making process of the
socially responsible investor. Their efforts in both areas are successful.
book, the authors reflect that the modern practice of socially responsible investing (SRI) began in
the eighteenth century with the Quakers. From its faith-based origins—which led to the first modern
SRI mutual fund, Pax World, created in 1971 by Methodist ministers—SRI has grown to encompass
secular causes. The SRI movement's first notable victory was its opposition to apartheid in South
Africa. According to Landier and Nair, "The decline in investment eventually forced a group of
businesses, representing 75% of South African employers, to draft a charter calling for an end to
SRI has since grown to encompass a range of social and environmental issues,
including corporate governance, climate change and human rights in corporate supply chains.
Shareowner resolutions increase in numbers and gain more support in proxy voting every year. By the
end of 2005 socially responsible investing totaled $2.3 trillion, or 10% of all assets under
management in the United States at the time. The number of socially responsible funds "has
increased fifteenfold since 1995," to 200 by 2007.
Yet even with such clearly articulated
benchmarks of success for SRI, skepticism continues in some quarters regarding its effectiveness.
Critics question whether socially responsible investing can earn profits over time, especially in
times of market downturn, when the screening practices of SRI result in portfolios less diversified
than those of mainstream investors.
In fact, Landier and Nair support the argument that
the lessened diversification of most SRI portfolios does lead to decreased profitability. The
authors argue that the traditional negative screening practices of SRI, and the exclusion of
so-called "sin stocks" from portfolios, could lead to a "Faustian choice" between values and
profits. Furthermore, the exclusion from SRI portfolios of tobacco companies, for instance, does
nothing to compel those companies to change the way they do business. To expect tobacco companies
to stop selling tobacco because responsible investors sell their stocks is unrealistic, the authors
Yet a middle ground between investment based on strictly moral principles and
investment based entirely upon profits has emerged, which the authors call "industry-agnostic"
investing. According to this method of investing, the fund manager trying to construct an
industry-agnostic portfolio applies a "best-in-class" methodology, in which information on
corporate social responsibility is used to exclude the least responsible companies. The method does
not exclude broad industries, and the resulting portfolio will include companies in industries such
As an example of the growing popularity of an industry-agnostic approach to
responsible investing, the authors report that in November 2006, KLD Research and Analytics, a
research company that provides corporate social responsibility information, launched its Global
Sustainability Index. Unlike KLD's previous indices, the authors report, "this index does not
exclude industries outright but selects stocks on the basis of their environmental, social, and
According to the authors, not only should the increased
diversification of an industry-agnostic portfolio improve the profitability of responsible
investing. In addition, they note, "Advocates argue that using industry-agnostic screens creates
powerful incentives for all companies to improve their responsibility standards and that industry
exclusion does not have this effect."
In the final analysis, the authors argue that
socially responsible investing can continue to grow only if it does not underperform against
mainstream investment practices. The authors point to several factors—research that suggests a
correlation between corporate responsibility and profitability, especially in certain industries;
the likelihood of increased government regulation in the environmental realm; and the
outperformance of the stocks of highly responsible companies, to name a few—to argue that the
profitability of SRI will continue to grow.
In fact, Landier and Nair point to a number of
trends to support their argument that the share of SRI capital should double within the next few
years. These trends include the standardization of information by such initiatives as the Carbon
Disclosure Project and the Global Reporting Initiative; the development of the Principles for
Responsible Investment; and the professional rise of women, who, it is estimated, make up 60% of
socially conscious investors.