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February 23, 2011
Is SRI 3.0 Ready for Mainstream?
    by Robert Kropp

Farnum Brown of Trillium Asset Management argues that improved environmental, social, and corporate governance data will lead to the mainstreaming of sustainable investing.


Last November, the Wall Street Journal published an article entitled Quants and Do-Gooders Unite, where it reported that Trillium Asset Management will be providing seed money this year for a sustainable fund based on quantitative investing, or quant.

In a recent blog on Trillium's web site, Chief Investment Strategist Farnum Brown wrote that the new investment vehicle "will rigorously integrate quantifiable ESG (environmental, social, and corporate governance) risk and opportunity factors with traditional investment metrics in the stock selection process."

Asserting, "This sort of rigorous quantitative analysis of ESG factors wasn't possible even three years ago," Brown describes the evolution of sustainable investing from its origins in negative screening to what he calls SRI (socially responsible investing) 3.0. Appropriating a statement by the philosopher Ludwig Wittgenstein, Brown wrote that negative screening, or SRI 1.0, "leaves the world as it is." That is, by refusing to invest in companies that do not meet their standards, practitioners of negative screening leave themselves without the avenue to influence corporate behavior that they would have had as shareowners.

According to Brown, shareowner activism represents SRI 2.0. In this phase in the evolution of sustainable investing, which has in fact been the norm for years, investors use their ownership in companies to influence corporate behavior through engagement and the filing of shareowner resolutions. As Brown points out, shareowner activism has itself undergone an evolution, from appeals based on moral persuasion to engaging "the firm's profit motive by demonstrating a connection between a social good and improved financial performance."

Brown credits Ceres with "having connected the dots between environmental issues like climate change and the risks they pose to long term corporate profitability."

A notable example of the evolution of shareowner activism can be found at Calvert, whose Large Cap Value Fund employs the firm's SAGE (Sustainability Achieved through Greater Engagement) investment strategy. According to Calvert, the strategy consists of investment in companies that do not meet the ESG criteria of its other funds, in order to "make an impact with companies never before held in our longstanding sustainable and responsible funds."

Now, Brown continued, sustainable investing is on the cusp of SRI 3.0. In large part due to the efforts of the Carbon Disclosure Project (CDP) and the Global Reporting Initiative (GRI), many more companies are publishing sustainability reports. Furthermore, as Brown points out, "Today, three of the largest financial data purveyors in the world…Bloomberg, Reuters and MSCI each now have ESG offerings."

"Better corporate and investor performance is not a partisan issue," Brown concluded. "Eventually, we won’t even call them ESG factors. They'll just be things that smart investors and able corporate managers pay attention to."

According to Trillium, a launch date for the ESG-quant fund, which will be offered by Auriel Capital Management, has not been set.

 

 
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