August 02, 2011
Book Review: Dilemmas in Responsible Investment
by Robert Kropp
Authors Celine Louche and Steve Lydenberg seek to prepare mainstream investment professionals for
navigating the increasingly complex practice of sustainable investment.
Currently, signatories to the United Nations' Principles for Responsible Investment (PRI) number 920 asset
owners, investment managers, and professional service partners, 129 of which are based in the US.
Of the Principles to which signatories agree to commit, the first states, "We will incorporate ESG
(environmental, social, and corporate governance) issues into investment analysis and
Also in the US, according to the 2010 Trends Report of The Forum for Sustainable and Responsible Investment
(US SIF), more than $3 trillion, or nearly one out of every eight dollars under professional
management in the US, is invested in sustainable assets.
Taken together, the above numbers
strongly suggest that sustainable and responsible investment is increasingly being taken up by the
mainstream investment community. But how can money managers and other investment professionals,
whose only focus until now has been on maximizing financial returns, effectively incorporate social
and environmental considerations into investment decision-making on behalf of the growing numbers
of investors requesting it?
A new book, entitled Dilemmas in
Responsible Investment, seeks to provide such guidance to investment professionals. It does so
not by purporting to respond to complex issues with simple solutions, but by offering hypothetical
case studies to help professionals navigate a path towards successful sustainable investment.
The book's co-authors bring a wealth of experience in sustainable investment to their task.
Celine Louche is an assistant professor of corporate responsibility at Vlerick Leuven Gent
Management School in Belgium, and has worked as a sustainability analyst for socially responsible
Steve Lydenberg, currently a Partner for Strategic Vision at Domini Social Investments, co-founded KLD
Research & Analytics, an ESG investment research firm, in 1988.
Before proceeding to the
12 case studies, the authors provide an overview of the evolution of sustainable investment, from
its origins in religious communities to its growing acceptance by the mainstream. For the early
adopters, the process was relatively straightforward; they did not want their money used to support
corporate activities with which they were not in ethical agreement. They therefore refrained from
including companies in such industries as tobacco, alcohol, and armaments in their portfolios.
This approach of negative screening enjoyed its greatest success in the 1980s, with the
campaign to divest from companies doing business in South Africa when the country was still under
apartheid. The flight of capital has been given considerable credit for helping dismantle the
system of apartheid.
While ethical considerations remain paramount for many sustainable
investors, the practice has grown in complexity over the years. As increasing numbers of
institutional investors have adopted sustainable investment policies, portfolios have become more
diversified. As ESG research became more sophisticated and most large corporations began publishing
annual sustainability reports, investors selected companies that outperformed their industry peers
in areas pertaining to society and the environment. The emergence of quantitative key performance
indicators (KPIs) in ESG research allowed investors to make meaningful comparisons of corporate
Of course, mainstream acceptance of sustainable investment could not have
occurred if financial returns from the practice did not match or exceed those gained by traditional
methods. The authors write, "Advocates have argued that societal and environmental performance can
affect a company's overall reputation and that companies with stronger reputations can command
higher price-to-earnings ratios in the stock markets and borrow at lower rates in the bond
"Considerable research indicates that, in general, societal and environmental
screening as recently practiced does not hurt a fund's financial performance," the authors
continue. As an example, they point out the performance of the MSCI KLD 400 Social Index, whose returns over the last 20 years have exceeded
those of the S&P 500.
Notwithstanding the growing emphasis on satisfactory financial
returns, the authors remind us, "It is in fact in the grappling with the often difficult questions
about the relationship between business and society, between the process of investment and its
societal and environmental implications, that responsible investment adds its greatest value."
The hypothetical case studies provided by the authors, supplemented with information gained
from interviews with 35 fund managers, researchers, and analysts, address many of the often complex
issues that are likely to be faced by investment professionals. The issues include how to address
the ethical priorities of investors, whether engagement or divestment is a proper course to take,
and whether investors should form public partnerships with other key stakeholders in an effort to
pressure companies to change their behavior.
None of the case studies included, it should
be noted, are prescriptive in nature. Instead, the authors deliberately leave them open-ended and
generalized, thereby allowing professionals to account for the number of factors that could come
"For students of business and finance unfamiliar with the field, these cases
can provide an introduction to RI's (responsible investment) various practices," the authors write.
"For finance professionals entering the field, they can provide an opportunity to explore some of
the challenges they will face daily."
While most sustainable investors are as concerned
with financial returns as their mainstream counterparts, the authors conclude, they have important
characteristics of their own that must be accounted for by investment professionals. In addition to
a focus on ESG factors in their decision-making, these characteristics include a long-term
investment horizon and a willingness to engage in ongoing communications with corporate managers
and key stakeholders.
These characteristics, the authors state, imply "a world of
investors with far broader thinking and more systemic views than those of many investors in the
"In other words," the authors add, "Responsible Investment implies a paradigm